Tag Archives | ProxyDemocracy.org

Starbucks: How I Voted

I waited until almost the last minute hoping to get proxy advice from my usual sources, ProxyDemocracy.org and MoxyVote.com. However, little has been forthcoming… nothing from Proxy Democracy as I write this.

Based on Moxy Vote information and recommendations from As You Sow, I went ahead and voted against two directors: Howard Schultz and Javier G. Teruel. I voted along with the As You Sow recommendation at Moxy Vote in favor of the shareowner proposal to Adopt Comprehensive Recycling Strategy for Beverage Containers. Starbuck’s is doing more than many companies in this area but I want to stress the importance of going even further, both for the environment and to project the right image for companies in which I want to continue to be a long-term shareowner.

I was able to find how Florida SBA voted, so went with them and voted against amending the omnibus stock plan. I understand their advance votes will soon be recorded at MoxyVote, which may finally make that platform a one-stop-shop, since it will give them the depth and breadth of the 4th largest public pension fund.

All of my other votes were with management.

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Don’t Toss that Proxy

During the next several months, most corporations will be sending out their proxies (ballots) and holding their annual meetings. Individual shareholders own about 30% of the stock in US markets but few bother to participate, even though we often feel corporate managers have too much power and too little accountability.

When we fail to vote, we essentially turn our assets over to management.  Most of us feel we should vote but we also think voting is too complicated and time consuming. Since we only hold a few shares, we often think that failing to vote won’t have any consequences.

Recent changes allowing corporations to e-mail and post proxy materials on the internet have dramatically reduced the proportion of shareholders voting to as little as 5%. (Apparently, it is easier to ignore a stack of e-mails on your computer than a stack of paper on the dining room table.) However, the internet also makes it much easier to vote in corporate elections and to vote intelligently.

There are literally thousands of sites for investors (here’s a few), ranging from brokers to associations to scam artists. Mostly, they focus on

  • stock picking,
  • allocating your investments, and
  • when to sell.

While these are important issues, what’s new are sites on how to be an owner. Voting is how we hold corporate directors and managers accountable.  Obviously, shareholders haven’t done a great job, especially at the banks. Voting is the cornerstone of good corporate governance. All the rules of Washington can’t save us from future Enrons and stock bubbles if shareholders don’t start acting like shareowners instead of gamblers.

Some say shareowners should leave everything to trusted financial advisors. What, like Bernie Madoff? Or we could just trust in the management of the companies we invest in… but their interests are often different from ours. We may not approve of the $6,000 shower curtain at Tyco or the unprotected derivative bets at AIG.

Institutional investors own about 2/3 of the market. Should we just leave voting up to them? After all, they have a fiduciary duty to vote and they have the resources to investigate the issues. Unfortunately, many also have potential conflicts of interests. For example, mutual funds don’t want to vote against corporate managers who may decide who will run the company’s 401(k) plan. That’s potential business a mutual fund doesn’t want to lose.

Additionally, the average turnover of stock, mostly by institutional investors, is huge. For NYSE listings it was 130% in 2008 and 250% in 2009, meaning the average stock was bought and sold 2 ½ times in 2009. Owning Intel 30 times in 10 years isn’t really being what I’d call a long-term owner. Most of us hold our stocks longer.

We’re usually in for the long term but since we generally only hold a small portion of the stock in any one company, we lack the economic incentive to buy expert advice or spend the time ourselves analyzing complicated proxy issues like shareowner proposals, board elections, executive compensation, mergers etc.

Until recently, being an actively involved shareowner was impractical for most of us but just like social media sites like Facebook are bringing people together, several new internet sites are making proxy advice obtainable for free. Here are five sites worth exploring:

1. Corpgov.net is my blog. For over 15 years I’ve discussed major trends and have provided links to dozens of activist or aggregator sites so that investors can join forces or research what other shareowners are doing.

2. ProxyDemocracy.org aggregates, displays and automatically e-mails to subscribers proxy votes announced in advance by respected activist funds like CalPERS, CalSTRS, Calvert, CBIS, Domini, Florida SBA, AFSCME, Trillium and others. Using ProxyDemocracy.org, you can copy the voting behavior of these trusted “brands.” The site also rates funds on how they vote on issues involving: director elections, executive compensation, corporate governance and corporate impact. So, if you know what issues concern you, you can use that information to help you decide whose votes to copy and which mutual funds to buy.

Another feature of ProxyDemocracy.org is that they will tell you when they have collected votes for upcoming proxies on the stocks in your portfolio (if you give them your e-mail address and name the stocks). Because of the breath and depth of the activists funds it follows, you’ll almost always be able to see how at least some funds are voting.  Unfortunately, you can’t vote your shares directly on ProxyDemocracy.

3. Moxyvote.com has dozens of “advisors,” mostly socially responsible mutual funds, unions, environmental groups and public interests groups who take a stand on various proxy issues. At Moxy Vote you can actually get voting advice and vote on the same site, using the pin number you get from your broker. Easier yet, you can also have your broker deliver your proxies directly to Moxy Vote.

If you choose that route, you can even set up voting defaults based on the recommendations of your chosen advocates. That way if you don’t vote your proxy or override your defaults, the system will automatically vote with your advocates. For example, mine are set up to look first to the Investor Environmental Health Network, if they haven’t taken a position on the proxy item, my vote will be cast per the Center for Political Accountability. If they don’t have a position it moves to my third choice and on down the line. Unfortunately, many of the advisors on Moxy Vote are focused narrowly and hold few stocks. They won’t give you advice on every stock you hold or on every issue at the companies where advocates have taken positions.

4. Shareowners.org is an advocacy site aimed at getting shareownrs to lobby Congress on various issues. Advice on voting at specific companies is limited but like Facebook, it is a great place to share announcements and commentaries with others.

5. The United States Proxy Exchange (proxyexchange.org or USPX), like Shareowners.org, is an advocacy site. However, USPX not only involves members in lobbying efforts, it also involves them in analyzing developing policies. Want to learn how to file resolutions? Present resolutions at local companies? Put your expert skills to good use? USPX provides training and multiple points of entry to baby-boomers and young people alike who would like to see their ideals put into action.

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Voting by Phone in Corporate Elections

Maybe the app will be renamed iVote.

Companies who want to encourage shareholders to vote on corporate resolutions publicized in proxy statements can do so next year, by allowing them to cast votes on their iPads, iPhones, Blackberries, Android or other smart handheld devices.

Broadridge Financial Solutions said that it will make its ProxyVote.com software available early next year on mobile data devices such as smartphones and tablets.

The software is already available for use on personal computers. The move to mobile devices is “to improve and encourage more shareholder voting and enhanced shareholder communications,” said Joseph Vicari, Vice President, Business Strategy and Development, Broadridge.  via Voting by Phone, in Corporate Elections.  Thanks to Gary Lutin for heads up on this article.

Attention: Anyone out there building the iVote app, please build in automatic interfaces with ProxyDemocracy.org and MoxyVote.com. Great to enable voting by phone but even better to enable intelligent voting. Shareowners need information on the people and the issues before they vote.

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How I Voted at Hain, Cisco & Accuray

I waited too long to vote on the MoxyVote.com platform. However, even waiting until the day before the meeting, I was still only able to get minimal advice. I hearty thanks goes out to CalSTRS and their cooperation with ProxyDemocracy.org. At least they had announced votes for Hain and Accuray as I cast my votes this morning.

At Hain, I voted down the line with CalSTRS, withholding votes from director nominees Berke, Futterman and Meltzer, as well as voting against the long-term stock plan proposed by management. At Accuray, I would have voted with CalSTRS and management. However, the ProxyVote platform wouldn’t accept the control number provided to me by my broker. With all the proxy plumbing issues mentioned in the SEC’s concept release, I guess I shouldn’t be too surprised with this glitch. I contacted my broker. We’ll see how quickly they can resolve this.

Since not even CalPERS had announced votes at Cisco, I was on my own. I voted abstain on all the director nominees and other measures except that I voted in favor of the shareowner resolution on environmental sustainability reporting and steps to reduce possible human rights violations. Just as an experiment, I left one field blank to see if Broadridge had addressed the blank vote issue. They had not. After voting, a second page comes up asking to confirm my vote. At the top of that page, in very small print obscured by the gray background the following note appeared.  “*No vote entered.  Your vote will be cast as recommended by the soliciting committee.” And there was a small asterisk next to the vote I left blank.

Obviously, there is much work to be done to improve proxy voting. Here in voting three stocks, I was only able to obtain voting advice on two. On one of the stocks I ran into a proxy plumbing issue. I also confirmed that blank votes are still being turned over to management with only the most obscure warning. For more about that issue, see Don’t Let Companies Change Shareholders’ Blank Votes, HLS Forum on Corporate Governance and Financial Regulation.

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How I Voted at ACAS + How ProxyVote and MoxyVote Handle Blank Votes

Before voting American Capital Ltd. (ACAS) I checked at ProxyDemocracy.org and saw how CalSTRS is voting. I voted with them against Harper, Lundine, Peterson, Puryer, stock option plan and against the issuance of convertible securities. CalPERS did not post how they are voting. I found no “advocates” at MoxyVote.com. Although I would be happier knowing how others are voting or why CalSTRS is voting the way they are, I still trust their judgment with respect to how to vote than I do the soliciting committee at ACAS.

I also checked to see if the blank vote problem with respect to director elections had been modified at Broadridge’s ProxyVote. It hasn’t. Dodd-Frank requires the rules of the exchange to “prohibit any member that is not the beneficial owner of a security… to vote the security in connection with a shareholder vote…(with respect to the election of directors)… unless the beneficial owner of the security has instructed the member to vote the proxy…”  I don’t know if this lapse is because this provision of Dodd-Frank only takes effect when the Exchange changes its rules and they are approved by the SEC or what. (see Open eMail to NYSE Re Blank Votes)

When using Broadridge’s ProxyVote system, if I vote but fail to indicate how I’m voting on a director (or any other issue), the next screen shows that I’m voting for the director with a little asterisk next to my new vote and a note elsewhere on the screen indicating votes left blank are voted per the “soliciting committee.”

Voting on MoxyVote.com is slightly different, even though my understanding is that Broadridge still process the votes. At MoxyVote.com my ballot was pre-marked, all in favor of management. (I presume if one of my selected “advocates” recommended how to vote on the proxy that would override the default.).  At least on the MoxyVote.com system you can clearly see how your vote will be recorded on both the first and second screens and that there will be no blank votes, since if you don’t change the vote, it will be voted for management (per the soliciting committee).

I wonder if MoxyVote.com could legally set the default at Abstain, even though SEC Rule 14a-4(b)(1) says that “a proxy may confer discretionary authority with respect to matters as to which a choice is not specified by the beneficial owner or security holder”? It seems to me that  MoxyVote.com could consider that a “choice” specified by the beneficial owner, since they are warned and must check a box before finally approving their correctness of their vote before it is recorded.

Before going live with this post, I contacted MoxyVote.com and learned what I had forgotten when I set my preferences. Actually, their system does allow users to set defaults to vote with or against management or to abstain. I went back in and set mine to “abstain.”

How to: Login and go to “preferences.” At your preferences  page, look down the left hand side at the bottom under your priority cue – it says “Prioritize and manage” in a big red button – hit that button.  Then at the bottom of that page you will see a drop down menu; select always vote with, against or abstain. You get to choose.

While I wouldn’t want to set these limited preferences and forget them, I like this option much better than what Broadridge offers on ProxyVote.  At MoxyVote.com is is harder to space out because on the first screen I see everything filled out.  If I do space out, my “blank” votes no longer go to management, since I set my default to abstain.

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An Open Proposal for Client Directed Voting

According to the SEC, “client directed voting” will be included in a forthcoming concept release on “proxy plumbing” issues and SEC Chairman Mary L. Schapiro now indicates review by the Commission is forthcoming (see this post on the Forum). It is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate entrenchment, by essentially reestablishing a limited form of broker voting, or their framework can further the interests of shareowners and the larger society through an open and competitive system.


Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. “Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. An open form of CDV, could result in similar impacts but would also create much more thoughtful and robust corporate elections.

Retail investors are the principals in the principal-agent system of corporate governance. We are the beneficial owners of all equities – in the U.S., 25 to 30 percent via direct purchases, and 70 to 75 percent via our “ownership” of shares in mutual funds, pension funds and other intermediaries. The agents in our corporate governance system include CEOs, boards of directors, institutional investors, proxy advisory firms, compensation consultants, etc. An “Open Proposal” on CDV will improve the accountability of all these agents to the principals by empowering retail investors with better information and voting tools.

Since Stephen Norman coined the phrase in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group. Looking back at the origins of the concept, on October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting in the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting to an investor communications conference.

The case for CDV was again made on the Harvard Law School Forum on Corporate Governance and Financial Regulation by Frank G. Zarb, Jr. and John Endean (available here). Similar to Norman, the voting options presented were severely restricted to the following: (1) in proportion to other retail shareholders; (2) in a manner consistent with the board’s recommendation; or (3) in a manner that is contrary to the board’s recommendation.

John Wilcox’s post several weeks later, Fixing the Problems with Client Directed Voting, helped to expand and popularize the concept beyond Norman’s initial concept with a much more open proposal.

Shareowners and the SEC would be well served to review the work of Mark Latham, a member or the SEC’s Investor Advisory Committee, who proposed something similar to CDV at least as far back as the year 2000. See The Internet Will Drive Corporate Monitoring and other papers on the VoterMedia.org Publications page). In stark contrast to Norman, Latham’s proposed system is open and competitive, using a market-driven framework. This post builds on his work, especially Latham’s recent post, Client Directed Voting Q&A, also found on the VoterMedia.org site.

How Open CDV Would Work

Open CDV enables retail shareowners to implement a specialization strategy similar to that of institutional investors. Most fund managers do not read the proxy statement and understand the proposals in the context of a company’s particular circumstances. They have specialized staff for that review, some in-house, some out-sourced. Likewise a few retail shareowners will read proxies, but most will not. Those who do not read them can increasingly be informed by those who do and by voting announcements posted on the Internet.

With an Open Proposal, anyone can create a voting feed, just as anyone can now create a blog. One way to create a feed is to remix other feeds, just as blogs often post or link to material from other blogs. A remixed feed can select different source feeds for different stocks or different industries or different categories of voting matters (director elections vs. shareowner proposals etc.). In his article The Internet Will Drive Corporate Monitoring, Latham called remixed feeds “meta-advisors.”

Engagement requires either a fiduciary obligation, which we won’t have for retail shareowners, the perception of value in the process (which may take years to establish) or passion around relevant issues. Of the three, passion around relevant issues will be the easiest to ignite.

Many third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners. More people will choose voting advice around policy concerns, like global climate change, than around procedural concerns, like whether or not the roles of board chair and CEO should be split.

A small but important percentage of retail shareowners will get more involved in helping to determine voting feed reputations. They will compare feed quality and issue/value identification by such means as creating focus lists at ProxyDemocracy.org. See, for example, this page.

Most retail investors will only pay attention to the best-known voting feeds. A small minority of institutional and retail investors, along with writers in the financial media, are likely to become the most influential opinion leaders helping to determine public reputations, and thus which of potentially hundreds of voting feeds deserve to be followed.

Investors should be able to choose voting feeds and instruct our brokers to implement them for our shares. That is powerful because it takes little time, yet can implement intelligent voting based on reputation – just as the reputations of carmakers and computer makers are widely available and influence our purchases.

There is already a healthy base of “brands” developing with Domini, Calvert, Florida SBA, CalSTRS, CalPERS and others announcing a growing number of their votes in advance of annual meetings. In addition, there are plenty of other sources of voting advice besides institutional investors, many of which focus on a limited number of issues and many can already be seen at MoxyVote.com.

Moxy Vote has already built an open CDV platform on a relatively low budget. Proxy Democracy and Transparent Democracy can be readily enhanced to include voting capability if the SEC adopts additional data standardization and if cost reimbursement is forthcoming from issuers. See comments submitted by MoxyVote.com to the SEC here.

Essential Elements of Open CDV

The key issue in any open CDV system is to let shareowners control where their electronic ballots are delivered. Just as there is no question shareowners can control where hardcopy ballots are delivered, there should be no question they can direct where their electronic ballots are delivered. This simple requirement would insure third-party content providers an opportunity to compete and improve the quality of voting advice.

Additional elements for a more effective CDV system include:

  • A wide range of voting opinion sources that will eventually cover all issues;
  • Open access for any new opinion sources to publish their opinions;
  • Open access for shareowners to choose any opinion source for our standing instructions on voting;
  • Sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote (or by beneficial owners of funds that may choose to “pass through” their votes).

Under an Open Proposal, feeds will offer the ability for retail shareowners to essentially build a “voting policy,” just as institutional voters are now able to do. That model will increase participation and voting quality. We shouldn’t ask shareowners to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in many different companies who would rather spend their time on other activities.

Third-party CDV systems, like Moxy Vote, will allow investors to create hierarchies of voting instructions. (Vote like X. If X hasn’t voted the item, vote per Y. If Y hasn’t voted, vote per Z, etc. Eventually, these systems could become very complex. Vote like X on issue A; vote like Y on issue B, also specifying defaults if either X or Y don’t have votes recorded.)

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around “proxy assignments.” Proxies assigned to organizations or individuals, for example, could give annual meetings a new meaning. See Investor Suffrage Movement by Glyn A. Holton.

In the 1940s and 1950s thousands of shareowners frequently showed up for shareowner meetings because they frequently deliberated issues and some of those in attendance held substantial proxies from others. Lewis Gilbert, for example, was often given unsolicited proxies, which he used to negotiate motions at meetings.

Impact of Open CDV

We are a long way removed from those days and advance notice requirements would preclude much of the activities Gilbert made famous. Voting at meetings is important, but having a say in setting the agenda on what will be voted on is even more powerful. If a significant number of proxies are assigned to others or thousands of shareowners routinely follow specific voting advisors or institutions, leading voices can actually begin to influence how agendas for annual meetings are set.

An Open Proposal will increase both the quantity and the quality of voting by both retail and institutional investors. Ease of voting and the ability to align with valued brands will drive quantity. Increased quality will result from competition between voting opinion sources for reputation in the eyes of investors. Opinion sources will include institutional investors, retail investors, bloggers, activists and professional proxy voting advisors funded by new mechanisms discussed later in this article.

An Open Proposal will cause retail shareowners to engage in proxy voting because it offers several new and powerful ways for us to do so, while respecting our other interests and time constraints.

Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners and funds. This is already happening. I have personally initiated such dialogues with several funds and have increasingly been met with a favorable response. As funds learn how and why other funds are voting, many are open to reexamining their own position.

Director elections in particular will be more closely watched, once shareowners gain a sense of empowerment. Prior to nascent CDV sites, we had little or no basis for voting against or withholding votes from individual directors. Soon we will be able to drill down through recommendations to discover which directors are over-boarded, miss meetings, have potential conflicts of interest, were on compensation committees that overpaid executives, etc. Funds will increasingly provide the reason for their votes, since that will drive more investors to vote with them. When a fund discloses not only their vote, but also the reason for their vote, investors get a better picture of their values and we begin to trust given “brands” as consistent with our own values.


Limiting CDV to only selected situations, like uncontested elections, would only lessen the benefits of CDV, so I don’t recommend imposing any such limits. It would be better not to establish any CDV through regulations that severely limits voting options, since once such systems are enacted they will be difficult to amend, given that those who benefit from such limitations will be in an even stronger position to fight opening up the process.

All matters should be eligible for inclusion in a CDV arrangement. All can be handled the same way, with the retail shareowner voting as per standing instructions to use specified voting feeds. Preferably, systems should allow users the ability to override standing instructions in any given situation. Competition among voting feeds will encourage those who create them to constantly improve their voting quality and reputation. One improvement is to adapt their analysis and voting decisions to the significant variation among proposals on any given matter. Another is to create industry specific analysis. Analysis could also vary by a company’s maturation and/or a great many other factors. Deeper levels of analysis are more likely with open CDV systems that enhance competition.

System Defaults

The default choice should either be whatever the shareowner selects or it should be a “not voted” vote, just like if a voter fails to mark an item on the proxy, that item should be left blank, although it is now often counted in favor of management. (See my petition to the SEC for a rulemaking on “blank votes” here)

Counting a blank vote as anything else would make mounting campaigns to deny companies a quorum much more difficult. Neither brokers nor anyone else should be permitted to vote on any ballot item in the absence of voter instructions (i.e., all items should be considered non-routine matters in NYSE rules).

Brokers/banks should not be forced to take on CDV design responsibilities. Other third-party specialist firms will probably do a better job. The key is to ensure that brokers or their agents deliver ballots to whomever the shareowner directs. Of course, it would also be a plus if brokers and banks would make their clients aware of the available options.

Competition for Funds Would Enhance CDV

I would recommend an ongoing competition open to providers of investor education, which would compete for funding allocated by retail investor vote. This could be limited to education about voting issues (informing CDV, providing voting opinions, organizing voting opinion data feeds, discussing reputations etc.), or voting could be included in a broader retail investor education competition. For more explanation, see Mark Latham’s Voter Funded Investor Education Proposal (November 30, 2009).

This would benefit all retail investors. Since the benefit is shared broadly, it should not be paid by individual retail investors, but rather through funds that we own collectively – corporate funds. There are several possible ways of arranging this. One example is Mark Latham’s Ultimate Proxy Advisor Proposal (June 1, 2010).

Under that proposal, companies pay voting advisors selected by their shareowners. Since there are no “free riders” and the advice is essentially paid for by all shareowners, we can pay much more for proxy research on our companies than current proxy advisors typically allocate. Additionally, the advice we get is less likely to be of a “box ticking” nature, more likely to be industry and company specific.

The SEC should encourage the development of shareowner selected proxy advisors by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to those who undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a company’s shareowners.

In the near term, the entrenched agents in our corporate governance system may try to prevent investors from using our funds to empower ourselves this way, so enabling regulations from the SEC and public funds may be helpful to get started. Public funds earmarked for retail investor education and advocacy could be used for the first such initiatives.


Cost categories for CDV include: (a) creating voting opinion feeds; (b) system development for brokers; (c) vote processing by Broadridge and similar service providers.

If the SEC publicly encourages the development of CDV, many organizations are likely to build the necessary systems. As previously mentioned, voting opinion websites have already started appearing (ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com). To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.

CDV will increase the quality of voting and decrease the quantity and costs of paper mailings. These benefits will outweigh the costs of building CDV systems. Standardized data tagging will likewise streamline the system and reduce costs in the long run, although it will require some up-front investment.

NYSE rules currently require payment by issuers for the cost of voting electronically but issuers may not always be making such payments to CDV platforms like Moxy Vote. See NYSE Rules 450-460 pertaining to proxy distribution, available here. The Rules are actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items. The rules are clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should be amended to apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like Moxy Vote, RiskMetrics, Glass Lewis and ProxyGovernance.

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, Glass Lewis, ProxyGovernance, Moxy Vote, etc.) should be paid by the issuers as part of the overall collection costs (like postage). The electronic platforms, in this function, are merely an extension of the proxy distribution agent. However, I understand that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less? Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners)

My understanding is that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year) and that electronic platforms are generally passing along these costs to voters. That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes and many more per ballot transactions, relative to shares voted.

This is, in effect, becomes a system where the voter is paying to vote, like the old Jim Crow poll tax. It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and through the phone is free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like Moxy Vote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as Proxy Democracy, would ever be able to offer users the option of voting on a Proxy Democracy platform. Such costs need to be eliminated or minimized if a robust open CDV system is to mature.

The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like MoxyVote.com that should be sharing in this incentive, since shifting to electronic from paper voting saves money. That would be a simple way of beginning to address the cost issue. The most fundamental point regarding costs is that issuers should bear the actual cost of voting, not shareowners or CDV systems.


An open CDV system improves corporate governance because voting advisors will make it easier for shareowners to meaningfully participate in voting, without having to read through proxies. Open CDV systems do this by allowing shareowners to informally build individualized proxy voting policies, much like formal policies maintained by many institutional investors. Unlike many institutional investors, who may ponder over their voting policies for months, retail shareowners will mostly build default policies based on brand identification. Voting advisors, chosen by shareowners through competitive markets for shared information, will help make agents more accountable and democracy in corporate elections an emerging reality.

(Note: this post is reprinted from Harvard Law School Forum on Corporate Governance and Financial Regulation, Wednesday July 14, 2010 at 9:08 am)

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Investment Clubs as Active Ownership Funds

Calgary, of course, has more than oil and tar sands. The Calgary Herald recently carried an interesting article on investment clubs. (New breed of Investment club goes big, 7/4/10) Traditionally, investment clubs have up to about 12 people who meet over lunch or dinner for as much a social function as for investing. As those clubs have declined, we now see a new type rising.

Podium, a new club in Calgary, is seeking more than 5,000 members at an investment limit of $5,000 each. Vancouver’s Freedom Investment Club had 5,000 members and was valued at $110 million. Podium plans to reduce risk by focusing exclusively on local companies, or “Calgary businesses with global potential.”

Podium is currently evaluating three local companies for investment potential. What if Better Investing teamed up with Motley Fool, ShareOwners.org and/or ProxyDemocracy.org to create a new breed of investments all around the US where investments are focused locally for the long-term and the clubs spend at least as much time on corporate governance and strategy as they do on stock picking?

Such investment clubs could be seen as potential advisory boards and test markets for local companies. Community involvement would create a greater bond between companies and society. We could start getting away from the notion that holding Intel 14 times in 5 years is long-term investing. I’d be happy to help.

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Q&A on Client Directed Voting

Historically, most retail shareowners have tossed their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. “Client directed voting” (CDV), a term coined by Stephen Norman is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture much of the broker-votes cast in their favor that evaporated with recent reforms.

The SEC has indicated that CDV will, among other “proxy plumbing” matters, be the subject of a forthcoming concept release. Therefore, it is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate management entrenchment or their framework can further the interests of shareowners. My intention with this Q&A is to help readers understand some of the surrounding issues and be better prepared to judge proposals.

Since Stephen Norman coined the phrase in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group.  On October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting on the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting at an investor communications conference.  The main feature of CDV is that it allows  shareowners to instruct their broker how to vote in the event they fail to return a proxy and it severely limits their default voting options.

Recent posts on the Harvard Law School Forum on Corporate Governance and Financial Regulation by John Wilcox (Fixing the Problems with Client Directed Voting, March 5, 2010) and Frank G. Zarb, Jr. and John Endean (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” February 14, 2010) have helped to expand and popularize the concept beyond Norman’s initial concept. See also: CDV vs FAVE: More Proxy Voting Options,  2/17/2010 and Comparison of “Proxy Plumbing” Recommendations, 11/8/09.

Mark Latham, a member or the SEC’s Investor Advisory Committee (SECIAC), actually proposed something similar at least as far back as 2000 (see The Internet Will Drive Corporate Monitoring and other papers at http://www.votermedia.org/publications) and his system provides more of an open framework, instead of leaning to management. Tbis post builds on his work, especially the Q&A he recently posted on the subject. My main contribution is to simply highlight some relatively small differences and to call out some additional concerns.

See Latham’s recent post Client Directed Voting Q&A on the VoterMedia.org Publications page at http://www.votermedia.org/publications. His post provides more online references as well as an interesting introduction to frame the topic. Here, I simply dive into frequently asked questions. The questions and Mark Latham’s responses are in black. My responses are in dark red. Caution: Where my response significantly differs from his, you won’t necessarily know, without comparing this post to Latham’s paper.

1. What do you view as the most significant merits and drawbacks of CDV?

Merits of the Open Proposal:

Quality of voting is more important than quantity of voting (voter turnout). The Open Proposal will increase both the quality and the quantity of voting by both retail and institutional investors. But I think its most significant impact will be to increase the quality of voting by both individuals and institutions. This will happen because of the implicit competition among various voting opinion sources, and their evolving reputations in the eyes of retail investors. Opinion sources will include institutional investors, retail investors, bloggers, activists and professional proxy voting advisors funded by possible new mechanisms discussed later in this questionnaire.

Retail investors are the principals in the principal-agent system of corporate governance. We are the beneficial owners of all equities – in the U.S., 25 to 30 percent via direct purchases, and 70 to 75 percent via our ownership of shares in mutual funds, pension funds and other intermediaries. (By “share” of a pension fund, I mean the fraction of the fund’s assets that funds a person’s expected future benefits.) The agents in our corporate governance system include CEOs, boards of directors, institutional investors, proxy advisory firms, compensation consultants etc. The Open Proposal will improve the accountability of all these agents to the principals, by empowering retail investors with better information and voting tools.

Drawbacks: The Limited Proposal has the substantial drawback of severely limiting retail investors’ choices for standing instructions on voting. The Centralized Proposal likewise has the drawback of limiting our choices to only the decisions shared by institutional investors. The Open Proposal has no drawbacks that I can think of.

The key issue is to let shareowners control where their electronic ballots are delivered, just as there is no question they can control where hardcopy ballots are delivered. This simple requirement would give third party content providers an opportunity to compete and improve content.

2. In your view, how viable a solution is CDV to increase retail participation in proxy voting in the short term? How long do you think it would take before CDV materially increased retail participation rates?

Once the Open Proposal is implemented by more and more retail brokers, I expect the quality of all voting and the quantity of retail voting to increase materially within 2 years. The increase in quality is more important, but I expect our retail voting rate to increase steadily and substantially in the long term, eventually surpassing 70%.

Any implementation schedule would be heavily influenced the need for fees to be delivered to third-party providers and the need for a requirement that brokers must follow client instructions to deliver ballots electronically to third-party platforms. I’ve had personal experience with a broker reluctant to deliver proxies according to my instructions.

3. What other complementary reforms would you view as essential to ensure the success of any CDV approach that were to be implemented?

We should fund various competing sources of proxy voting advice that would be available free to all investors. We should also fund some infrastructure for sharing voting opinions. Funds should be allocated among competing providers by retail investor vote. Sources of funds are discussed in my responses to later questions below.

Retail Shareholder Participation

1. In your view, would CDV be more likely to cause retail shareholders to engage with or disengage from proxy voting? Why? Do you think that either of the Limited Proposal or Centralized Proposal would be more likely to engage retail shareholder participation? Why?

I don’t think the Limited Proposal would engage retail participation significantly. A wider range of voting choices is needed for that, so the Centralized Proposal would engage more retail participation, and the Open Proposal would engage the most retail participation.

The Open Proposal will cause retail shareowners to engage with proxy voting because it offers several new and powerful ways for us to do so. Most will just choose a voting feed and instruct our brokers to implement it for our shares. That is powerful because it takes little time, yet can implement intelligent voting based on reputations of the voting feeds – reputations that will become conveniently available in the financial media, just as the reputations of car makers and computer makers are widely available.

Many third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners.

A small but important percentage of retail shareowners will get more involved in helping to determine those reputations of voting feeds. They will compare feed quality by such means as creating focus lists at ProxyDemocracy – see for example http://proxydemocracy.org/fund_owners/focus_lists/25.

Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners. Both are already happening, mostly as a result of votes disclosed at ProxyDemocracy. I’ve personally initiated such dialogues with several funds and have increasingly been met with a favorable response.

2. Assume there are three groups of retail shareholders: (i) those who participate in proxy voting currently, (ii) those who would participate but find the process too time consuming and onerous and (iii) those who are unlikely to ever participate in proxy voting. (a) In your view, how many retail shareholders would switch from category (ii) to category (i) if CDV were implemented? Would it make a difference in your view if the Limited Proposal or Centralized Proposal were implemented?

My rough guesses for long term participation rates: Limited Proposal: 25% increase, with most votes going automatically to management. Centralized Proposal: 50% participation. Open Proposal: 70% participation. Of course, these numbers depend on the promotion, regulation and disclosure of whatever CDV system is implemented. Engagement requires either a fiduciary obligation, which we won’t have for retail shareowners, the perception of value in the process (which may take a while) or passion around relevant issues. Of the three, passion around relevant issues will be the easiest to ignite.

(b) In your view, would CDV have a meaningful impact on the level of category (iii) investors?

Yes – the Open Proposal in particular will significantly reduce category (iii). Most shareowners are passionate about at least some specific issues. Once engaged, they are likely to engage further.

3. In your view, would implementation of CDV increase retail shareholder engagement with the annual meeting process? Why or why not?

Yes. The most important part of the AGM is voting, so in my view engagement with voting is one type of engagement with the annual meeting process, even if the shareowner doesn’t physically attend the meeting. (See answer under #1 above). Director elections will be more closely watched, once shareowners gain a sense of empowerment.

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around proxy assignments. Proxies assigned to organizations or individuals, for example, could give AGMs a new meaning. See http://contingencyanalysis.com/home/papers/suffrage.pdf.

In the 1940s and 1950s thousands of shareowners frequently showed up for shareowner meetings because they sometimes actually deliberated issues and some of those in attendance held proxies from others. Lewis Gilbert, for example, was often given unsolicited proxies, which he used to negotiate motions at meetings.

We are a long way removed from those days. Voting is important, but having a say in setting the agenda on what will be voted on is even better. If a significant number of proxies are assigned or even if shareowners routinely follow specific voting advisors or institutions, leading voices can actually begin to influence how agendas for annual meetings are set.

4. Do you think a CDV arrangement that called for individualized marked proxy cards, as contemplated under the Limited Proposal, would encourage or discourage retail shareholder engagement in the proxy process?

The Limited Proposal would take us at least part way back to broker votes. In the absence of meaningful choices, most shareowners will defer to management. Although that would result in votes, I don’t see it resulting in “engagement.” It might be a plus for shareowners to be able to pull up a pre-filled ballot to show them this is how they are about to vote, according to registered preferences.

However, I wouldn’t ask them to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in lots of different companies or who would just rather spend their time on other activities. Under an Open Proposal, feeds will offer the ability for retail shareowners to essentially build a “voting policy” just as institutional voters are able to do. That model will increase participation and the quality of the vote.

5. In your view, would CDV encourage sufficiently informed retail shareholder voting or would it effectively discourage retail investors from reading the proxy statement and understanding the particular proposals in the context of a company’s particular circumstances? What criteria do you use in determining whether retail shareholder voting is sufficiently informed? Does your answer differ as between the Limited Proposal and Centralized Proposal?

In my view, the Open Proposal will encourage sufficiently informed retail shareowner voting. In order for retail voting to be sufficiently informed, it is not necessary for all retail shareowners to read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. Most retail shareowners won’t read proxy statements.

Open Proposal CDV enables retail shareowners to implement a specialization strategy similar to that of institutional investors. Most fund managers do not read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. They have specialized staff for that, some in-house, some out-sourced. Likewise a few of us retail shareowners will read proxies, but most will not. Those who do not read them will be informed by those who do, and by the many other sources of voting opinions who read the proxies.

The criteria for determining sufficient information are in general too complex and subjective to describe concisely. But some features I would look for in an effective retail shareowner information system include:

(a) a wide range of voting opinion sources;

(b) open access for any new opinion sources to publish their opinions;

(c) open access for shareowners to choose any opinion source for our standing instructions on voting;

(d) sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote.

Thus the Limited Proposal would not inform shareowners sufficiently; the Centralized Proposal would be better; and the Open Proposal would be best in facilitating the ability of retail shareowners to align with groups they trust and that share their values.

6. What investor education measures would you recommend to ensure investors were sufficiently informed about CDV? Who should undertake those and bear the cost?

I would recommend an ongoing competition open to any providers of investor education, who would compete for funding allocated by retail investor vote. This could be limited to education about voting issues (informing about CDV, providing voting opinions, organizing voting opinion data feeds, discussing reputations etc.), or voting could be included in a broader retail investor education competition. For more explanation, please see http://votermedia.wordpress.com/2010/01/23/voter-funded-investor-education-proposal/ .

This would benefit us retail investors, so we should pay for it. Since the benefit is shared broadly, it should not be paid by retail investors one at a time, but rather by funds that we own collectively – corporate funds. (See my answer to General question #1 above – “Retail investors are the beneficial owners of all equities.”) There are several possible ways of arranging this. One example is the “Proxy Advisor” proposal at votermedia.org/proposals. In the near term, the agents in our corporate governance system may try to prevent us from using our funds to empower ourselves this way, so a helping hand from regulators may be needed to get it started. Public funds earmarked for retail investor education and advocacy could be used for the first such initiatives.

Implementation and Ongoing Administration

1. Should retail shareholders have to renew their agreement with their brokers with respect to standing voting instructions annually or on some other basis? Why? Is your conclusion affected by the lower incidence of retail voting following the introduction of “notice and access” (i.e., even asking shareholders to take the time to access the proxy statement online resulted in a significant drop in participation)?

Yes, it’s reasonable to require retail shareowners to renew their standing instructions annually. This renewal should only require a simple mouse-click, once the investor has logged in to the broker’s website and gone to the standing instructions page. The renewal could be done at any time, and be valid for one year from the last time the investor clicked to renew. It also affirms the channel of communication… the e-mail address is still valid.

The quality and reputation of voting feeds will change over time, so retail investors should review their choice of feed at least annually.

No, the “notice and access” participation dropoff may not be relevant here, since it occurred in a system without CDV. CDV is likely to fundamentally change retail investor attitudes and behavior regarding proxy voting.

2. Should the renewal process be an affirmative one – that is, the arrangement would drop away, absent shareholder action to renew his / her voting preferences? Does the fact of a rapidly changing governance landscape affect your decision? Why or why not?

My answer to the previous question covers this question also.

3. How should CDV address director slates, in contested and uncontested elections?

I don’t think director slates in contested and uncontested elections would make any difference to the implementation of CDV. All such cases can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed.

4. Which matters should be eligible for inclusion in a CDV arrangement (e.g., only uncontested matters)? How would those matters be defined (e.g., shareholder proposals are almost always “contested” by management and the board)? How should the fact of significant variation among proposals on a given matter, particularly in light of a company’s particular circumstances, affect the decision about whether a matter is appropriate for treatment within a CDV arrangement?

Like my answer to #3 above: All matters should be eligible for inclusion in a CDV arrangement. All can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed. Competition among voting feeds will encourage those who create them to constantly try to improve their voting quality and reputation. One improvement is to adapt their analysis and voting decisions to the significant variation among proposals on a given matter.

5. If only selected matters are eligible for inclusion in a CDV arrangement, will CDV materially improve the retail investor’s engagement in the annual meeting process or the administration of proxy voting, given that there could be other matters on the proxy card as to which the shareholder would have to vote?

Limiting CDV to selected matters only would lessen the benefits of CDV, so I don’t recommend such limits. It would be better not to implement any CDV that severely limits voting options, since once such a system is enacted it would be difficult to amend, given that those who would benefit from such limitations will be in an even stronger position to fight opening up the process.

6. Should preferences be indicated on a portfolio or per stock basis?

Preferences should be indicated on a portfolio basis. That is simplest for retail investors and for brokers when they offer CDV to clients. Changing preferences stock-by-stock can be handled by those who create the voting feeds. So brokers need not build systems for stock-by-stock customization of standing instructions.

With the Open Proposal, anyone can create a voting feed, just as anyone now can create a blog. One way to create a feed is to remix other feeds, just as blogs often post or link to material from other blogs. A remixed feed can select different source feeds for different stocks or different industries or different categories of voting matters (director elections vs shareowner proposals etc.). In the article “The Internet Will Drive Corporate Monitoring” I called remixed feeds “meta- advisors”.

7. The Limited Proposal is constructed such that retail investors could provide standing voting instructions to their brokers in their brokerage agreements. If standing voting instructions were indicated on a portfolio basis, should the instructions cover only those companies in which a retail investor owns shares at the time the brokerage agreement is signed or all subsequent purchases of stock as well? If instead preferences were indicated on a per stock basis, when would retail investors indicate their preferences with respect to stocks purchased after the investor’s brokerage agreement was signed? At the time of purchase or some other time?

Standing voting instructions on a portfolio basis should cover all subsequent purchases of stock in that portfolio.

8. What choices should a retail shareholder have when deciding its standing voting instructions? (a) Only those from the Limited Proposal, namely (i) vote against management, (ii) vote for management, (iii) abstain on all matters, and (iv) vote proportionally with the firm’s other clients’ instructed votes? (b) Vote in accordance with the brokerage firm’s published guidelines? (c) Various institutional investor voting guidelines? (d) Proxy advisory firm guidelines? What do you see as the pros and cons in providing each of these choices to shareholders (e.g., insufficient number of choices, information overload, likely absence of action when too many choices)? Are there other choices that are appropriate?

Because we retail investors are principals not agents, there are few reasons to regulate how we vote our stock. One valid reason is to prevent vote-selling. The tried-and-true way to prevent vote- selling is to keep voting decisions confidential, as we do in democracies. Only when an agent is voting other people’s stock do we require vote disclosure, even though that opens the door to vote-selling.

Therefore retail shareowners should be able to vote any way we choose, subject only to a prohibition on selling our votes. So I recommend the Open Proposal, where we can choose any voting feed. The potential information overload problem can be handled well enough by the market for public reputation. Most retail investors will only pay attention to perhaps the top ten best known voting feeds. A small minority of retail investors, along with writers in the financial media, will be the opinion leaders helping to determine public reputations, and thus which of the hundreds of voting feeds deserve to become the best known.

9. The Limited Proposal, as originally conceived, calls for the default choice to be proportional voting with the brokerage firm’s other instructed votes. Do you agree or disagree with this default choice and, if the latter, what should the default choice be (e.g., no vote)?

This question arises for all three CDV proposals discussed here: what about investors who don’t give standing instructions, or whose instructions have lapsed after one year with no renewal? The default choice should either be whatever the shareowner selects or it should be a “no” vote, just like if a voter fails to mark an item on the proxy, that item should be left blank.

Counting a blank vote as anything else would make mounting campaigns to deny companies a quorum much more difficult. Neither brokers nor anyone else should be permitted to vote on any ballot item in the absence of voter instructions (i.e., all items should be considered non-routine matters in NYSE rules). This is one reason why the Limited Proposal is such a poor choice. It would be better not to have CDV at all than it would be to go with the Limited Proposal. Again, once adopted, it will be hard to change because those who benefit from severely limiting options will have a vested interested in continuing to limit the voice of shareowners.

10. What administrative steps would brokers have to take to implement CDV? What step is most likely to provide an obstacle for CDV (e.g., individualized marked proxy cards, having information from companies about proposals to be voted on a timely basis)? How would broker obligations affect the company’s own obligations under Rule 14a-8 (e.g., would those obligations have to be accelerated)?

Brokers would have to create a page on their website for retail investors to indicate which voting feed they want to use for standing instructions. Brokers would have to store their clients’ instructions and transmit them to Broadridge (or other service provider). I don’t think individualized marked proxy cards are necessary, but could be provided if an investor requests them. Broadridge could handle the details of getting the voting decisions from the selected voting feeds, matching them with client shareholdings, and offering electronic and paper-based ways for investors to override their feed-based instructions if desired. I don’t think broker obligations would affect the company’s own obligations under Rule 14a-8.

Brokers/banks, transfer agents should be capable of passing through or delivering proxy votes to all valid electronic platforms. If that is the case, they don’t need to do much more than be aware and make their clients aware of the options.

11. In your view, would brokers in fact increase their engagement with retail investors about matters subject to a vote at a company’s next annual meeting? Would liability considerations affect your conclusion? Should brokers who do engage be exempt from the solicitation rules?

I don’t think it would be the brokers’ role to increase engagement with retail investors on voting matters, unless a broker wants to develop a reputation as a voting “brand.” (see Proxy Voting Brand Competition at http://votermedia.org/publications) There will be plenty of engagement in the public shared realm, for example via sites like moxyvote.com. Brokers could just link to such sites from their client web interface.

12. Should brokers be able to delegate responsibility for fulfilling their obligations under a CDV approach such as that contemplated by the Limited Proposal (i.e., filling out individualized proxy cards, maintaining lists of customer standing voting instructions, etc.) to a third party agent? Are there any obligations brokers should not be able to delegate to an agent?

I’ve addressed most of these issues in my response to question #10 above. Brokers should not be forced to take on CDV responsibilities. Other third-party firms will do a better job. The key is to ensure that brokers or their agents deliver ballots to wherever the shareowner directs.

13. What level of responsibility and liability should be attached to intermediaries for properly completing a proxy card for CDV, if that feature were adopted as part of a CDV arrangement? If brokers are able to delegate such responsibilities to a third party agent, what liability, if any, should attach to the agent?

I have no particular view on this, beyond the obvious general principle that there must be enough responsibility to make the overall CDV system work. I’m not sure which design will best balance cost, integrity and ease of use.

14. Should a clear audit trail and related reporting be required elements of CDV? Who would bear responsibility for assuring the quality of the audit trail and producing related reports? Who should receive the reports in the first instance (e.g., only the company and the tabulation agent)?

Same answer as for #13 above.

15. What costs would you foresee in implementation of CDV? Who should bear those costs? If the costs should be shared, how should that decision be made? Why should companies wish to pay for CDV, given that they may view CDV as a reductionist approach to complex issues of governance (i.e., indirect subsidies by smaller companies with fewer issues or larger institutional ownership, as compared to larger companies that attract greater attention and have potentially larger retail ownership)?

Cost categories include: (a) creating voting opinion feeds; (b) system development for brokers; (c) vote processing by Broadridge and similar service providers.

If the SEC publicly encourages the development of CDV, many organizations are likely to build the necessary systems voluntarily at their own cost. Voting opinion websites have already started appearing (ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com). These can easily start sharing voting opinion feeds. To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.

Once we have a broad choice of publicly available voting feeds, it will not be expensive for brokers and Broadridge to adapt their existing proxy vote systems to use the feeds. Some adjustment to the existing system of issuer fees for vote processing will help shift payments from paper mailings to electronic submission via CDV standing instructions.

CDV will increase the quality of voting and decrease the quantity and costs of paper mailings. These benefits will outweigh the costs of building CDV systems. Standardized data tagging will likewise streamline the system and reduce costs in the long run, although it will require some up- front investment.

In your question “Why should companies wish to pay…?”, I’m not sure if you mean “Why should the owners of companies wish to pay…?” or “Why should senior employees of companies (e.g. CEOs) want companies to pay…?” So I’ll answer both questions: We owners of companies should wish to pay (with our companies’ funds) because for us, the benefits of better voting, increased accountability, better corporate governance, and resulting higher investment returns will outweigh the costs. Some employees (e.g. some CEOs) may not want companies to pay, because the increased accountability would reduce their power and influence over their own pay and tenure as CEOs.

NYSE rules require payment by issuers for the cost of voting electronically but issuers may not always be doing so. See NYSE Rules 450-460 pertaining to proxy distribution.  The Rules are actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items.  The rules are very clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should also apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like RiskMetrics, ProxyGovernance and MoxyVote.

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, ProxyGovernance, MoxyVote, etc.) should be paid by the issuers as part of the overall collection costs (like postage).  The electronic platforms, in this function, are merely an extension of the proxy distribution agent and it’s odd that fees are payable to Broadridge (beyond a nominal fee covering their costs).  It’s also notable that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers, from what I understand.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less?  The answer is that one does not exist. Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners at https://www.corpgov.net/wordpress/?p=1459 and the petition I filed with the SEC for a rulemaking on “blank votes” at https://www.corpgov.net/wp-content/uploads/2010/04/SECpetitonOnBlankVotes.pdf)

A key point here is also that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year).  Electronic platforms are generally passing along these costs to voters.  That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes.

This is, in effect, a system where the voter is paying to vote, like the old Jim Crow poll tax.  It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and through the phone is free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like MoxyVote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as ProxyDemocracy, would ever be able to offer users the option of voting on a ProxyDemocracy platform.

16. What ongoing costs would there be in the use of CDV? Who should bear those costs?

My answer to the previous question applies to this question also. The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like MoxyVote.com that should be sharing in this incentive, since shifting to electronic from paper voting saves money.

17. Do websites such as ProxyDemocracy.org, TransparentDemocracy.org or MoxyVote.com (or even a new database of institutional decisions) make CDV, or at least the need for tailored proxy cards, less necessary as a method?

These websites are the first steps toward Open CDV. For the sake of improved accountability, corporate governance and investment returns, we should build on these pioneering initiatives and develop a complete Open CDV system to empower all retail shareowners. I don’t think hard-copy proxy cards are important, but could be offered to those investors who request them. We should have online systems that let investors manually override their standing instructions. All CDV proposals include this feature. We can preserve the manual online voting systems we already have, as an option that each investor could use if and when desired. Ballots can land in electronic mailboxes of choice blank and can then be pre-filled based on the “voting policy” or “brand” loyalty program created by the user (i.e., just as institutional voters have been doing for years).

Centralized Proposal

In this section, I try to answer the questions in two contexts – for the Centralized Proposal and for the Open Proposal (which I also call Open CDV).

1. In your view, would institutional investors be willing to provide their voting decisions in advance of a meeting? Are there obstacles to institutional investors’ providing this information (e.g., confidentiality considerations, considerations relating to proprietary investing strategies or investments)? (Note that some mutual funds do this now.)

If predisclosing their voting decisions is voluntary, then some institutional investors would do so and some would not. One reason could be to maintain confidentiality of their voting decisions, for example to avoid improper influence on them from corporate management. Another may be to avoid revealing their holdings (and thus proprietary investing strategies) at that moment.

In the Open Proposal which I favor, it’s not a problem if many institutional investors don’t predisclose their votes.

There is already a healthy base with Florida SBA, CalSTRS and CalPERS  covering most companies. In addition, there will be plenty of other sources of voting advice besides institutional investors, many of which will be focused on a limited number of issues. Some can already be seen at MoxyVote.com.

2. In your view, is it feasible to receive institutional investor voting decisions sufficiently in advance of an annual meeting to input into a database as contemplated in the Centralized Proposal? What operational concerns might you have?

Yes, with automated networked systems, timeliness should not be a problem. This would be less of a concern with the Open Proposal, since its numerous sources of voting advice can be used as fallbacks in case some voting decision sources are too late or missing. MoxyVote.com has already built its system that way, where users specify a priority list of decision sources, and the highest priority one with a decision available is used.

A fundamental operational issue is data standardization across all users in this shared networked system. The SEC Investor Advisory Committee’s Proxy Voting Transparency proposal, passed unanimously on February 22, 2010, advocated standardized data tagging that should resolve this issue. Additionally, I understand that on electronic voting platforms, the vote doesn’t necessarily get submitted until very near the final deadline. However, if votes are simply being filled out according to the guidance of third-parties, votes can be compiled and cast very quickly.

3. Should retail investors be given notice when new institutional investors add their voting decisions to the database after a retail investor has provided its standing voting instructions? What sort of notice should be provided? Who should be responsible for providing the notice?

CDV will induce an active public discussion in the financial media about the reputation of various sources of voting opinions. Most of us retail investors will not need to pay attention to every new source of opinions. Most of us will pay attention to the opinion leaders in this public discussion, who will let us know, for example, their top ten recommended and/or popular opinion sources, and their general characteristics – e.g. degree of emphasis on financial vs environmental vs social/political considerations. It will be like brand reputation for makers of complex products like cars or computers.

So no, there is no need for notice to be sent to retail investors when new institutional investors add their voting decisions but investors should be able to seek and find such information easily and should be able to subscribe to a news feed like google, alerting them to new participants. The new providers have every incentive to get the word out. Again, this issue is less of a concern in the Open Proposal, with its greater breadth of available voting opinion sources. Annual review and/or confirmation will help those who do not pay attention to keep up more than they otherwise might.

4. Would you allow any institutional investor who wanted its voting decisions to be in the database to be included? Why or why not? If not, what criteria should be used to decide which voting decisions would be available? Should there be an ownership threshold? If so, what threshold would you recommend? Should they be paid a license fee?

Likewise, these kinds of concerns are a good illustration of why the Open Proposal is better than the Centralized Proposal. In the Open Proposal, anyone can publish a voting feed for free, just as anyone can now publish a blog for free. There is no centralized database of blogs; there is just a data standard, which we should soon have for proxy votes.

5. Should a CDV database of voting decisions provide background about the nature of the contributing institutional investors, so that retail investors could place the voting decisions in context (e.g., determine whether the institutional investor likely has a bias)? If an institutional investor’s voting guidelines or decisions are reported, should it be required to provide context for the guidelines or decisions (e.g., conflict of interest disclosure)? If so, what contextual information would be appropriate? Should liability attach to that information?

An unregulated public market for reputation of voting opinion sources can probably handle most of these issues well enough, especially in the Open Proposal where it is easy for new entrants to compete by building better reputations for serving retail investor interests. Additional disclosures, especially regarding potential conflicts of interest, should be encouraged but not required until we see abuses that may make such requirements advantageous. Normal contract law should cover liability requirements.

6. In your view, should a proxy advisory firm’s guidelines on voting various measures be included in a database of voting decisions? Why or why not? Would your view change if the SEC regulated proxy advisory firms?

If I answer in the context of the Centralized Proposal, I would favor making it as much like the Open Proposal as possible: free voluntary access by all who want to participate, as providers of voting decisions and receivers of voting decisions. If a proxy advisory firm wants to publish its guidelines and/or its specific voting recommendations, they should be allowed to do so, as at least some do now. The Open Proposal does not depend on a centralized database, so the inclusion question does not arise. My views here do not depend on SEC regulation of advisory firms.

7. How easy or difficult would it be to develop the technology for the voting decision database and proxy-voting platform contemplated in the Centralized Proposal?

Not difficult. ProxyDemocracy and Moxy Vote have already built much of this, on a very low budget. Both systems can be readily enhanced if additional data standardization is adopted by the SEC and if cost reimbursement is forthcoming from issuers. See discussion by MoxyVote.com at http://www.sec.gov/comments/s7-22-09/s72209-8.pdf.

8. Who should bear the costs of maintaining any database of voting decisions? Who would determine what fees could be charged for use of the database? Should CDV be premised on retail investor willingness to pay for access to the database (as is the case for existing proxy advisory firms)?

Voting systems are a collective benefit to all shareowners of a company. So it does not make sense to make each individual voter pay to be able to vote. That’s why democracies don’t charge their citizens a fee to use a polling booth when there is an election. Citizens pay for election administration costs as a group, not one by one.

Likewise the information systems to enable intelligent voting are a collective benefit, and should be paid collectively, not one user at a time. To encourage competition among information providers, collective funds (i.e. corporate funds) should be allocated among them by the voters. Thus retail shareowners should allocate at least some of the CDV infrastructure funds by vote. This could pay for professional proxy voting advice that could then be shared freely. It could also pay for some infrastructure, such as free shared databases if they are needed. There is a large cost differential between delivering proxies by U.S. mail and through the internet. This cost savings should be used to pay the costs of Open CDV.

Institutional Investor Perspective

1. Why should institutional investors care about CDV? Isn’t this a retail shareholder issue?

Building reputations will build followers; institutions successful in creating “brands” will gain following and influence. As mentioned above, CDV will create a new public debate about the quality of institutional investor voting. Institutions are voting on behalf of retail shareowners now. So this retail issue is also an institutional issue.

2. If a database of institutional investor voting decisions were made available as contemplated under the Centralized Proposal, would other, smaller, institutional investors make use of this database?

Under either the Centralized Proposal or the Open Proposal, I expect that many smaller institutional investors would make use of the voting opinions available. Proxy advisory services may try to curtail disclosure by larger institutional investors in order to maintain their business and avoid disseminating research for free to smaller institutional investors but I expect they will have a difficult case, since many of these larger institutions subscribe to multiple services and have their own staff. They will be able to argue and show that disclosure of their votes is not giving the proxy advisory services they paid for directly to smaller institutions, since their final votes will often differ.

Management Perspective

1. In your view, would corporate managements generally be willing to support CDV as a means to increase retail shareholder participation or does the diversity of issues facing public companies in light of their particular circumstances make it less likely that they would favor participation over informed participation? Do you think CDV would be more or less likely to promote a “one size fits all” approach to governance and other issues?

Some corporate managements would be willing to support CDV as a means to increase retail shareholder participation. Other corporate managements may oppose CDV (especially the Open Proposal) because it will reduce their power while empowering the firm’s beneficial owners.

Some managers and entrenched directors may prefer participation by “sheep” in a relatively constrained environment where a few sizes fit all. However, an Open CDV system would encourage management to participate in these platforms as well. Management and existing boards want the ability to communicate with shareowners. Open CDV systems could provide the platform in a space of higher trust.

It will enable more informed voting by networking and sharing the information available. This is similar to the way institutional investors vote stock, where typically a staff of specialists make the voting decisions on behalf of fund managers and beneficial owners.

One key difference with CDV however, especially under the Open Proposal, will be that we beneficial owners will have the power to choose among competing sources of voting opinions. We will also have more opportunity to contribute to the voting opinions and the reputation assessment of opinion sources. Open CDV will increase informed participation by retail investors in the voting decisions of stock we beneficially own through institutional investors. At a minimum, we will be able to express more informed opinions about how institutions are voting our stock.

Open CDV would be less likely to promote a “one size fits all” approach to governance and other issues, since it offers maximum competition among sources of voting opinions. Competition will enhance voting quality, and “one size fits all” is a low quality approach which will thus be used less and less.

For example, when I find conflicting votes between CalPERS and another advance discloser, I often go with CalPERS because they most frequently provide a reason for their vote. As this becomes more popular, more care will be put into the reasons disclosed.  Canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following.

2. In your view, would you expect that solicitation expenditures would decline, increase or stay the same if CDV were implemented? Why?

I expect that that solicitation expenditures will decline under Open CDV, especially in terms of just getting participation. Solicitation will be replaced by and/or migrate to elements of the CDV system, which will be supported by collective funds, becoming free or low cost to all users. Solicitation will focus on convincing the CDV opinion leaders and large funds of the relative merits of each possible voting decision, just as solicitation now gives emphasis to convincing proxy advisory firms.


1. Are other approaches that are comparable to CDV more desirable?

a. Creating a system of “public” proxy advisory firms to increase public availability of professional voting advice?

This would be a valuable adjunct to CDV. Even under the Open Proposal where anyone can contribute voting opinions to the public, I expect we will still need professional voting advice. Widespread sharing of free advice via the internet is likely to undermine the business model of existing proxy advisory firms (PAFs), just as free sharing of news is now undermining business models of the mainstream media. So to raise the overall quality of voting, a system of “public” PAFs makes sense. That was the reason for the title of my article “The Internet Will Drive Corporate Monitoring”. “The Internet” was a reference to internet-based CDV, and “Corporate Monitoring” was a reference to public PAFs and enhancements thereof.

For such a system to work, it is important for the public PAFs to be chosen by shareowner vote, to give PAFs a strong incentive to serve the owners’ interests. They should be paid from the shareowners’ corporate funds. The SEC should encourage the development of PAFs by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples at http://www.corpmon.com/corporations/proposals.html that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented.

b. Changing the pop-up on proxyvote.com to allow for other choices besides voting for management?

This too would work best as an adjunct to CDV. A potential difficulty with the pop-up approach is, which choices should be offered? With Open CDV, there will be potentially hundreds of choices – too many for a pop-up. But the proxyvote.com pop-up could show the choices being selected by those retail investors who are using the full CDV system by rank and another alphabetically.

c. Allowing shareholders to “plug in” to a voting feed or electronic voting platform (e.g., by requiring companies to permit shareholders to direct the proxy card or VIF to the desired platform)?

Voting feeds and electronic voting platforms like Moxy Vote are not “comparable” to CDV. They are CDV – ways for clients to direct voting by giving standing instructions. I think the best design for CDV is the Open Proposal with voting feeds. It is scary to me that CDV systems that don’t allow shareowners to dictate where their electronic proxy ballots are to be delivered are actually being contemplated. NYSE rules already allow the shareowner to control delivery to a physical address, why would this not extend to electronic mailboxes?

2. Would you be in favor of additional regulation to facilitate the creation of public voting databases, such as data-tagging of proxy and vote filings and further relaxation of solicitation rules?

I would be in favor of data tagging mandates. They are a mild and inexpensive form of regulation, just a transparency requirement. In the long run, Open CDV will make it feasible to reduce many other more expensive and intrusive forms of regulation, that try to limit abuses by the agents in our corporate governance system. It is cheaper and more effective to empower the principals with a better information system.

I also favor relaxation of solicitation rules. That would be less regulation, not “additional regulation”. Certainly, it would be good to have clarification that making voting decisions known in advance of AGMs does not constitute solicitation.

Further Comments

The development and implementation of Open CDV seem to me both desirable and inevitable. The SEC Investor Advisory Committee has created momentum toward data standards (like XBRL) for proxy votes. General principles of free speech would support allowing anyone with an opinion on any proxy voting issue to share that opinion with others, such as in a voting feed published on the internet. When a range of well informed voting feeds become available, some brokers will start offering CDV, and retail clients at other brokers will start demanding it too. In “The Internet Will Drive Corporate Monitoring”, I described the inevitability this way: “Would you outlaw software that makes voting easy? Would you outlaw advice?”

Not only will CDV improve our corporate governance system, but “public” voting advisors will make agents more accountable to principals in corporations and in democracies. We will have competitive markets for shared information. Voting advisors that compete for public funds allocated by citizen vote in democracies are called “Voter Funded Media” or VFM. They make political leaders and bureaucrats more accountable to citizens.

The VFM system has been developed and tested at the University of British Columbia for the past four years – see “Global Voter Media Platform” at votermedia.org/publications. Its success provides a live illustration of how a new competitive voter information system can influence the older less competitive system, even when the older system has far more funding. If the new system is more closely aligned with the principals’ interests, it will put competitive pressure on the old system.

The established campus newspaper, The Ubyssey, receives an annual fee of $5 from each student, totalling over $200,000 per year. In the new VFM system, blogs compete for slices of an award pool averaging less than $10,000 per year for the past four years. Not surprisingly, the bloggers appreciate this support, even though they have to compete hard for a piece of it. The voting system does not guarantee positive shares for all; many receive nothing – see votermedia.org/communities/82-ubc-ams. Perhaps more surprising however, is the reaction of The Ubyssey’s Coordinating Editor Justin McElroy [Video interview, 2010-04-30]:

…the established media, the one that students are giving their money to, and are more or less bound to giving, you know, that media wasn’t doing its job, and so competition is always good. It ensures that people do their best, and try to break the stories first, and get that information out there. And from a simple standpoint of, does it ensure that The Ubyssey does a better job meeting the needs of students and getting stories out there, VFMs ensure that, because it provides accountability to us, simply because if a story’s out there by a VFM that’s better than ours before us, you know, we have egg on our face. So, we’re paid way more money, we have way more resources…

…the fundamental questions of whether, does VFM work for students? I think yes. Does it increase campus discussion and student engagement? I think absolutely. Does it ensure that established media, you know, does a better job? Yeah. Are students and is this campus better off because of that? Well, absolutely.

The new equilibrium is one of cooperative competition. The Ubyssey now cooperates with VFMs on joint news media productions. These media competitors often link to each other. Student journalists comment on their competitors’ news stories, and sometimes leave one media group to join a competing media group.

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How I Voted: Home Depot, Interface & Talbots

Home Depot: Since I’m only getting around to voting the day before the meeting I knew I couldn’t vote at MoxyVote.com but I went there anyway because it is very easy to pull up the proxy there. I also went to CalPERS but they had no voting advice on HD. I then went to ProxyDemocracy.org, which had collected the votes of five institutional investors.  Most voted for the directors and most of the shareowner resolutions, except the resolution from John Chevedden to reincorporate in North Dakota. Only AFSCME voted for that one. I went with their recommendations. I like the North Dakota resolution and have submitted it to several companies. I’d love to see a race to the top, instead of the current race to the bottom by states that pander to management, rather than shareowners. The North Dakota incorporation code facilitates proxy access, favors director term limits, restricts poison pills, requires separating the role of chairman and chief executive officer, permits votes on compensation, requires majority voting when electing directors, etc. Frankly I can’t understand why CBIS, Calvert and MMA Praxis voted against it. Likewise, the proposal to allow cumulative voting from Evelyn Davis got support from AFSCME, Calvert and MMA, but CBIS voted against it and Trillium and Domni abstained. AFSCME appeared to make the right choices down the line.

Interface, Inc.: Likewise, I’m voting late at Interface as well. I went through the same drill. Not surprisingly, CalPERS had nothing (so far, they are announcing in advance on only 300 companies). There weren’t any shareowner proposals. I’m fairly comfortable with the company. It has been hit hard by the building downturn. Domini and Trillium withheld votes from some directors. Along with Florida SBA, they also voted against amending the omnibus stock plan. I voted with Florida SBA. I wish we were able to drill down to see why funds are voting against various directors. If I could see their reasons, I might be more inclined to follow their lead… perhaps in the future.

Talbots: Third company of mine that is meeting tomorrow. I didn’t even bother checking CalPERS or looking up the proxy. There aren’t any shareowner resolutions. CBIS voted against the auditors but, of course, I don’t know why. The company appears to be turning around during the past year. So, I went with management and Florida SBA.

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How I Voted at Winmark, Rovi, Under Armour, Fluor and Waste Connections

Busy week coming, so I used ProxyDemocracy.org on Sunday mostly to research how my favorite “brands” voted and  MoxyVote.com to vote. Here are the results:

  • Winmark – I got no voting advice from my usual sources, so voted with management’s recommendations.
  • Rovi – I voted with the recommendations of Florida SBA and management’s recommendations.
  • Under Armour – I voted with CalSTRS, withholding my vote from several director nominees.
  • Fluor – I voted with Florida SBA in favor of the proposal from the Central Laborers’ Pension, Welfare & Annuity Funds (Jacksonville, Illinois) resolution to adopt a policy that the board’s chairman be an independent director who has not previously served as an executive officer of Fluor.
  • Marriott International – I voted with Florida SBA, withholding from a couple of directors.
  • Waste Connections – I voted with management.

Upcoming are 3M, Goldman Sachs, Valeant, EW Scripps, Dreamworks, Interface, Home Depot, Sirius XM, among others. Any voting advice from readers on these issuers?

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How I Voted at Citigroup

ProxyDemocracy.org was very helpful, with several funds reporting their votes in advance. Also very helpful was CalPERS’ site, which provided reasons for their votes.  I voted for most of the directors, along with most of the funds who reported voting in advance on ProxyDemocracy. However, I joined with CalPERS in withholding my vote from the following two, since I found CalPERS’ reasons compelling:

Director Andrew N. Liveris – I joined with CalPERS in voting against Liveris, since he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place. Additionally, Mr. Liveris is a current CEO while serving on an excessive number of public company boards.

Director Judith Rodin –  Like Liveris, he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place.

Along with most of the funds, I voted to ratify the auditors, support the omnibus stock plan, and approve TARP repayment shares. I voted against the Advisory Vote to Ratify Named Executive Officers’ Compensation, since CalPERS believes the company does not adequately disclose the process by which executive compensation is determined.

Along with most of the funds, I voted to Amend NOL Rights Plan (NOL Pill). Generally, I vote against such plans, but CalPERS believes the poison pill is in shareowner best interest. Additionally, the company has indicated the adoption is not for anti-takeover purposes.

I joined with the funds to Approve Reverse Stock Split. I voted with most of the funds in favor of Affirm Political Non-Partisanship, a proposal by Evelyn Y. Davis. CalPERS voted against it. They believe the proposal is unnecessary because Citigroup indicates it adheres to all state and federal regulations on this matter. That doesn’t seem like a convincing reason to me but I’m not very firm in my support. In glancing at the proposal, it may well be that everything in the resolution is already covered by law. If so, it does no harm to vote in favor of it.

Along with most of the funds, I voted in favor of all the shareowner proposals. Report on Political Contributions, by the Firefighters’ Pension System of the City of Kansas City. CalPERS believes this proposal poses no long-term harm to the company. According to MoxyVote.com, the Center for Political Accountability also supports this proposal.

Report on Collateral in Derivatives Trading, by the Sisters of Charity of St. Elizabeth. CalPERS believes this proposal poses no long-term harm to the company. It seems to me this has the potential to reduce risk. That’s better than posing no long-term harm. In fact, if shareowners had listened to the Sisters of Charity and members of the Interfaith Center on Corporate Responsibility there is a good chance we would have missed the Great Recession. See this 2008 press release about ICCR sounding the alarm for 15 years. Why weren’t shareowners and management listening? Rev. Seamus Finn, director, Justice, Peace & Integrity of Creation, Missionary Oblates of Mary Immaculate and an ICCR board member, said:

The U.S. government controls over a quarter of outstanding Citigroup shares today.   It has an extraordinary opportunity here to send a clear message to Wall Street that more derivatives disclosure is vital.   Even more to the point, the Treasury Department really has no choice other than to support our resolution since a failure to do so would directly undercut its campaign for critical financial reform.

ICCR Executive Director Laura Berry said:

To adopt an inconsistent posture at this critical juncture on derivatives disclosure would be disastrous both in terms of how Wall Street reads the signals from Washington and how seriously Congress sees the Obama Administration as being in its support of vital financial services reform. (Shareholders: Treasury Should be Consistent on Capitol Hill and on Wall Street by Voting Citi Shares for More Derivatives Disclosure, press release, 4/16/2010)

Ability to Call Special Meetings, by William Steiner. CalPERS believes shareowners should be able to call special meetings. So do I. I’ve even submitted proposals myself on this issue and, like William Steiner, I often work with John Chevedden on these submissions.

Proposal Regarding Stock Retention, by AFL-CIO. CalPERS is a firm supporter of stock ownership guidelines that require executives to satisfy minimum levels of ownership after leaving the company. It should be noted the proposal mandates that executives hold 75% of their equity awards for two years after retirement or termination. CalPERS prefers that guideline specifics be designed and implemented through the company’s Independent Compensation Committee. I favor holding most equity awards until after retirement.

Shareholder Proposal Regarding the Reimbursement of Expenses in a Contested Election, by AFSCME. CalPERS believes this proposal poses no long-term harm to the company and would be a benefit to shareowners. I think this proposal could increase the ability of shareowners to have additional influence on nomination and election of directors.

I voted using MoxyVote.com. I you agree or disagree with my votes, you can leave comments here on CorpGov.net or on my wall at MoxyVote, search James McRitchie. If you use ProxyDemocracy, keep in mind that you can post how you’ve voted or any other advice regarding a company right on the site. For and example, see the bottom of the Citigroup page. When it becomes technologically feasible, it would be great if sites like MoxyVote and ProxyDemocracy can tell users who sponsored each resolution. Having to look that information up on the proxy takes an extra minute or so. Just as many will vote with various funds because of their “brand” reputation, we will also vote based on the brand of the sponsor.

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How I Voted at BP

Per my disclosures, I own a small amount of BP PLC ADS. Maybe because it is a foreign issue, I didn’t find BP as I tried to use MoxyVote.com but I was able to see how CalSTRS voted at ProxyDemocracy.org. Frankly, I’m not as informed as I would like to be, especially with regard to the directors.

I know that investors from both sides of the Atlantic have filed resolutions for the BP, Shell, ConocoPhillips and ExxonMobil annual general meetings, which ask the companies to report on the financial, environmental and social risks associated with their oil sands investments. FairPensions UK, the California State Teachers Retirement Fund (CalSTRS), and Boston-based Green Century Capital Management (Green Century) are coordinating the shareholders’ efforts.


Canada’s tar sands are the second largest oil resource in the world, with 173Bn barrels in reserves. However, extraction is energy-intensive and environmentally-damaging, requiring deforestation, extensive water use, and the creation of massive amounts of toxic waste. Even using the most conservative lifecycle analysis, oil from this source emits between 15% and 40% more greenhouse gases than the average of conventional sources, raising doubts about the long-term economic viability of oil sands development. Local indigenous communities affected by oil sands pollution and ecological harm, such as the Beaver Lake Cree Nation, have filed legal challenges that could drastically slow or halt oil sands development.  BP has responded, but not to my satisfaction.

Frankly, I trust the analysis done by CalSTRS, FairPensions UK, and Green Century on this issue. “Shareholders must know how companies are preparing for these costs and mitigating future risks,” says Emily Stone for Green Century. Mindy S. Lubber, president of Ceres and director of the $8 trillion Investor Network on Climate Risk (INCR) says,

Investors are concerned that many companies seem to be moving ahead without a well-articulated plan to manage the environmental and social risks associated with the oil sands. Given the extra-long investment horizons of oil sands projects, it is especially important for companies to invest in solutions to these challenges upfront.

I recall my dad, an engineer, showing me some of the oil sands when we visited his brothers in Canada about 50 years ago. He was very skeptical concerning our ability to extract the oil without ruining the environment. I’m not sure we’re there yet. Since I’m voting with CalSTRS on this shareowner resolution, I’m also going with them and voting against all the director nominees and several management proposals as well.

If you are in the UK, I urge you to go to FairPensions on this issue. Click the take action button. From there, you can send a message to your own pension scheme to try to get them onboard with this issue at BP, Shell, ConocoPhillips and ExxonMobil. I wish we had a similar advocacy organizations in the US.

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How I Voted at Schlumberger

Last year I had a Say on Pay proposal at Schlumberger, which received 39.8% of the votes. I tried to send a message that companies can’t hide, even if they meet in the Netherlands Antilles.

Apparently, they can. Schlumberger got no shareowner proposals in 2010.  I haven’t seen much in the way of voting advice, so I checked the voting at ProxyDemocracy.org and voted with CalSTRS using MoxyVote.com. Thanks to these sites, we’re empowered… at least a bit. CalSTRS is withholding votes from Gorelick, Lajous, and Marks. As reported by The Corporate Library,

Schlumberger CEO Andrew Gould’s pay package is the highest among the 75 S&P 500 companies for which we’ve processed proxies so far this year.  Last year, Gould realized a total of nearly $51 million in compensation, including a $2.5 million base salary and nearly $46 million in profit from the exercise of market-priced stock options, which vested without a performance requirement.  For that money, at the national average gas price of $2.57 in August 2009, Gould could have bought more than 19,832,868 gallons of regular gasoline.  If he used them to drive a Toyota Prius getting 50 miles to the gallon, he could have driven to the moon and back more than 2,075 times. Comp committee members Jamie Gorelick, Adrian Lajous, and Michael Marks apparently want to keep those options flowing:  in 2009 Gould was awarded 680,000 stock options, more than twice the award granted in 2008. Over the last three fiscal years, he has received more than 1.4 million options and has profited more than $113 million from the exercise of over 2.7 million options. (Astronomical Pay: Schlumberger and Smith Acquisition, 3/22/2010)

Next up for me is Citigroup. Voting ends 4/16/2010. So far, there are no votes recorded or recommended at either ProxyDemocracy.org, CalPERS or MoxyVote.com. However, there are plenty of proposals from shareonwers, several of which look very reasonable.

The Board’s Role at Annual Shareholders Meetings at This Week in the Boardroom: 4/01/10 also mentioned that sites like MoxyVote.com may be changing corporate and board dynamics. I know its changing my behavior.

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Take a Stand Today as a ShareOwner

Joe Mont writes New Efforts Push Investors to Take a Stand (thestreet.com, 3/22/2010). When shareowner returns slid, CEOs continued to be paid 319 times what the average employee drew down. The checks and balances built into corporate governance don’t seem to be working. And how could they, when only 20% of individual shareowners bother to vote? Yes, CEOs are responsible to boards elected by shareowners… at least in theory. Mont reports on some of the new tools that might just make those checks and balances more effective.

MoxyVote.com hopes to be a portal for proxy materials and online voting. Posting the advice of “advocates” and allowing shareowners to vote directly on their site, Moxy Vote could become the next Facebook for people who take their role as owners seriously. ProxyDemocracy.org, helps shareholders vote by publicizing the votes of institutional investors.  They pay for proxy research and advice; you can benefit from it by following their advice. It also publishes and scores how mutual funds have voted, so investors can “purchase funds that represent their interests and pressure those that don’t.” ShareOwners.org is helping shareowners advocate together — pushing the Dodd bill, majority voting, and proxy access.

It is good to see theStreet.com bringing attention to these important resources. Of course, we’ve been bringing these sites to the attention of our readers for years. Unfortunately, with an internet traffic ranking of  380,000 at CorpGov.net v 2,500 for theStreet.com, we don’t reach anywhere near the audience. Will they take it to the next level? For example, will they join with ShareOwners.org in asking for their readers to call their Senators TODAY at 202-224-3121 and urge them to support the corporate governance provisions of the Dodd bill. (main points) You can also send them a message through their web-based contact forms. Read some helpful do’s and dont’s from CalPERS and others regarding what to say or write (press release). Read a letter from major public employee retirement systems. I told my Senators the following:

In uncontested elections, directors should be elected by a majority of votes cast. However, the bill needs amendments to give this provision teeth or else boards will simply refuse to accept the resignations of directors who fail to win a majority vote. Please amend the bill so that directors who fail to get a majority vote must be removed within 90 days.

Shareowners should have the right to place director nominees on the company’s proxy. Please ensure the SEC has full authority to proceed with their proposed proxy access rulemaking.

Companies should give shareowners an annual advisory vote on executive compensation. I’m under no illusion this will immediately bring CEO pay back to earth. However, it will get boards talking to shareowners about this issue and it seems likely to reduce the use of incentive structures based on “heads I win, tails you lose.”

Now if the hundreds of thousands of Street.com readers would do the same, we could begin to make real progress in acting like shareowners, not just shareholders.

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CorpGov Bites

“Bank of America persuaded the SEC to drop “proxy access” provision as they negotiated a $150 million settlement of a lawsuit tied to the takeover of Merrill Lynch & Co… The U.S. Chamber of Commerce, which represents more than 3 million companies, has said “activist shareholders” would use proxy access to hijack elections to pursue “political or social issues.”” (SEC Said to Push BofA Proxy Rule in Enforcement Case, Bloomberg.com, 2/18/10)  “SOX substantially beefed up the obligations of the audit committee, at least for Exchange traded companies.  See Section 301 of SOX.  The committee was given the direct authority to supervise and to hire/fire the outside auditor.  The committee was also given the authority to hire counsel without full board approval.” “In the proposed settlement with BofA, the SEC is seeking to augment the authority of the audit committee one more time.  The Commission is giving to the audit committee (not the full board) the authority to hire counsel.  Counsel must not only review filings but must discuss possible deficiencies with the audit committee in executive session, without the presence of the non-indpendent directors.  The latter restriction is significant.” (The Board of Directors and a Review of Corporate Disclosure, theRacetotheBottom.org, 2/17/10)

Interesting, Bloomberg failed to get the Chamber’s new line. “Late last month, for the first time in more than a decade, the US Chamber of Commerce changed the boilerplate language that appears at the bottom of its press releases. The nation’s largest business lobby no longer claims to be “representing more than 3 million businesses and organizations of every size, sector, and region.” Instead, it claims to be “representing the interests of more than 3 million businesses” (emphasis added). The smallness of the tweak masks its major significance: Representing somebody, which strongly implies a direct relationship, is very different from representing their interests. The Chamber is in effect acknowleging that the “3 million” businesses aren’t actually its members… It was forced to admit that its true membership isn’t the 3 million businesses that it has claimed, but something on the order of 300,000.” (Chamber of Commerce No Longer “Represents” 3 Million Businesses, Mother Jones, 2/12/10)

I guess we at CorpGov.net should be claiming to represent the interests of the approximately 100 million Americans who own stocks or mutual funds… but why stop at Americans, since we occasionally cover corporate governance issues in other countries as well?

Apple, lags industry peers on sustainability reporting and has not made public greenhouse gas reduction commitments. Apple shareowners are beginning to vote their proxies on Moxy Vote, based on recommendations from Calvert Investments to support a resolution on on sustainability reporting. (Is Apple green enough?, Mac News)  The problem is there is another proposal seeking a bylaw requiring a board committee on sustainability… and there are all those directors to vote for or against. While I love Moxy Vote and own Apple stock, at this point, in Beta form, I’m disappointed the site has no one to advise me on how to vote the other issues or on the directors. So, I turn to ProxyDemocracy.org and even they have collected no votes in advance of the 2/25/10 meeting from “ten institutional investors that are particularly engaged in corporate governance.” I’ll wait until next week to vote.

Eric Jackson does a nice job interviewing John Gillespie and David Zweig, co-authors of “Money for Nothing.”  Gillespie says we won’t have real change until the old players like Bernanke, Geithner and Summers leave. Zweig says, “corporate governance needs a new name to encourage change, maybe corporate democracy.” (Corporate Governance Role in Meltdown, TheStreet.com, 2/17/10) See my review under the heading Fix the Boards – Fix the System. Buy the book.

“Advocates of genocide-free investing won another important victory this week, when American Funds, a family of mutual funds with more than $775 billion in investments, decided to divest virtually all its holdings in PetroChina. Before a shareowner meeting held on November 24, American Funds owned 167 million shares in PetroChina, worth $190 million.”  “Investors Against Genocide advanced a resolution asking that the Board of American Funds “institute procedures to prevent holding investments in companies that…substantially contribute to genocide or crimes against humanity.” American Funds opposed the measure, and affirmative votes for the proposal ranged from 8.5% to 11.8% at the meeting.” (American Funds Sells PetroChina Holdings, SocialFunds.com, 2/18/10) The showing on their resolution would have probably been much higher had voting instructions issued by Broadridge actually complied with the requirements for proxies to clearly indicate the voting topic instead of simply referencing “a shareholder proposal described in the proxy statement.” Broadridge could get away with it because that the language the issuer wanted and since Broadridge uses a voter information form, they don’t feel they are bound by SEC requirements that apply to proxies. (see our coverage of that issue at Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

Corporate governance advisory firm PIRC made history again. In January 2009 they took a radical step, and began publicly disclosing via their website the voting recommendations they make for company meetings. Now they have set out have set out six best practice principles for corporate governance advisors, as follows:

  • Clear voting policy guidelines should be made available to clients, the companies whom the adviser is monitoring and to the market;
  • Clear audit trail and explanation of the process for assessing companies and making voting recommendations should be available to clients and the companies monitored;
  • Possible conflicts of interest should be disclosed to clients and to companies monitored and, where necessary, to market regulators (i.e. paid consulting with companies);
  • Companies monitored should be given reasonable opportunity to comment on voting recommendations made and the basis of such recommendations;
  • Voting agencies should routinely report to clients on actions taken on their behalf;
  • All voting recommendations made by a voting adviser should be publicly disclosed post-meeting. (Corporate governance agencies: the need for transparent voting decisions by Tom Powdrill on Responsible Investor, 2/18/10)

The Securities and Exchange Commission Investor Advisory Committee will meet in DC on February 22 at 9 a.m. The agenda for the meeting includes consideration of a Committee recusal policy, a report from the Education Subcommittee, including a presentation on the National Financial Capability Survey, a report from the Investor as Purchaser Subcommittee, including a discussion of fiduciary duty and mandatory arbitration, a report from the Investor as Owner Subcommittee, including recommendations for the Committee on Regulation FD and proxy voting transparency, as well as reports on a work plan for environmental, social, and governance disclosure and on financial reform legislation, and discussion of next steps and closing comments. I’ll be tuning into the webcast if time permits.

The Conference Board issued a new report, Directors’ Duties under the New SEC Rules on Disclosure Enhancement, available to members. From my quick review, the report appears comprehensive but written clearly and in an easy to understand format. Highly recommended for directors, their advisors and monitors. Additionally, the SEC posted six new Compliance and Disclosure Interpretations 116.07, 117.05; 119.21, 119.22 and 119.23, which offer guidance on disclosure under Items 401, 402(a), and Item 402(c) of Regulation S-K. Staff also added new question 121A.01 related to Exchange Act Form 8-K, which explains calculation of the four-business day filing period for disclosing the results of a shareholder vote. See also  guidance on the new requirements from Compliance Week issued in January and December as well as the original rule. Additional guidance from the Altman Group, Walking the Tightrope – New Proxy Disclosures on Director Qualifications, Board Risk Oversight and Board Diversity – and new Climate Change Disclosures for the 10K.

The Corporate Library’s ‘2010 Proxy Season Foresights #3: The Growth of Clawback Provisions, ($15) found that the number of companies with clawback provisions continued to increase in 2009, and almost half of such companies are smaller-cap firms outside the Russell 1000.

The Centre for Corporate Governance Research (CCGR) is organising its 8th International Corporate Governance Conference on Wednesday 23rd June 2010, to be held at the University of Birmingham, UK.  The theme of the conference is ‘Corporate Governance and Sustainability’. Keynote speakers include Colin Melvin (Chief Executive, Hermes Equity Ownership Services Ltd), Dr Michael Blowfield (University of Oxford) and Dr Beate Sjåfjell (University of Oslo). Sir Adrian Cadbury, the CCGR’s External Advisor, will be attending the event. Papers are invited on issues relating to any area of corporate governance and sustainability. Papers should be sent as an electronic copy in PDF format, by 31st March 2010 to Karen Hanson.

Moxy Vote is running a series, Here’s to the many pioneers!, Part 1 includes yours truly, Jim McRitchie, along with Mark Latham, Andy Eggers and Matt Keenan. Part 2 will include Glyn Holton, Nell Minow, and the Social Investment Forum. I’m blushing to be in such company. Thanks to Mark Schlegal and to all the fine work at Moxy Vote for facilitating involvement by retail investors and providing advocates such an important pipeline of influence.

The Council of Institutional Investors (CII) published a White Paper, The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting, authored by Alan Beller and Janet Fisher of the law firm Cleary Gottlieb Steen & Hamilton LLP.  Mr. Beller is a former Director of the SEC’s Division of Corporation Finance. From the Executive Summary:

The SEC is likely to be cautious in seeking to change the current framework in significant ways, at least in the near term. Defining the objective is critical to developing a proposal. If the goal is to increase the ability of shareowners and companies to communicate directly, a number of incremental steps may be taken to address the OBO/NOBO distinction and facilitate direct distribution of proxy materials, without discarding the current distribution platform. Such an approach could lead to meaningful improvements, without seriously affecting the interests of many of the participants in the current framework, and we believe it has a greater chance of widespread support than more radical alternatives… On balance, we believe that the immediate interest of shareowners and companies in better communications would be better and more effectively served with an incremental approach that promotes less reliance on — or eliminates altogether — the OBO/NOBO distinction and otherwise increases the potential for direct communications.

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CDV vs FAVE: More Proxy Voting Options (updated)

Frank G. Zarb, Jr., a Partner at Katten Muchin Rosenman LLP, and John Endean,  President of the American Business Conference, raise an important topic in a recent post to the HLS Forum on Corporate Governance and Financial Regulation (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” 1/14/2010). Unfortunately, their solution would likely lead us essentially back to a restoration of “balance” through what amounts to “broker voting.” Mark Latham’s proposal for “Feed-based Automated Vote Emulation” (FAVE, see Investor Education On Proxy Voting, VoterMedia Finance Blog, 1/29/2010) based on the concept of Proxy Voting Brand Competition offers more promise. Let’s take the best elements from both proposals.

As Zarb and Endean point out, “the voting rate among individual investors hovers at the 20% level.  Companies that mail their investors a notice that the materials are available on the internet – in lieu of mailing the all materials in paper – have seen even lower voting levels in the 5% range.” They attribute the low turnout to “busy lives” and likelihood that “reviewing and completing multiple voting forms along with related materials is not a center ring concern.”

As Latham puts it:

It’s not that we retail investors lack intelligence. We lack the time and expertise to analyze proxy voting issues – board elections, executive compensation, mergers etc. We lack the economic incentive to spend the time and to gain or buy the expertise. So those who do vote tend to follow the board’s recommendations – the only professional advice conveniently available.

By contrast, institutional investors are much better organized to use specialized professionals for voting decisions.

Most people realize there’s no point in casting uninformed votes just for the sake of voting. That plus the difficulty of becoming informed are key reasons why many do not vote.

Under CDV, a shareowner could provide their broker with advance standing instructions for the voting on specific types of proposals “that are sufficiently clear that the broker would not have to interpret standing instructions when applying them to the proposal.  An example is a company or shareholder proposal to de-stagger the board of directors.” The voter instruction form provided to each shareowner would be tailored to them, indicating which proposals are the subject of standing instructions and providing them with a means to over-ride their previous instructions.

I like this aspect of the Zarb and Endean proposal on CDV. Unfortunately, very few shareowners would be willing to sit down and fill out a questionnaire that lists typical shareowner resolutions, hopefully also explaining the pros and cons of each. If they were willing to do that, they’d probably be voting already. The most effective way to educate shareowners on these issues would be to expose them to the policies developed by institutional investors and encourage them to compare policies as a whole and/or as applied to specific votes.

Many shareowners could eventually be encouraged to undertake such exercises. However, it is mostly likely to be a gradual process. Education will mostly likely come one issue or one company at a time. Most shareowners faced with such a questionnaire would probably ask for other options. The default offered by Zarb and Endean’s CDV proposal consists of choosing one of the following options to ba applied to all votes:

  1. in proportion to other retail shareholders;
  2. in a manner consistent with the board’s recommendation; or
  3. in a manner that is contrary to the board’s recommendation.

If a participant did not choose one of these default elections, no vote would be recorded on matters with respect to which the shareholder has not otherwise affirmatively cast a vote.

I call option 3 the “bomb throwing option.” Why would individual own a stock and provide instruction to always vote against the board’s recommendation? That makes no sense, especially when applied to a whole portfolio. Option 1 allows your vote to count toward forming a quorum but would otherwise have no effect. Marking none of the three options would deny your vote to the quorum. Neither would appear rational on a predetermined basis for an entire portfolio. That leaves option 2, which would have an effect very similar to broker voting. We can do better than blind trust in all the boards of all the companies in our portfolio on every issue. Think of giving such a blank slate to a politician.

In contrast, Latham’s proposal would rely on “proxy voting feeds,” similar to blog RSS feeds, that would have a standardized format for transmitting and receiving proxy voting decisions. “Anyone could publish a feed, and anyone could subscribe to any published feed. You would instruct your broker to vote your shares according to the decisions in your chosen feed. You could change your choice of feed at any time, and manually override any specific voting decision.”

These feeds, for example, could be provided directly by institutional investors, public interest groups and others. I could set up my feeds to vote with the Domini Funds, if they own the stock and announce their vote in advance. If Domini doesn’t vote, vote like Florida SBA. If neither vote, vote like CalPERS, then CalSTRS, TIAA-CREF, etc.

More likely than direct feeds from individual institutional investors or advocates, initial feeds would probably come from aggregators like ProxyDemocracy.org, MoxyVote.com, or TransparentDemocracy.org. I’d like to see a system that allows me to set defaults by resolution type AND by the voting practices of trusted brands. Let’s give shareowners real options… and options that will eventually encourage them to obtain an education by conducting their own comparisons, whether of proxy voting policies or the basis for brand reputation.  Latham’s paper also offers some reforms that will help us to get from here to there, like “data-tagging (e.g. XBRL) of proxy and vote filings, to facilitate creating public databases.”

I’d like to see further discussion of such proposal and exploration of all options. The Corporate Library Blog provided a good start with the following: “I’d like this if it also offered investors the opportunity to have their proxies voted according to the recommendations of independent sources like RiskMetrics or according to the guidelines of groups like the Council of Institutional Investors, the Shareholders Education Network, or the organizations participating in Moxy Vote.” (“Client Directed” Voting, 2/14/10)

Larry Eiben of MoxyVote.com also raised important issues in a letter to the SEC dated November 19, 2009. Among his many thoughtful recommendations is the following:

The Commission should pass a rule that states that a shareholder has full control to request that a proxy ballot or VIF be delivered electronically to the voting platform of his or her choice (e.g., as one may select a physical address or an e-mail address). Such a rule would compel participants to “plug in” to electronic voting platforms that are being developed. Consequently, distributors and tabulators would quickly realize that a central dissemination and collection point may provide a nice solution to the inefficiency of attempting to build an interface with each platform separately. Or, in lieu of a central source, such a rule would encourage the development of standardized file formats and procedures for electronic voting that would expedite progress.

A January 20 Moxy Vote Blog, Want better governance? Here is your silver bullet, raises a final important point, conflicts of interest.

It is of even greater importance for regulators to ensure that a shareholder has full control over the delivery of his/her proxy ballot because there are conflicts of interest among industry participants that could derail the development of electronic voting platforms.  The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares).  As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance.  By giving delivery control to the shareholder, we’d create a proper check and balance on the proxy distribution agents that otherwise may not have incentive to engage with all retail-friendly electronic platforms.

Client Directed Voting, as outlined by Zarb and Endean, has some very good elements… like the ability of creating “default” proxy voting policies, much like those used by institutional shareowners. However, it falls short in failing to recognize the potential conflicts of interest outlined in the above cited Moxy Vote Blog post. “The distribution agents in the industry work for the issuers (either directly or, indirectly, as is the case with broker-held shares).  As such, the agents have the incentive to satisfy these paying customers rather than do what is best for corporate governance” or what is best for the individual shareowner.  Delivery and feed subscription control must go to the shareowner.

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Proxy Voting Made Easy

David Bogoslaw, writing for BusinessWeek, notes new services like Moxy Vote—and upcoming regulatory changes—may boost the level of individual investors’ participation in shareholder voting. (Proxy Voting Made Easy, 2/10/2010)

Our hope is that is also will allow shareowners to vote more intelligently by letting the see how others are voting and by providing abbreviated reasons. Shareowners can vote like their favorite brands, using services like Proxy Democracy and MoxyVote.com. Good to see mainstream media picking up on this development.

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ProxyDemocracy Update

ProxyDemocracy.org shares our vision of empowered investors and of corporations that stay accountable to their owners.  They’ve got a new look to the site and sent out a note updating readers on the following:

Get the latest information: ProxyDemocracy has changed its appearance — and is offering more information than ever. Visit our dynamic new Web site and check out the storyboard that explains our educational services. In addition, see how “ProxyDemocracy News’’ catches you up with reports and analysis about votes, campaigns, meetings and policy. And explore “Around the Web,” a daily update of shareholder news from a variety of sources.

Influence critical decisions:  As we head into the peak 2010 corporate meeting season, we’d like to keep you informed. Soon ProxyDemocracy will be launching a newsletter describing our activities, previewing our reports and inviting your feedback. While we have your e-mail address, under federal rules you need to opt in to continue receiving updates from us. Just enter your e-mail address and name in the “Join Our Mailing List’’’ box on our Web site. We promise not to abuse the privilege.

Change corporate behavior: Writing last month in Slate, former New York Governor Eliot Spitzer said that, just as technology has changed politics, new-media forums led by ProxyDemocracy are transforming corporate democracy.  You are on the verge of something big.

Build ProxyDemocracy: ProxyDemocracy is a one-of-a-kind resource. Ours is the only organization to show individual shareholders how big institutions plan to vote at corporate meetings — and to keep score of the proxy votes made by the mutual funds in your 401(k) accounts. As a nonprofit organization, we rely on your help. To cast your vote for ProxyDemocracy, make a tax-deductible contribution. Please click the new “Donate” box on our Web site so we can continue this exciting work.

I hope readers will check out their new site, give them some feedback and make a donation to keep their effort growing.

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Advocacy websites offer hope

Nice article by that title appeared in Canada’s Financial Post. “Imagine a democracy where those who don’t vote have their ballots automatically cast in favour of the incumbents… Enter an idea whose time has come: websites such as corpgov.net, shareowners.org (corrected), proxydemocracy.org and moxyvote.com. These are just four offerings on the Internet designed to help disgruntled shareholders organize and register their displeasure or lobby for change.” (1/26/2010) Prior article was entitled Shareholder democracy oxymoron (FP, 1/25/2010)

Reporter, Diane Francis, goes on to compare our sites to the Politics 2.0 social movement that elected Obama. She concludes with a quote from former New York governor Eliot Spitzer from an article in the Wall Street Journal. “Virtually every thoughtful discussion of corporate governance concludes that unless shareholders act like the true owners they are, all the proposed corporate reforms will fail. While there are some who claim shareholders are simply too ill-informed to participate meaningfully, this argument should carry no more weight in the corporate context than it does in the traditional political arena.”

I certainly hope the sites mentioned by Ms. Francis, and others such as isuffrage.org, Lemonjuice.biz and theRacetotheBottom.org, can foster the type of movement that changed politics… and I hope we can do it sustainably.

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Vote Disclosure Coming at Pension Funds

At a hearing on compensation in the financial services industry, House Financial Services Committee Chairman Barney Frank said, “If you are the owner of shares … you have a privacy right, but if you own shares on behalf of a fiduciary you will need to disclose how you vote.” In late 2003, after years of pushing from people like Bob Monks and Nell Minow, approved rules requiring mutual-fund managers to disclose how they voted their proxies once a year every August.

A MarketWatch article (Frank: We’re going to have big investors disclose votes, 1/22/10) quotes Beth Young of the Corporate Library, “”By requiring public disclosure of votes, investment managers will think more about whether they have the information and staff to act as a fiduciary for the people they are voting on behalf.” Public disclosure increases feedback between corporations and investment managers as both consider votes more carefully.

The Employee Retirement Income Security Act (ERISA), has long required pension-fund administrators to disclose to pension-fund investors how they are voting on their behalf. However, that information does not need to be disclosed publicly. Additionally, to my knowledge, no fund administrator has ever been disciplined for failing to vote in the interests of plan beneficiaries. See my 1995 correspondence with the Pension and Welfare Benefits Administration and commentary under Fiduciary Responsibilities for Proxy Voting.

The MarketWatch article goes on to quote Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, on the positive impace on mutual fund voting. “The public-disclosure requirement has had a positive impact on how they operated and voted their slates. The information about mutual-fund votes does push the funds to be more active than they were.”

Apparently, no bill is in the drafting stage but such a provision may be included in future legislation later this year. This would be another very positive step that would help shareowners, in this case pension members, hold fund managers and ultimately corporate managers accountable. You can’t hold your pension fund trustees accountable if you don’t know how they vote. Examination can lead to change.

We saw that to be the case earlier this week at State Street Global Advisors (SSgA) after pressure from Walden Asset Management and United for a Fair Economy. Prior to their scrutiny, SSgA voted automatically Against ALL shareholder resolutions on environmental and social issues, whether the issue affected shareholder value or not. SSgA will now abstain if the resolution’s economic impact case is not clear, but will vote FOR resolutions where a strong case regarding how this affects shareholder value is made. (Major Shift in Proxy Voting Policy at State Street, CorpGov.net, 1/20/10)

We can expect similar shifts at pension funds, once Frank’s future measure is enacted. Of course, several public pension funds already not only disclose their votes once a year, but also do so in advance. You can see how leaders like the AFSCME Employees Pension Plan, CalPERS, CalSTRS, and Florida SBA are voting by going to ProxyDemocracy.org. I find that information very valuable when I’m voting my own shares as a retail investor. As a member of CalPERS, I also monitor how they are voting to ensure it is in the best interest of plan beneficiaries, like myself. When it isn’t, you can be sure CalPERS hears from me. Fortunately, those disagreements are infrequent.

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SIF Funds Outperformed

A review of 160 socially responsible mutual funds from 22 members of the Social Investment Forum (SIF) finds that the vast majority of the funds — 65 percent — outperformed their benchmarks in calendar year 2009, most by significant margins.

These SRI funds topped benchmarks across nearly all asset classes, including balanced, large cap, small cap and global funds, as well as bonds. The performance data that was analyzed by the Social Investment Forum covered all of 2009 and was provided by an independent third party, Thomson Reuters. (Download full table of results.)

This analysis underscores the reality that socially responsible investments offer what are genuinely competitive returns,” said Cheryl Smith, chairman of the board at SIF and president at Boston-based Trillium Asset Management Corporation. “In fact, the 2009 data show that SRI funds specializing in large cap stocks have turned in an extremely strong performance that outpaced the S&P 500 over both the short term and the long term.”

The 22 fund families represented in the SIF analysis are: Access Capital Strategies; AHA; Appleseed; Ariel; Azzad; Calvert; Community Capital Management; Domini; Gabelli; Green Century; Integrity; Legg Mason; Meeder Asset Management; MMA Praxis; Neuberger Berman; New Alternatives; Parnassus; Pax World; Portfolio 21; Sentinel; Walden; and Winslow.

Today, SIF also unveiled its revamped Mutual Fund Performance Chart for retail investors. The new and improved chart allows interested investors to learn more about SRI mutual funds based on asset class, performance record, approaches to environmental, social and governance (ESG or sustainability) issues, proxy voting guidelines, and other investment criteria.

For example, the Chart shows that more than 50 percent of SIF member mutual funds consider companies’ executive pay practices when developing their portfolios, and more than two-thirds look for companies with good records on climate change issues and community development. Virtually all exclude tobacco companies altogether from their portfolios or restrict their involvement in such firms. (Download table.)

Lisa Woll, CEO, Social Investment Forum said: “In the wake of the financial crisis more and more consumers are concerned about runaway executive pay practices and other forms of corporate misconduct and sustainability risks. The SIF’s Mutual Fund Performance Chart allows retail investors to explore which SRI funds incorporate these and other sustainability issues into their investing and proxy voting practices.”

You can also compare many of the proxy voting records of these and other funds at ProxyDemocracy.org. Responsible investing is less risky in times of bubbles. They are also less risky if you want to keep living on a habitable planet.

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Can We Change Voting Behavior?

We Own You!: How technology can help stockholders take control of the corporations they own, Slate.com, 1/12/10.  Eliot Spitzer writes,  “Twitter, text messages, YouTube, and other technology transformed politics in 2008. This success raises a compelling question: Can the same technology awaken the more dormant world of corporate democracy?… Could proxy voting in 2011 generate the same enthusiasm as actual voting did in 2008?” It just might if we can get a few people with Spitzer’s star power to focus attention.

Good to see Eliot Spitzer talking up use of ProxyDemocracy.org, MoxyVote.com and Shareowners.org. He gets his facts slightly wrong, Both ProxyDemocracy.org AND MoxyVote.com intend to be neutral information providers. MoxyVote.com labels its information sources as “advocates” but that doesn’t mean MoxyVote.com agrees with them.

Both work on the concept of trusted brands to help shareowners vote more easily and more intelligently. In the case of ProxyDemocracy.org, their “respected institutional investors” spend considerable resources investigating not only resolutions but also director nominees. By announcing their votes in advance, they allow retail shareowners to benefit from their research and they create brands with a larger following than they would have voting alone.

Spitzer says there are at least two critical hurdles that still have to be overcome:

  1. “First, most shareholders don’t vote because they assume their votes don’t matter; shareholder votes are almost never close.” However, this year that is changing. With most of the Fortune 500 using majority vote requirements to elect directors and with “broker votes” no longer allowed when retail shareowners fail to vote within 10 days of the annual meeting, your vote counts more than ever. We are sure to see several directors turned out of office. That doesn’t stop them from replacing tweedle dee with tweedle dum, but its a good start.
  2. “There is no water cooler for corporate democracy. A presidential or mayoral race prompts conversations among friends and colleagues and generates daily press coverage. A corporate proxy vote doesn’t. We don’t all own the same shares, and even if we did, we probably wouldn’t talk about it.” That’s where sites like Shareowners.org and my own blog come in. People should be talking about how they are voting. It would be great to have TV shows like the Nightly Business Report actually providing analysis of the issues facing owners, rather than tips for the next bet. If PBS doesn’t do it, Spitzer could do it through Slate.com.

Of the two problems, the second is more important. When shareowners start talking to each other about how they’re voting, more will vote… and, more will vote intelligently. We will also start taking on more of the issues that currently send the system off balance.

For example, this morning I received a copy of a letter from Goldman Sachs to the SEC referencing my resolution to allow shareowners to ask the board to amend the bylaws, allowing owners of 10% of the company’s stock to call a special meeting. Management at Goldman Sachs wants to omit the resolution from the proxy on the basis that they intend to submit a proposal to the 2010 annual meeting to allow shareowners of 25% to hold a special meeting.

They argue that Rule 14a-8(i)(9) allows them to exclude the proposal from its proxy, since the proposal directly conflicts with their proposal. In the past, the SEC has allowed such exclusion based on confusion that would reign if shareowners passed both resolutions. That is nonsense. If both pass, the lower threshold applies. If we can ever get the “water cooler” discussions going around corporate democracy, shareowners won’t stand for a system that tips the balance of power to management at every turn. We will see if the SEC under Mary Schapiro acts to protect shareowners by allowing the resolution, or if they protect management by issuing a “no action” letter.

“Street name registration” undermines our culture, turning investors into gamblers by providing them “security entitlements,” instead of real ownership rights. Just as poker chips allow us to play under rules which often favor the house, those holding “security entitlements” do not acquire the rights of share owners. For example, one right sharowners have is to receive a proxy, whereas those of us registered in street name receive a voter instruction form (VIF). SEC rules guarantee certain rights to proxy holders but not, it is argued, to those voting through VIFs. (see
Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

On January 13th I will post a draft petition to the SEC that I have been working on with Glyn Holton, of the United States Proxy Exchange, and others to convert from “street name” to a system of direct registration. I hope you will consider signing on as a co-filer. Can we change voting behavior? Yes, we can! Just give us the rights of ownership and see how democracy transforms the world of corporations.

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Latham at Stanford: Governance Reform for Corporations and Democracies

On November 16, 2009, the Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford University presented a lunch-time lecture with Mark Latham, Director of VoterMedia.org and MarkLathamProxyDemocracy.org. Latham is also a member of the SEC’s Investor Advisory Committee, as a representative of individual investors. He has written extensively on how the internet can be used to allocate resources to facilitate voter education using a democratic marketplace model. Previously, Latham was a professor at UC Berkeley and a money manager with Salomon Brothers and Merrill Lynch. LathamLunch

Mark Latham has spent the last seven years developing new tools for voters (investors and citizens) to hold elected leaders accountable in corporations and democracies. The financial crisis, changes at the SEC and the decline of mainstream media are opening doors for implementing these ideas. Latham’s lunch-time talk at Stanford’s law school attracted mostly a young crowd of students to a presentation that was much more discussion than lecture.

Latham briefly discussed his role on the SEC Investor Advisory Committee and some of the recent developments that have laid fertile ground for his ideas, including:

  • the financial crisis and our poor systems of accountability,
  • 25% of the stock market is held directly by individuals but the other 75% held through institutions is also held for our benefits. We should have more input into how proxies are voted
  • broker voting no longer applies to director nominees
  • most large companies have instituted majority voting requirements for electing directors and that is now filtering down to medium and small companies, and
  • proxy access will bring more focus on proxy voting and the need to facilitate more intelligent voting with minimal effort.

He described something of the developing battle for the hearts and minds of investors as proxy "plumbing" or "mechanics" issues are explored by the SEC and interested parties. The Business Roundtable is lobbying hard for a system that allows management to communicate directly with shareowners. One component they have been pushing is client directed voting, CDV. Various proposals by Stephen Norman, the corporate secretary of American Express, have outlined that under CDV, investors would give their brokers general instructions on how they wanted their shares cast on all matters, routine and not routine. One frequently cited variant involves five options, including:

  1. always voting as management recommends;
  2. always voting against management recommendations;
  3. abstaining on all matters;
  4. voting according to the brokerage firm’s voting policies; or,
  5. voting shares in proportion to the way the brokerage’s other clients have voted their shares.

If investors did not declare a preference, the default choice would be proportional voting, and investors could always override these choices with their own. Latham noted the need to expand the concept of CDV to include options provided by ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com and others as they develop.

A lively discussion ensued on issues such as: LathamAud

  • Why should we think recommendations by these groups, or indeed the current advisors to institutional investors are any good?
  • How important is making money and what part would other values play in CDV options?
  • Would these organizations not only lead to greater participation by retail shareowners but also greater financial literacy?
  • Are there various legal issues that need to be addressed around free speech, fiduciary duties, and/or proxy solicitation? (download, for example, a request to the SEC re guidance)
  • How will these sites drive the selection of mutual funds and the limited options available to most workers through 401(k) type plans?KimCranston

I spotted Kim Cranston, President of TransparentDemocracy.org, in the back of the room and had a few minutes to chat with him after the event. Their site covers both civil and corporate elections and is designed to will help you…

  • Learn more about the contests on your ballot,
  • See how organizations and individuals recommend that you vote,
  • Create a printed ballot based on your opinions that you can use to mark your real ballot,
  • Share your opinions with friends.

A video recording of the session with Mark Latham will be posted on the Arthur and Toni Rembe Rock Center site by early December. The next stop for Latham was the Institute of Governmental Studies at the University of California at Berkeley.

Mark Latham"We can support public interest journalism with our tax funds, by letting voters allocate the funding to competing media organizations. This would prevent the government from controlling the publicly funded media and their messages. Such a system has been implemented for three years at the University of British Columbia’s student union, and tested in Vancouver’s 2008 civic election. Each voter community can fund its own media: each municipality, state, country, student union, labor union, corporation etc. The city of Berkeley may be a good fit for the next implementation."

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Handbook of Social Capital

When Tocqueville visited the United States in the 1830s, it was our propensity for civic association that impressed him as the key to making democracy work. "Americans of all ages, all stations in life, and all types of disposition:’ he observed, "are forever
forming associations. There are not only commercial and industrial associations in which all take part, but others of a thousand different types–religious, moral, serious, futile, very general and very limited, immensely large and very minute…. Nothing, in my view, deserves more attention than the intellectual and moral associations in America." Robert D. Putnam’s famous 1995 essay, Bowling Alone, introduced many to the concept of social capital.

Gert Tinggaard Svendsen and Gunnar Lind Haase Svendsen have edited an informative and greatly expanded update. The "Handbook Of Social Capital: The Troika of Sociology, Political Science and Economics" examines how three disciplines work together in developing and shaping networks. Economics primarily focuses on transaction costs. Political science focuses on institutions and sociology focuses on the norms that regulate behavior.

Life is easier in communities with high social capital. Networks of civic engagement foster generalized reciprocity and trust. Communication and coordination amplify the growth of reputations, facilitating collective action. Well worn templates and success lead to future collaboration and broaden our sense of empowerment. I read the essay’s mainly thinking of how these concepts might be applied to internet sites, such as the Investor Suffrage Movement, Proxy Democracy.org, Shareowners.org, TransparentDemocracy.org, MoxyVote.com, and VoterMedia.org.

One concept discussed by the editors was that of bridging vs. bonding. Bridging implies open networks across social cleavages, inclusion, and generalized trust. Bonding implies closed, inward looking networks based on particularized trust. Bridging seems more important for organizations attempting to facilitate shareowner action.

According to Elinor Ostrom and T.K. Ahn, "trust is the core link between social capital and collective action. Trust is enhanced when individuals are trustworthy, are networked with one another and are within institutions that reward honest behavior." One interesting study found that reciprocal agents using conditionally cooperative strategies have a higher chance to interact with one another and the surrounding population than agents who defect. "Information regarding a potential transaction partner’s trustworthiness is crucial when trustworthy individuals try to initiate cooperation."

Reputation is everything. "Self-governing systems in any arena of social interaction tend to be more efficient and stable not because of any magical effects of grassroots participation itself but because of the social capital in the form of effective working rules those systems are more likely to develop and preserve, the networks that the participants have created and the norms they have adopted." For example in in development projects, even "primitive" irrigation systems developed with the involvement of farmers often outperform those using more modern concrete and steel headworks. Investment by participants makes the difference.

In other words, in project planning we need to focus as much on the incentives of participants as we do on the physical or virtual technical infrastructure. Simply agreeing on a set of rules put in place with by others may get something up and running but doesn’t engender participation or long-term success.

Poulsen discusses research on cooperation, such as the "Prisoner’s Dilemma." Cooperation often falls over time because reciprocally minded subjects give up contributing if they feel like they are the only ones doing so. Punishing or expelling nonparticipants can generate higher and more stable cooperation but only if group members have information about each other’s contributions.

The chapter, "Corruption," by Uslaner found unequal distribution of resources in a society to be at the heart of the problem. Inequality leads to low generalized trust and high in-group trust, which leads to corruption, which leads to more inequality. Corruption thrives on particularized trust, where people only have faith in their own kind or small circle. "The policies that work best to reduce inequality and promote trust – universalistic social welfare policies – also depend upon honest governments to deliver the good and upon a social compact to provide benefits such as universal education and health care to the rich and poor alike."

Rothstein carries the theme forward by noting the services for the poor tend to become "poor services," whereas if all are included, middle and upper classes will demand higher quality. Popular movements of protest and self-help stand in contrast with charities dominated by middle and upper classes. "Needs testing and bureaucratic discretionary power are often more difficult to reconcile with principles of procedural justice, compared with universal public services. Since selective welfare institutions must test each case individually, they are to a greater extent subject to the suspicion of cheating, arbitrariness and discrimination, compared with universal public agencies."

That should give potential readers a rough idea of some key discussions. While the Handbook is geared toward an academic audience, especially those concerned with economic, political and social development, the more general reader will also find important insights in the cross-disciplinary approach.

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July 2008

ESG Gaining Acceptance

Since 2005, KLD has studied the S&P 100’s sustainability reporting practices for the Sustainable Investment Research Analyst Network, a working group of the Social Investment Forum. The 2008 Sustainability Report Comparison reveals encouraging news. Of the 100 largest U.S. publicly-traded companies, 86 maintain corporate sustainability websites and 49 produced sustainability reports in 2007. These numbers represent significant progress over the past three years.

Now, Watson Wyatt says ESG to be one of six major investment trends in next five years. (Responsible Investor, 7/31/08) The rise of integrating environmental, social and governance issues into investing will be predicated on four major trends:

  • demand for big institutional funds to apply responsible investing principles,
  • sustainability and climate change as mainstream or specialized propositions,
  • the impact of politically motivated activism, and
  • responsible investment becoming more personalized through defined contribution pensions saving.

CalPERS: The Opposite

The Opposite” was a famous Seinfeld situation comedy episode where George Costanza decides that every decision he has ever made has been wrong and resolves to do the complete opposite of his normal instincts. He suddenly begins to experience good luck — getting a girlfriend, moving out of his parents’ house, and even landing a job with the New York Yankees. Maybe CalPERS should use the same tactic with regard to its own governance.

When it comes to advising corporations, CalPERS emphasizes transparency, getting input from shareowners and a wide variety of good governance measures. (As I began to write this, I got a press release from CalPERS on improving governance at La-Z-Boy.) I applaud these efforts, which have been widely credited with moving directors to action and increasing shareowner value. Yet, when it comes to their own governance, perhaps CalPERS should adopt the strategy of doing the opposite of what Board members want to do instinctively.

I’ve tangled with CalPERS over many internal governance issues, as documented at PersWatch.net. The latest involves AB 2940, scheduled for hearing in California’s Senate Appropriations Committee. The bill, authored by Kevin de Leon and sponsored by the New America Foundation, would set up a low-cost IRA option administered by CalPERS. The Program would facilitate the ability of millions of Californians to save for retirement, reduce future dependency on taxpayers, increase California’s tax base, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate our defined benefit plans.

The trouble is, as a condition of neutrality, CalPERS asked the author to amend the bill to permanently exempt the Board from contracting and rulemaking laws with respect to the Program. Unfortunately, de Leon was forced to accept those changes if he wanted to see his bill pass. In contrast to CalSTRS, which recently adopted regulations to guard against the appearance of “pay to play” on investment decisions, the proposed new law would open the CalPERS Board to the increased likelihood of such dishonest behavior.

In my letter of opposition for an otherwise excellent bill, I wrote, “One major ‘pay to play’ scandal involving a large sole-source contract could put the whole System in jeopardy, making CalPERS politically vulnerable. Additionally, what moral authority would CalPERS have in advising corporations to be transparent, if its own contracting procedures were suspect?” Additionally, “The language exempting the Board from the APA disenfranchises millions – ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program.”

For many years, CalPERS claimed California Constitution, article XVI, section 17, exempted the agency from the Administrative Procedure Act and other laws that apply to state agencies. That claim was thoroughly rejected by Connell v. CalPERS in appellate court. The APA offers an opportunity to comment and have those comments addressed in a legal framework that includes many protections for public involvement.

I understand the need to keep costs low, especially during start-up. I even suggested that initial contracts could be noncompetitively bid for up to two years and that initial rules could be adopted as permanent “emergency” regulations. However, any such exemptions should be temporary. These suggestions have been rejected by a Board that too often sees itself as above the law.

If successful, the new fund will quickly have assets in the millions, if not billions. Don’t sacrifice good governance for expediency. CalPERS Board members should consider a new mantra with regard to their own governance, “Do the opposite.”

CorpGov Bites

The final version of the AFL-CIO’s 2008 AFL-CIO Key Votes Survey scorecard is now available.

I’ve added implu to our growing list of Stakeholders. Find out about the comings and goings of corporate officers and directors. Plus, the site lists at least rudimentary contact information and sometimes you can even learn about their associations. Enter a list of companies or people and get automatic e-mail alerts.

A total of 70 federal securities class actions were filed during the first half of 2008, a roughly 17% increase from the total filings in the first six months of 2007. (Securities class actions increase in ’08, Investment News, 7/29/08)

Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’? finds they do. “Boards take a variety of value-enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value enhancing, post-campaign operating performance improvements are economically and statistically significantly higher in these sub-samples of target firms.”

Businesses must incorporate environmental, social and governance (ESG) factors into their management strategies, says Peter Kinder, President of KLD Research & Analytics, in Q&A with an Australian business reporter.

ResponsibleShopper.org (updated) ranks companies by industry from best to worst based on global research and campaign information regarding the impact of the largest corporations on human rights, social justice, environmental sustainability and more.

Gibson, Dunn & Crutcher LLP offer advice on “clawbacks” of executive compensation. What is your company doing in this area?

Subchapter S companies owned by their employees through ESOPs generate some 85,000 new jobs each year and create $14 billion in new savings for workers that otherwise would not have been earned. A study by Knoll and Freeman also found S ESOPs’ higher productivity, profitability, job stability and job growth collectively help ESOP companies amass $33 billion more in combined earnings than what they would earn if they were not ESOP-owned S corporations.


Sign-up online to gain free access. Articles in the Summer ‘08 issue include:

  • Non-Deal Roadshows: Latest Developments and Trends
  • Lessons Learned: How Funds Vote on Proxy Proposals
  • Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
  • How Blogging Can Enhance Your Investor Relationships (and Your Career)
  • My Ten Cents: The SEC’s Coming Guidance on IR Web Pages
  • SEC Staff Says “No” to Non-GAAP Financial Statements

Written to aid the corporate investor relations function, InvestorRelationships.com is also a valuable resources for shareowners. Broc Romanek is doing a great job on this new offering.


Broc also posted a podcast interview with another of our favorites. Andy Eggers discusses his website, ProxyDemocracy.org. Their discussions include:

  • Where did you get the idea for the site?
  • How long did it take to launch?
  • What features does ProxyDemocracy.org currently have?
  • Any plans to tweak things going forward?
  • What have been the biggest surprises in how the site is used so far?


Fraud Risk Guide

“Managing the Business Risk of Fraud: A Practical Guide” can be downloaded for free from the sponsoring organizations’ Web sites from sponsoring organizations – the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants (AICPA), and The Institute of Internal Auditors (IIA). Principles for establishing effective fraud risk management, regardless of the type or size of an organization, are outlined in the guide.

According to the ACFE’s 2006 Report to the Nation on Occupational Fraud, U.S. organizations lose an estimated 5 percent of their annual revenues due to fraud. When applied to the estimated 2006 GDP, those losses added up to approximately $653 billion. Organizations with anti-fraud programs – such as fraud hotlines, internal audit departments, and anti-fraud training – lost approximately half as much as those without such programs.

Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

  • Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
  • Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
  • Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
  • Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
  • Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

The new guidance provides a practical approach for companies committed to preserving stakeholder value. It can be used to assess or improve an organization’s fraud risk management program, or to develop an effective program where none exists.

We added a link to the paper from our small list of online articles, as well as a Team Performance Scorecard from Brown Governance for evaluating boards of directors. CorpGov.net depends on input from readers to bring these resources to our attention. Thanks to Scott McCallum, of IIA ,and Dan Swanson of Dan Swanson & Associates.

Say on Pay Denial

Support for an advisory “say on pay” continues to grow, if more slowly than expected, rising from 41% last year to 42% in 2008. Directorship, reporting the results of a Corporate Library study, notes that “say-on-pay proposals received majority support at a total of 15 companies in 2007 and 2008. But not all of those companies are rushing to put the advisory vote in place. In fact, only five of those companies, or roughly two-thirds, have adopted the vote.”

Vote results are lower this year at financial institutions, where CEOs have been replaced with lower compensation packages. (Companies Ignore ‘Say on Pay’ Votes, 7/23/08)

Look for shareowners to increase the pressure on companies that filed to implement resolutions that obtained a majority vote (MV) next year. Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals by Yonca Ertimur, Stephen Stubben and Fabrizio Ferri investigated board responses to advisory shareholder proposals between 1997 and 2004. The frequency of implementation of MV proposals almost doubled after 2002, from approximately 20% (1997-2002) to more than 40% (2003-2004), “consistent with an increase in the cost of ignoring MV resolutions in the post-Enron environment.” “Directors failing to implement majority-vote (MV) proposals are often the target of ‘vote-no’ campaigns and receive a ‘withhold vote’ recommendation by ISS. Firms ignoring MV proposals end up on CalPERS’ ‘focus list’, receive lower ratings from governance services and attract negative press coverage.”

Perhaps more striking is that “implementation of a MV shareholder proposal is associated with approximately a one-fifth reduction in the probability of director turnover at the targeted firm.” In short, the market rewards those companies that follow the advice of shareowners.

Time will tell at Citigroup, which just named new chairs to its audit and risk, nomination and governance, and personnel and compensation committees. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced chairs would be rotated.

But will rotations be enough, especially when two of the three received significant withhold votes at Citigroup’s annual meeting. AFSCME’s Richard Ferlauto says the union sees little value in rearranging committee chairs. “What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business,” Ferlauto told R&GW. (Citigroup Names New Board Committee Chairs, RiskMetrics Group, 7/25/08)

Congratulations Race to the Bottom

Once of our favorite sources of legal commentary, TheRacetotheBottom, has been chosen by the Library of Congress for inclusion in its historic collections of Internet materials related to “Legal Blawgs.”

Aim’s Race to the Bottom

Speaking of a race to the bottom, a study released by PwC found that while 77% of the Aim’s top 100 comply with some aspects of the Combined Code, just 3% chose to fully adopt it. A record 28 companies were suspended, raising doubts about the exchange’s voluntary approach to governance. (Junior index must aim higher to improve reputation, FT.com, 7/24/08)

New Election Rules at CalPERS

New election rules take effect on July 26, 2008, thanks to action taken by Corpgov.net publisher, James McRitchie. At McRitchie’s request, the Office of Administrative Law determined several CalPERS election rules were illegally adopted “underground regulations.” (see 2007 OAL Determination No. 1) The amended regulations clarify many election procedures and significantly reduce the risk of CalPERS members to identity theft.

Back to the top

Further information about the next three items and more at Corporate Watchdog Radio.

Get the Lead Out and Protect Genitals

More than your money is at risk. Independent laboratory testing initiated by the Campaign for Safe Cosmetics in 2007 found that two-thirds of 33 sample lipsticks from top brands contain lead. The Environmental Working Group’s six-month investigation into the health and safety assessments on more than 10,000 personal care products found major gaps in the regulatory safety net. A recent government-funded study by Dr. Shanna Swan links linking phthalate levels with feminized genitals in baby boys. Independent laboratory tests found phthalates in more than 70% of health and beauty products tested – including popular brands of shampoo, deodorant, hair mouse, face lotion and every single fragrance tested. Have I got your attention yet?

If you own shares in a company that makes personal care products or just don’t want to use poison products, check the growing (600) list of those that have pledged to not use chemicals that are known or strongly suspected of causing cancer, mutation or birth defects in their products and to implement substitution plans that replace hazardous materials with safer alternatives in every market they serve. Several major cosmetics companies, including OPI, Avon, Estee Lauder, L’Oreal, Revlon, Proctor & Gamble and Unilever have thus far refused to sign the Compact for Safe Cosmetics.

Take action for safe cosmeticsSign on to have Congress empower the FDA to ensure that cosmetic ingredients and products are safe before they reach store shelves. DisclosureThe publisher of CorpGov.net owns stock in Proctor & Gamble and has requested they join the Campaign for Safe Cosmetics. Please make similar appeals to the companies in your portfolio.

Unfortunately, P&G sent a canned response. “I’m sorry you heard a report that caused you to question the safety of our beauty care products. The claims you’ve heard are completely false. Consumer safety is always our first priority and all our products are tested extensively before going to the market. We stand firmly behind their safety. It’s important to know that cosmetic products sold in the U.S. are regulated by the Food, Drug, and Cosmetics Act. We comply with all legal requirements wherever our products are sold.” Of course this misses the point that current laws are totally inadequate. When I brought this to their attention, investor relations wrote back with an oops; “I can understand your concern and I’m sharing your comments with our Health and Safety Division.”

Chamber Attacks Resolution Process

Members of the U.S. Chamber of Commerce should be questioning use of their dues money for a study that is so deeply flawed it would be laughable, if the money to pay for the study wasn’t coming out of your pocket.

The study, Analysis of the Wealth Effects of Shareholder Proposals by Navigant Consulting, purports to make the following finding: “Taken as a whole, these results provide little evidence that shareholder proposals increase target firm value.” What is the basis of the study?

First, Navigant (under the pay and direction of the Chamber), reviewed the academic literature from about a decade ago and found mixed results. “There is little evidence of measurable improvements in (sort-term or long-term) stock market or (long-term) operating performance in target companies as a result of shareholder proposals.” However, “Certain types of proposals, especially those concerned with removing companies’ takeover defenses, appear to be supported by the market.” Updated findings would probably be different, since their is increasing recognition by shareowners and the market that social and environmental factors can have an economic impact on the firm. Thus, the support for resolutions, such those to address a company’s carbon footprint, have been increasing.

Second, Navigant examined five resolutions for short-term impact and another five resolutions for long-term impact. How did they select these resolutions? Were they randomly selected from all resolutions during a specified period? No, they were picked by the Chamber! This would be like a drug company selecting 10 patients out of thousands to represent the efficacy of their product for FDA review. Even if the resolutions had been randomly selected, the samples would have been too small to have any statistical significance. However, the fact that they were picked by the Chamber, which has for years advocated doing away with the resolution process, completely destroys the potential validity of findings.

Additionally, that portion of the study uses deeply flawed statistical modeling based on “abnormal returns.” The implication is that stock price is predictable. If the academics who invented the Fama-French three-factor model were actually able to predict price, they wouldn’t be working at universities. Instead, they would be reaping huge financial rewards in the stock market.

The study then goes on to look at the cost of the shareowner resolution process and cites an estimate by Bainbridge of $90.654 million, based on an “implied cost” of $87,000 per proposal and the assumption that corporations seek to exclude all proposals. The study fails to note that with e-proxy, costs are going down, sometimes dramatically. (Thanks to William Michael Cunningham of Creative Investment Research, Inc. for providing a copy of his meeting notes and his analysis of the Chamber’s study. This article draws heavily upon those notes but the opinions expressed are those of Corpgov.net publisher, James McRitchie.)

Businesses should ask their local and state chambers, which may be members of the US Chamber of Commerce, to seek new leadership at the federal level. Sure, shareowner resolutions and annual meetings are a bit of a pain in the ass and a circus, but they keep us in touch with what is coming. Social and environmental resolutions often seek to address “externalities,” the costs of business to society. Without such resolutions, shareowners would immediately seek regulations and legislation. The resolution process is an early warning system that allows us to gauge the popularity of a given issue. Often we can avoid regulations by working out less burdensome voluntary measures. Even when businesses fully adopt resolutions, the costs can be substantially less than complying with mandatory rules.

Tell your local chamber that the U.S. Chamber should spend its time and money on more important efforts. For example, they could push Congress to legislate higher margin requirements for speculators. That might lower the cost of oil. They could push for single-payer universal health insurance to put an end to our competitive disadvantage due to rising health care costs. They could also seriously address global climate change. Failure to resolve that issue will cost trillions of dollars and millions of lives. Fighting wildfires now takes nearly half of the U.S. Forest Service budget. That’s up from just 13% in 1991. Fighting shareowner resolutions pales in comparison.

About a million and a half people have already signed on to support Al Gore’s Challenge to Repower America. McCain said, “If the vice president says it’s doable, I believe it’s doable. Obama said, “I strongly agree with Vice President Gore that we cannot drill our way to energy independence, but must fast-track investments in renewable sources of energy like solar power, wind power and advanced biofuels, and those are the investments I will make as President.” Local chambers and the U.S. Chamber of Commerce should focus on fighting the real issues, not our own shareowners.

Improve Corporate Disclosure

A proposed accounting standard would require corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities. Investor input is critical on these issues, as the corporate lobby is expected to turn out in force to oppose expanded disclosure.

While the proposal is on the right track, it stops short of requiring full disclosure of risks that would impact investors, most notably long-term severe impact risks. The proposal may also allow corporate lawyers to routinely block disclosure of almost any information that they designate as prejudicial.

The proposed FAS 5 changes would be subject to three important exceptions and loopholes, which the Investor Environmental Health Network believes can be addressed by the following changes:

  • FASB should require a disclosure of “severe impact risks” deemed by the reporting company to be remotely possible and long term.
  • FASB should apply the new standard to asset impairments, not just legal liabilities.
  • FASB needs to eliminate or strictly limit this ”prejudicial” exception to avoid misuse.

Submit comments on the Exposure Draft entitled Disclosure of Certain Loss Contingencies to the Federal Accounting Standards Board (FASB) by August 8, 2008. Send them via email to[email protected]. Put File Reference No. 1600-100 in the subject line. For more information, see the relevant FASB documents and IEHN’s Investor Alert and model letter and watch Sanford Lewis, Counsel to the Investor Environmental Health Network discuss the proposal.

CorpGov Bites

Eighty-six percent of companies on the Standard and Poor’s 100 Index have corporate sustainability websites, compared to 58 percent in 2005, according to the “2008 S&P 100 Sustainability Report Comparison” from the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum. (More S&P 100 Companies Reporting CSR Progress: Study, GreenBiz.com, 7/22/08)

ECOFACT has released a report listing the top ten most environmentally and socially criticized companies. The top ten companies were: Samsung, Total, Wal-Mart, China National Petroleum Corporation (CNPC), Shell, ExxonMobil, Citigroup, Nestlé, ArcelorMittal, and Chevron. The companies have been consistently and severely criticized by the world’s media and NGOs for issues including human rights abuses, severe environmental violations, corruption and bribery, and breaches of labor, health and safety standards. Rankings are based on the Reputational Risk Index (RRI), as measured by RepRisk in the first six months of this year. For a copy of the report, please contact Charlotte ManssonDisclosureThe publisher of CorpGov.net is happy to announce he owns none of these companies directly.

“Most big businesses now require directors to be elected by a majority of shareholders, giving board members incentive to court investor goodwill.” Joann S. Lublin, writing for WSJ (New Breed of Directors Reaches Out to Shareholders, 7/21/08) Lubin appears to credit this reform with the fact that more shareowner resolutions are being withdrawn. Think of how many resolutions would be withdrawn or would not even be submitted with a rise in proxy access.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. Boards are also meeting more frequently with investors. Yet, in reading RMG’sPreliminary U.S. Postseason Report, it appears many of those meeting may have been to simply cave on issues where they were likely to lose. For example, 47 of the 90 majority vote resolutions filed have been withdrawn by proponents because companies agreed to adopt their own bylaws. More than 72% of S&P 500 companies have adopted some form of a majority vote standard, according to Claudia Allen, a partner with the law firm Neal, Gerber & Eisenberg.

Highlights included the resignation of Mary Pugh, chair of the finance committee at Washington Mutual, after getting 49.9% opposition in a campaign by CtW. Overall support for “say on pay” advisory vote proposals increased marginally at U.S. companies. Other results:

  • Pay-for-performance proposals have averaged 27.4 percent support over nine meetings where results are known, as opposed to 29.5 percent support over 38 meetings last year.
  • Independent board chair proposals received record support this year–31.3 percent support over 20 meetings, 4.6 percentage points higher than last year, when they averaged 26.7 percent support over 43 meetings.
  • Resolutions asking firms to end staggered boards received slightly less support so far this year, with 60.2 percent average support at 16 meetings where results are known. This compares to 63.9 percent support over 38 meetings in 2007.
  • 2008 is on pace to shatter the all-time record for proxy challenges, although few contests have gone to a vote. Given the market meltdown, many boards have been willing to provide board representation to dissidents… including at Yahoo (Yahoo, Icahn Let Bygones Be Bygone, David Gaffen, WSJ, 7/21/08) and How I Spent My Weekend, The Ichan Report, 7/22/08)

Gretchen Morgenson’s Borrowers and Bankers: A Great Divide clarifies the current conventional wisdom. “Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.”

“Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?” (NYTimes, 7/20/08)

Over the weekend, Jane Bryant Quinn also brought our attention to the question or whether or not the Public Company Accounting Oversight Board, created by Sarbanes-Oxley, is constitutional. The challenge to PCAOB revolves around whether the president rather than the SEC should appoint board members. Because the law lacks a “severability” clause, if one of its provisions is found to be unconstitutional, the whole law may go down. (Lawsuit Threatens Sarbanes-Oxley Act, Washington Post, 7/20/08)

Investors are responding to the sharp falls on equity markets around the world by shifting from what are now being seen as vulnerable emerging markets to relatively safer developed ones. State Street says the flows it tracks amount to a “safety first” mood… MSCI’s emerging market index has lost 0.6% in the past week. The developed market index has gained 1.9%. (See America first? Investors suddenly fleeing emerging markets, Financial Week, 7/21/08) Perhaps a rush to relative corporate governance quality?

Mandatory Reimbursement Bylaw Could Breach Board’s Fiduciary Duty

The Delaware Supreme Court ruled that CA shouldn’t be forced to pay for dissident shareholders’ proxy fights and the SEC issued a no action letter. (decision)

Under a procedure established under Delaware law last year, the SEC asked the state’s Supreme Court to decide whether a bylaw proposal by AFSCME to CA, formerly Computer Associates, was “a proper subject” for shareholder action under state law. The bylaw would have required CA to reimburse a shareowner for proxy costs, including legal expenses, printings and mailings, if the shareowner unseats at least one CA director in a slate of candidates representing less than half the board.

The Court held that the bylaw was a proper subject for stockholder action. However, the Court also held that if adopted the bylaw would violate state law because “the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” (Del. Supreme Court rules for CA on shareholder issue, delawareonline, 7/18/08)

John Olson, a corporate-governance lawyer at Gibson, Dunn & Crutcher, is quoted in the WSJ saying, “The court is soundly affirming that shareholders have the right to propose bylaws relating to the process of electing directors. I think people will try to be creative in ways of using state law to get access to the corporate proxy.”

In the same article, Richard Ferlauto, director of pension investment policy for AFSCME, said discussions about shareholder election rights now focus on “the creation of an appropriate right of shareholder access at the federal level” through the SEC. (Delaware Court Rules for CA in Suit, 7/18/08)

With regard to the question of whether or not he AFSCME Proposal a proper subject for action by shareholders, the court wrote, in part:

The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election…That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action.

With regard to the question of whether adoption of the bylaw would cause CA to violate Delaware law, the court wrote, in part:

As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all. (footnotes omitted) (Supreme Court Decides SEC-presented Delaware Bylaw Issue, Francis G.X. Pileggi, Delaware Corporate and Commercial Litigation Blog, 7/17/08)

Getting into more of the details of the decision, analysis by Travis Laster, reported by Broc Romanek, explains that Section 109 gives stockholders the statutory right to adopt bylaws, which may contain “any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” However, Section 141(a) vests the power to manage the business and affairs of every corporation in the board of directors. Consistent with Delaware’s historic model of director-centric governance, the Supreme Court makes clear that Section 141(a) has primacy over Section 109.

An interesting discussion of implications and possible unintended consequences follows. For example, “A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis.” However, the court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year.” (CA v. AFSCME: The Delaware Supreme Court Giveth and the Supreme Court Taketh Away, TheCorporateCounsel.net Blog, 7/18/08)

AFSCME proposed a similar bylaw change at Dell. At the company’s annual meeting, management noted that a preliminary tally showed the proposal received 33.7% of the vote. A similar proposal last year garnered only 14% of shareholder votes. (Union loses proxy reimbursement battle, but may have won war, Financial Week, 7/18/08)

Much more commentary at Delaware Supreme Court Issues Opinion on Shareholder-adopted Bylaws(The Harvard Law School Corporate Governance Blog, 7/18/08), Delaware Supreme Court Rejects Reimbursement Proposal (Risk & Governance Blog) and in at least a 20 part series atTheRacetotheBottom.org.

If the SEC fails to adopt a proxy access rule this year, where will shareowners concerned with the lack of democracy in corporate elections turn in 2009? One possibility is to seek reincorporation in North Dakota. Such proposals bring up several issues that could be the subject of negotiations. Among the most significant features of North Dakota law are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

No Action Letters

The SEC posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October ’07). According to Broc Romanek, we should expect to see new 14a-8 no-action letters posted going forward – although not likely on a real-time basis during the proxy season. (Corp Fin Goes “Live” with Shareholder Proposal No-Action Letters, TheCorporateCounsel.net Blog, 7/17/08)

I wish they would have posted the letters using a database sortable by resolution type or searchable by word/phrase. If anyone dumps this data into a file and makes it available as a searchable database, please let me know. I’m sure it is available by paid subscription. I want to know if it is available for free. It would be a great resource for small shareowners and for a class I’ll be teaching in the fall.

What is Broadridge Thinking?

About 10 years ago Sona Shah and Kai Barret began filing complaints against their employer, ADP Wilco, now a subsidiary of Broadridge Financial Solutions, for discriminating against its employees based on their citizenship and immigration status. Amazingly, Wilco called its foreign recruitment program ‘Project Delhi Belly.’  Delly Belly is a derogatory slang term coined during the British occupation of India.  If an officer arrived in Delhi and had stomach problems it was called getting a ‘Delhi Belly.’  Why Wilco’s management thought this was an appropriate title for its recruitment of foreign programmers is anyone’s guess but it gives you some sense of their cultural sensitivity.

Their complaints went out to Immigration, Department of Labor, Department of Justice. Their campaign even led to Congressional testimonypress and blog coverage. They also filed with the EEOC and began the currently pending litigation.

The case progressed with usual ups and downs. Lawyers would come into the case attracted by positive publicity and press. Then when they saw how much work was involved they wouldd abandon their effort or seek to withdraw. In 2006 Shah attempted to settle the case but noticed her attorney may have committed fraud with both the settlement and the case.  Simultaneously, Wilco went through a corporate restructuring with Broadridge.

Four months ago Shah attempted a mutual discontinuance but Broadridge refuses. Instead, they continue to spend thousands of dollars on unnecessary legal expenses, with no apparent benefit to shareowners. The disputed settlement sought by Wilco/Broadridge basically pays Shah and her attorneys $100,000. Shah she says the settlement exposes her to tax consequences worse than if she had lost the case, so she opposes it.

Since it appeared that outside counsel seeks to continue the lawsuit simply to continue billing Broadridge, Shah wrote a letter to Broadridge’s CEO of her offer. When there was no response, she began contacting large shareowners, alleging that Broadridge was wasting money on a lawsuit she was willing to discontinue. (typical email) After several investors wrote to the company, Broadridge’s outside counsel then sought to enjoin Shah from communicating with Broadridge’s investors — a motion which the court summarily dismissed.

Investors should ask Broadridge why the company continues to waste potentially hundreds of thousands of dollars defending a lawsuit which the plaintiff is willing to discontinue. For further background information Google Sona Shah or Shah v. Wilco. See also Stipulation to Discontinue.

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Big Changes Coming

E.J. Dionne at Truthdig.com (The Death of Reaganomics) writes, “This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early ’80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What’s becoming the Panic of 2008 will mean an end to the latest Capital Rules era.” Markets need regulated.

Stephen Davis and Jon Lukomnik, writing for Compliance Week, argue “by late next year the United States may well see two things happen that most boardrooms today consider impossible.” The first is “say on pay,” since both Obama and McCain favor it. Votes on resolutions may be lagging public opinion. Mutual funds, pensions and insurance companies that dominate the vote are more tolerant than the public, whose own economic pain adds to the strain. Davis and Lukomnik call say-on-pay in 2009 “a no-brainer, as it shows them (politicians) to be sensitive to the issue without imposing arbitrary caps antithetical to U.S.-style capitalism.”

The second change they see coming is the non-executive chairman. GMI has found that only a bare majority—52%—of companies in its U.S. database now still combine the chairman and CEO roles. Three years ago the figure was 62%. According to Spencer Stuart, 35% of S&P 500 companies separated the posts last year, compared to a 16% in 1998. “The ‘Chairmen’s Forum‘ is to debut with an Oct. 7 session in New York, aiming to adopt best practices and explore collaboration on common issues. The forum stems from a project initiated by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, which will start off serving as secretariat to the group.” Stephen Davis is the project director. That change is expected to take a little more time. (Dreaming the Impossible Governance Dream, 7/8/2008)

Let Them Eat Bugs

Little to do with corporate governance, other than the growing disparity between rich and poor, but I couldn’t resist citing The Economist article with the above title (7/12/2008). “Bugs provide more nutrients than beef or fish, gram for gram.” Feed crops gobble up some 70% of agricultural land but crickets take up just a small space in the home.

E-Proxy Vote Bleak

Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop). (Broadridge’s “Near-Final” E-Proxy Stats for the Proxy Season, TheCorporateCounsel.net Blog, 7/14/2008)

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ICI Defends Mutual Fund Votes

With almost 30% US company shares and 90 million shareholders, how mutual funds vote is a matter of great public importance. That’s why many of us fought to have the SEC require disclosure of votes and policies several years ago. While ICI opposed the measure, they now claim to have embraced their new role and have recommended that Congress require that other fiduciaries also be required to make similar disclosures.

ICI President and CEO Paul Schott Stevens presented a comprehensive new study by the Institute on proxy votes cast by registered investment companies in an address, In the Shareholders’ Interest: Funds and Proxy Voting, at the American Enterprise Institute. Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders, examined more than 3.5 million proxy votes cast by funds in 160 of the largest fund families during the 12 months ending June 30, 2007. The study is the largest known examination of proxy votes cast by funds. Key Findings are as follows:

  • Funds play an important role in corporate governance. Proxy voting is one of several ways that funds promote stronger governance and better management, and in turn promote shareholder value. By law, funds must vote proxies in the best interests of funds and their shareholders.
  • Proxy proposals cover a wide range of governance and other issues. Proxy proposals can be initiated by company boards of directors (“management proposals”) or company shareholders (“shareholder proposals”). More than 80% of management proposals relate to election of company boards and ratification of company audit firms; most of the remainder concern fundamental changes that must be approved by company shareholders. Shareholder proposals cover a range of issues but tend to be sponsored by a small number of individuals and organizations. One-third of the more than 600 shareholder proposals that came to a vote in the year ending June 30, 2007, were sponsored by five individuals and three labor unions.
  • Funds and their advisers devote substantial resources to proxy voting. As part of this effort, they adopt and publish proxy voting guidelines. The guidelines of 35 of the largest fund families indicate that their funds generally support management or shareholder proposals that align the interests of company employees with those of shareholders or that bolster shareholders’ rights, including proposals to remove antitakeover devices such as poison pills or classified boards. Funds’ guidelines are often silent on, or indicate that funds will vote against, proposals on social and environmental issues.
  • Funds supported the majority of management proposals and voted in favor of shareholder proposals about 40% of the time, giving especially strong support to shareholder proposals calling for elimination of antitakeover provisions.
  • Funds’ votes are not outliers. In many areas funds’ votes mirrored the vote recommendations of proxy advisory firms.
  • Funds establish procedures to manage potential conflicts of interest in proxy voting. Academic research indicates that funds’ proxy votes are not influenced by the business interests of fund advisers. Funds’ votes are not swayed, for example, by their advisers’ management of 401(k) plans.

This report certainly represents a step in the right direction. Yet, ICI acknowledges that there are many funds “with broader investment purposes — including about 260 that pursue financial returns in tandem with social, environmental or other objectives, and whose advisers manage with these additional objectives in mind.” Unfortunately, it rationalizes most funds ignoring such issues because there goal is to “maximize financial returns.” Since they “do not have a mandate from their investors to engage portfolio companies on social, environmental or similar issues — valid as these may be,… they neither can nor should vote proxies simply on the basis of these considerations.”

However, many environmental and social issues have direct financial impact. Additionally, consider climate change. Even the wealthiest among us cannot escape the assaults of global warming and acidic oceans. As Robert Monks observes, “The primary thing that workers need for their retirement [is] money, but don’t workers also need a safe, clean, decent world in which to spend it. These ends are not economically exclusive…”

Environmental, social and governance (ESG) issues should be integrated into financial analysis. As Stephen Viederman notes, “There is no triple bottom line. There can only be a single bottom that offers positive social and financial returns against which all business decisions must be measured. Fiduciary duty… must give weight to how ESG factors, more broadly understood than at present, affect both risks and opportunities, now and in the future.”

A more fundamental criticism of the ICI’s methodology is that it only presents aggregated data. It reminds me of Robert Reich’s frequent quip that “basketball player, Shaquille O’Neal and I have an average height of over six feet.” By aggregating the data, voting patterns look normal.

More informative are reports at Fundvotes.com where, as its author Jackie Cook notes, “the most striking thing about the graphical representation of the data by fund family is the difference between fund groups’ voting profiles on various issues.”  “Most reports that criticize mutual funds’ proxy voting, including those mentioned in the ICI report) are more detailed with respect to who are the leaders and who are the laggards in particular areas of voting (for instance, why does one fund family support every board nominee at portfolio companies, whereas others support nominees less than 80% of the time, where the two might hold many of the same securities?), says Cook.  Not only does the ICI report fail to dissaggregate, it doesn’t even tell us which funds are included and which are not.

Unrelated to ICI’s report, but also of interest is a new Morningstar Inc. study which looks at how much managers invest in their own funds. The study looked at 6,000 issues and found that in 46% of the domestic stock funds surveyed, the manager hadn’t invested a dime. Nearly 60% of foreign stock funds reported no manager ownership, two-thirds of taxable bond funds have no managers with money in the fund, up to 70% of balanced funds have no manager cash and some 78% of muni bond funds have shareholder cash only. See table showing fund ownership. (No skin in the game, Chuck Jaffe, MarketWatch, 7/6/08)

Chuck Jaffe seems to believe the report shows Proxy voting (by funds is) more than a rubber stamp(Philiadelphia Inquirer, 7/13/08) However, he also notes that “At most large firms, fund managers still don’t sit on the proxy-voting committee. And so long as investors favor results to disclosures and returns to process – which is true in all funds except for those that pursue a social agenda – there will always be some lingering sense that fund firms don’t care that much about these issues. Further, there are no studies showing any kind of link between how funds vote their shares and how they perform.” Once those two threads are connected, we should see a lot more emphasis on voting. See also Shareholders’ Voices Hold Little Clout, mmexecutive.com, 7/14/08.

Lukomnik to Head IRRCi

The Investor Responsibility Research Center Institute for Corporate Responsibility (IRRCi) hired Jon Lukomnik as program director. Lukomnik will spearhead the Institute’s efforts to become the preeminent source of objective and relevant research examining the intersection of investments with environmental, social and governance issues.

“The Institute will encourage and support important research in the fields of corporate governance and corporate responsibility and will be a convener and coalescing force in this area of growing importance. Jon is the right person to lead us, and our board looks forward to working with him as he develops relationships with educational and other research organizations in these fields which are critically important in the securities markets and for the economy,” said Peter Clapman, Chair of the Institute.

“This is an opportunity of a lifetime – the chance to give back to the industry,” said Lukomnik. “If we do it right, the IRRC Institute will contribute to building the solid, independent research base which will affect how investors view and value corporations’ environmental, social and governance efforts for decades, even while allowing corporations to understand how to profit by being responsible. I envision the Institute as the go-to non-profit organization for such independent, objective research.”

Lukomnik is well-known globally for his corporate governance efforts over a quarter of a century. He is a founder and former Governor of the International Corporate Governance Network which now boasts 500 members representing some $15 trillion of assets under management, ex-chair of the executive committee of the Council of Institutional Investors, former Deputy Comptroller of New York City in charge of investing that City’s pension funds and treasury assets, a founder of GovernanceMetrics International, and co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Bargain price of less than $10 for hardcover edition) Lukomnik will also continue as Managing Partner of Sinclair Capital LLC, a strategic consultancy for the asset management industry.


In a CFA Institute survey of1,956 investment professionals, 11% said they had seen a credit rating agency change a bond grade in response to pressure from an issuer, underwriter or investor.

Many respondents felt the most harmful conflict of interest results from the payment structure under which rating agencies such as Moody’s Investors Service and Standard and Poor’s are paid by the same issuers whose securities they grade. (Investors cite rating agencies’ conflicts of interest, Financial Week, 7/8/08)

An SEC report found that none of the rating agencies examined had specific written comprehensive procedures for rating residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO). Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. (SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors) See also: Rating agencies in-depth, FT; SEC proposed rules.

Procedural Error in SEC Request to Delaware Court

J. Robert Brown argues that the decision by the Delaware Supreme Court to consider the certified question re AFSCME’s Proposed Bylaw at CA violates its own rule. No action letters represent requests for “informal” advice from the staff of the SEC.  The advice is not attributable to the Commission.

The petition provides that the answer “will determine whether the Division will ultimately concur in CA’s view that it may exclude the AFSCME Proposal . . . ”  (emphasis added).  In other words, it will be the staff that rules once the answer has been received, not the entire Commission. The fact that a no action letter is not a position of the Commission means that it can be easily disavowed (by the Commission or the staff) and cannot be challenged as a final action under the APA. Procedures matter. [As Predicted: The SEC and the Further Denial of Shareholder Access (Delaware Supreme Court and the Lack of Jurisdiction)(Part 4), theRacetotheBottom.org, 7/8/08)

TIAA-CREF Faces Pressure at Annual Meeting

Shareholders and advocacy groups will press TIAA-CREF officers on its investment in companies with socially irresponsible practices at its July 15 meeting. After years of pressure, TIAA-CREF agreed to become a shareholder activist on issues of social responsibility. Now it’s time for them to either put pressure on five industry leaders that consistently display egregious behavior or divest their stock, says the Make TIAA- CREF Ethical coalition, which includes Corporate Accountability International (formerly Infact), World Bank Bonds Boycott, Press for Change, Social Choice for Social Change, Canadian Committee To Combat Crimes Against Humanity (CCCCH) , Citizens Coalition (Frente Civico), Educating for Justice, National Community Reinvestment Coalition, Campaign to Stop Killer Coke/Corporate Campaign, Inc., Campaign for a Commercial-Free Childhood, and Sprawl-Busters. The Coalition urges that TIAA-CREF “reform them or dump them.”

  • Nike and Wal-Mart, condemned for selling products produced by overseas sweatshop labor;
  • Wal-Mart, widely criticized for its domestic labor practices, hurting local businesses, and promoting urban sprawl;
  • Philip Morris/Altria, responsible for Marlboro, the leading cigarette for youth;
  • Costco, which promotes police brutality in Mexico and the destruction of its cultural heritage and the environment;
  • Coke, with complicity in widespread labor, human rights and environmental abuses; exploits child labor and aggressively markets harmful products to children.
  • While TIAA-CREF did divest from harmful World Bank bonds, it should now pledge to buy “no more.”

According to coalition group representative Neil Wollman, a Senior Fellow at Bentley College in Massachusetts, TIAA-CREF claims that outside of their socially responsible fund, they cannot use non-financial criteria in their financial decisions. Yet, Wollman asks, “Would TIAA-CREF have invested in the production of Nazi gas chambers in World War II if it meant a healthy financial profit? It’s time for TIAA-CREF to answer that kind of question.” He adds, “Our coalition praises TIAA-CREF for changes over the years in its social responsibility practices often spurred by participant lobbying; but now they need to move on our companies of concern.” For further information, contact Neil Wollman, Ph.D., Senior Fellow (for the Make TIAA-CREF Ethical coalition): 260-568-0116. DisclosureThe publisher of CorpGov.net is a Costco shareowner.

Audit Committee Practices

TheCorporateCounsel.net recently conducted a survey and found that more than 90% review company earnings releases prior to their release to the media. Most hold a meeting by telephone a day or two prior to the release. (Survey Results: Audit Committees and Earnings Releases)

Sweeping Resoution at Hain

Congratulations to Kenneth Steiner and John Chevedden for creating and submitting what is certainly one of the most innovative and important resolutions of 2008. The SEC Rules on Shareholder Resolutions (Rule 14a-8) limit shareowners to one resolution per annual meeting. Yet, Steiner’s resolution to the Hain Celestial Group covers a lot of territory simply by asking Hain to reincorporate in North Dakota.

RMG/ISS blog points out that the United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively. At least we know such proposal aren’t likely to be excluded by “no action” requests.

As RMG/ISS report, there is some dispute as to the benefits to be gained by reincorporation. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.” But being based at the University of Delaware, Elson is hardly be viewed as unbiased.

William H. Clark, Jr., who served as president of the North Dakota Corporate Governance Council, which drafted the statute, of course, sees things differently. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.” (Reincorporation proposal seeks to address “major issues in corporate governance,” 7/2/08)

Regardless of the merits of incorporating in North Dakota, the proposal brings up several issues that could be the subject of negotiations. Among the most significant are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

See text of the law and discussion, The North Dakota Experiment, at Harvard Law School Corporate Governance Blog, 4/23/07, Expect to similar proposals at a great many companies next year.DisclosureThe publisher of CorpGov.net is a Hain Celestial Group shareowner and will be voting in favor of Steiner’s proposal.

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CorpGov Bits

Writing for FT, Kristin Gribben concludes Shareholder democracy is on hold (7/6/08) based on mid-year voting results, which show “say on pay” support has remained flat. However, since both Barack Obama and John McCain have said they support say on pay, why should shareowners exert much effort on such proposals this year? Yes, many are waiting to see what the next administration brings.

One out of every four working Americans (25%) describes their workplace as a dictatorship and only 34% believe their bosses react well to valid criticism, according to a new Workplace Democracy Association/Zogby Interactive survey. 80% of workers said they work better when they are given the freedom to decide how to best do their job. (Workplace Democracy Survey, Workplace Democracy Association and The WorldBlu Blog, 7/5/08) The revolution continues.

A socially responsible investment (SRI) global equity allocation could produce 40% lower CO2emissions than a conventional portfolio indexed to the MSCI World, according to a study by Pictet Asset Management (PAM). Such a portfolio also showed the positive impact on job creation for 2007, creating half again as many as compared to the benchmark increase.

There is growing recognition that proactive management of social and environmental issues by corporations will have a material impact on their long-term value. Pension funds should disclose the extent to which (if at all) LTRI issues are taken into account in investment-related decisions, including proxy voting policies, selection of investments, engagement with companies or regulators, and selection of investment managers. (Responsible investing requires full disclosureDavid Hess, P&I, 6/9/08)

Karthik Ramanna and Sugata Roychowdhury find that outsourcing firms donating to congressional candidates in closely watched races managed their earnings downwards in the two quarters immediately preceding the 2004 election, deflecting attention away from outsourcing and negative media. As expected, such candidates to do better in elections. Conclusion: Accounting Information (can be used) as Political Currency. Ah, another form of corruption. People are so creative.

A bill signed into law in June positions Vermont as a leader in incorporating so-called virtual firms — those without a physical headquarters, actual paper filings, and directors’ meetings (they’re all online.) The state will charge virtual companies the same amount — about $235 per year — that standard corporations pay when filing. (Vermont Wants to Be the “Delaware of the Net,” CFO.com, 6/30/08)

Dennis Johnson, Director of Corporate Governance, will be leaving CalPERS  to become Managing Director of Shamrock Activist Value Fund. He also intends on stepping down from the post as Chair of the Council of Institutional Investors Board of Directors. (press release, 7/2/08) It looks like 3 years is all we can hope for at CalPERS until they move to the private sector for higher pay.

CalPERS also reached an $895-million settlement of a class-action lawsuit brought against UnitedHealth Group, over its stock-option grant practices… probably the largest stock option backdating recovery to date.

The Delaware Supreme Court accepted questions from the SEC on AFSCME’s binding bylaw proposal seeking reimbursement for third-party solicitations at CA. Briefs are due July 7; oral argument is scheduled for July 9. (Delaware Supreme Court: CA/AFSCME Certification Accepted and Fast Tracked, TheCorporateCounsel.net Blog, 7/2/08)

It has now been more than 10 years since DOL wrote a letter to Calvert advising them that the fiduciary standards of ERISA didn’t preclude socially screened funds as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.” (Socially conscious investing blossoms with DOL’s blessing, Investment News, 6/23/08)

Preliminary 2008 AFL-CIO Key Votes Survey Preliminary Scorecard posted.

Former SEC chairman Arthur Levitt Jr. called on the SEC to immediately take up proxy access with “a significant, but not onerous, threshold amount of stock one must own to put forward a vote, a framework regarding disclosure and conflicts of interest, and rules that ensure that any changes to a board do not violate stock-exchange listing standards.” (How to Boost Shareholder Democracy, WSJ, 7/1/08)

Lipton and Democracy

In Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World?, Martin Lipton discusses the pressures that have been “pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization.”

Lipton cries out that “directors risk embarrassment for any misbehavior or other failures of their companies, however diligent they may have been.” Of course, since board minutes are not routinely made public, how can shareowners assign blame other than to responsible committees and their members? “Many active CEOs and other senior business people now restrict themselves to only one outside board…” leading to a situation “where few members are CEOs or former CEOs, and too few members are fully qualified to provide the best possible business and strategic advice.” Yes, shareowners want fully engaged directors with a variety of skills and perspectives, not primarily CEOs.

Of course, not all his criticisms are baseless. For example, he points to a recent study by Bhagat, Bolton and Romano that found “no consistent relation between governance indices and measures of corporate performance… the most effective governance institution appears to depend on context, and on firms’ specific circumstances.” Similarly, Robert Daines and Dave Larker found no correlation between the corporate governance ratings given by four services to various corporations. (Rating the Ratings: How Good Are Commercial Governance Ratings?, Daines, Gow and Larcker, 6/26/08)

The bottomline question for Lipton is, will the subprime and leveraged loan financial crisis sufficiently move us from “director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence.” I certainly hope so, and I’m sure shareowner-centric directors will also offer plenty of excellent advice.

When Berle and Means wrote The Modern Corporation, pointing out the separation between the ownership of property and the control of property, they didn’t blame performance failings on the greed of shareowners but on their passivity. They looked to the court as the ultimate arbitrator of the corporation’s legitimacy and viewed its ultimate purpose as maximizing not shareowner profits but the general interest of society. “The control groups… have placed the community in a position to demand that modern corporations serve not alone the owners or the control but all the society.” (p. 312, 1968, London: Transaction Publishers) As New Dealers, they believed political intervention was necessary to support market forces.

Managers and economists have sought for decades to avoid political regulations by overcoming the inherent inefficiencies of separate ownership and control by relying on and developing more efficient market forces. Through the pure economic model (PEM), financial markets take on the role of the entrepreneur, ensuring profit maximization by directing the flow of capital. However, markets behave more in line with crowds and mass movements, than as rationally efficient. Shareowners seek to exploit imperfect information.

Advocates of PEM have concentrated on designing mechanisms to reduce agency costs, by aligning CEO pay, for example, with stock price. However, PEM depends on all shareowners expecting the same maximized level of profit over the same time and different shareowners have different timeframes. PEM also underestimates the fragmentation of ownership and the consequences for corporate governance.

Lipton is right that costly regulatory checklists could kill the goose that lays the golden eggs, but the solution is not to return to a Fordist management dominated system that worked when corporations were conservative bureaucracies, politically counterbalanced by unionionized employees.

In a recent interview, Bob Monks describes some of his thoughts in returning from the 2008 ExxonMobil meeting. “Coming back from Dallas, I sat down and I began to write, ‘Shareholder Democracy, R-I-P’ which is inscribed on tombstones for Requiescat in Pace, or ‘Rest in Peace.’ Unhappily, the bold experiment that came out of the 1930s and some very idealistic people who tried to repair some of the damage of the Depression has now been thoroughly thwarted by people like Exxon, who view shareholder involvement as being at best a tax and at worst a crime.” (Bob Monks: ExxonMobil Exemplifies Corpocracy, SocialFunds, 6/30/08)

It would be a mistake, however, to think we have moved from a golden age of shareowner primacy. That only existed when corporations were owned, controlled and operated by families. The most interesting book I’ve seen in years on the evolution of the corporation is one that Bob knows well. His cover note says, in part, “The ideal of democratization of economic values, following de Toqueville, is a perilous voyage for which this book is a fine route map. Everyone can benefit from understanding the underlying precepts of tomorrow’s dialogue.”

Entrepreneurs and Democracy: A Political Theory of Corporate Governance by Pierre-Yves Gomez and Harry Korine identifies three “models of reference ” for corporate governance: the familial, managerial and public — each corresponding to distinct stages of evolution. The first stage began with the liberal thought of equal rights and the emergence of private property, which initiated enfranchisement of the entrepreneur. The second stage had roots in the separation of powers between owners and management. The third stage, emerging now, is typified by increasing representation and public debate, giving shareowners effective oversight of the corporation.

Gomez and Krine view the tension between individuals and the collective as opposing forces: that of the entrepreneur, a force necessary for directing and channeling the energies of individuals, and that of social fragmentation, a force that divides and balances individual interests, involving increased exercise of authority and control. Democracy, through institutions and processes, helps to establish equilibrium between these two forces. The governed view governance as legitimate only if there is balance between the directing force of the entrepreneur and the contrary force of fragmentation and independence.

“Management finds itself increasingly subordinated to the markets and has to take investors’ reaction into account to define and weigh decisions.” (p. 184) Shareholders have taken the entrepreneurial mantle and drive the market in two ways. “Investors” exercise the entrepreneurial force by allocating resources to the highest performers based on extrinsic comparisons. “Shareowners” seek to integrate active owners at specific firms based on their interpretation which also includes more intrinsic data. Contemporary corporate governance is characterized by the omnipresence of information, the de-privatization of the corporation, debate and the representation of different interests. Public opinion has become the counterweight to the entrepreneurial force of direction.

Under familial governance, business secrecy was paramount. Under managerial governance, we relied on the primacy of management expertise. Today, good governance depends on a mass of standardized information that allows easy comparison by the investing public of risks and opportunities. It depends both on relatively efficient markets to direct large capital flows and on actively involved shareowners to improve efficiencies at specific corporations.

Under the managerial form of governance that has been in dominant for most of Lipton’s brilliant career, the board is composed of experts and operates primarily to provide internal technical advice. Under public governance, the board is composed of outside directors, shareowner interest groups and even more broadly defined stakeholders to link the corporation to mass markets and society… functions increasingly important for companies operating in a global context.

Lipton’s clients would be better served if he helped them adapt to the process of democratic deliberation, rather than fighting a rear guard action. How can they evolve to a system of selecting board members nominated by and directly accountable to shareowners? How can they supplement the annual meeting with an assembly of elected shareowners who provide advice to management throughout the year? By inviting public discussion in areas heretofore regarded as the exclusive domain of management, companies deliberate matters of public concern in advance and are less vulnerable to the vagaries of market bubbles and crashes. Lipton can best help his clients avoid the imposition of overly burdensome regulations by advising them on how to build democratic mechanisms into the very structures and processes of corporations themselves.

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Corpocracy and How to Get Our Democracy Back

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

1. Proxy Assignment

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

2. My Proxy Advisor

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

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

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

3. Proxy Exchange

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

4. A US Shareholder’s Association

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

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

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

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

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

5. Shareholder Advocacy Trust

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

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

6. Collectively Paid Proxy Research

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

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

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

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

7. Provide Full Public Disclosure of Votes as Tabulated

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

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

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

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