Tag Archives | SEC

Apache v Chevedden: SEC Rules Don't Reflect Reality

I was delighted to see Broc Romanek coverage of the controversy surrounding Apache v Chevedden, although he did so in a members only area of theCorporateCounsel.net. I hope the case gets a lot of attention.

Yesterday, I was discussing a table I am working on that shows some of the rights denied to street name shareowners that are readily available to registered shareowners. Glyn Holton, Executive Director of the United State Proxy Exchange, pointed out something.  It is obvious those who wrote the regulations don’t know how the system works… or perhaps the rules haven’t been changed since the great immobilization, when almost all the shares were turned over to Cede & Co. and we started trading “security entitlements.”

Rule 14a-8 (b)(2)(i) says that “If you are the registered holder of your securities, which means that your name appears in the company’s records as a shareholder, the company can verify your eligibility on its own. Otherwise submit to the company a written statement from the ‘record’ holder of your securities (usually a broker or bank) verifying that, at the time you submitted your proposal, you continuously held the securities for at least one year.”

Of course, that is exactly what Chevedden did. He followed the rules and got a letter from his broker, Ram Trust. When Apache insisted that Ram Trust didn’t show on their records, he went another level up. However, Apache’s gotcha moment may have been in recognizing that the SEC rules are incorrect, since the rules assume that brokers and banks are “usually” record holders. They are not. Brokers and banks  also largely hold “security entitlements.” Cede & Co. holds the actual immobilized registered securities.

Please pull up the simple table I have begun constructing of  known instances where Street Name shareowners are being denied rights readily available to registered shareowners. (SECRuleStName2) Do you know of other similar situations? Please share your information by e-mailing James McRitchie at [email protected]

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SEC Self-Funding Authority Demanded

Members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs were sent a letter today from signatories representing a broad coalition of investors and market participants (including the publisher of CorpGov.net) urging them to provide self-funding authority to the SEC so that it has the resources necessary to fulfill its mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation.

The SEC monitors 30,000 entities, including more than 11,000 investment advisers, up 32% in the last four years. Yet, in the three years from 2005 to 2007, the SEC’s budgets were flat or declining. Self-funding could give them the resources they need and the ability to do long-term planning.

Like the letter earlier today to the same committee urging them to require proxy access and majority votes for director elections, this letter was also signed by several members of the SEC’s relatively new Investor Advisory Committee, in fact, the vast majority of Committee members signed.

The SEC collected $1.54 billion in fees in 2007 but received only $881.6 million through Congressional appropriations. The SEC’s budget could have increased by 75% that year if it had been self-funded. A 2002 GAO report concluded, the “increased funding flexibility (from self-funding) would likely allow SEC to more readily fund certain budget priorities, such as pay parity, and to more quickly respond to the ever- changing securities markets.” (SEC OPERATIONS: Implications of Alternative Funding Structures)

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CorpGov Bites

TheCorporateCouncil.net posted a transcript of a recent Webcast on the SEC’s new Proxy Disclosure requirement. Like always, they do an excellent job of sorting out issues for those getting into the weeds.

RMG reports “The wave of new federal securities lawsuits related to the global credit crisis has finally subsided, down 7-24% depending on whose data you use. The largest category of 2009 cases were those that arose from the credit crisis. (Investors File Fewer Lawsuits in 2009, 1/6/10)

theRacetotheBottom.org has covered a raft of issues lately that are worth a read. These include: Executive Compensation at Goldman Sachs, Executive Compensation, Delaware’s Top Five Worst Shareholder Decisions of 2009 and the need for reinstating Glass-Steagall.

Bowing to pressure from shareholders of On2 Technologies, 11.5% of whom voted they share through MoxyVote.com, Google raised its offer  to  $132 million, up from $106.5 million. (Shazam! Google raises its offer price for On2, 2/7/10)

Study finds Private Investments in Public Equity (PIPEs) announcement returns decrease almost linearly across the first six PIPE transactions, going from positive to negative. Firms that issue multiple PIPEs have high cash levels, and a majority make acquisitions. Successive PIPE transactions delay accessing of public markets while keeping institutional ownership low. Hence, they are greeted skeptically by the market as maintaining managerial entrenchment. (Are Private Placement Announcement Returns Really Positive? On the Information Content of Repeated PIPE Offerings, Ioannis V. Floros and Travis Sapp, SSRN, 1/7/2010)

Small ESOPs, those controlling less than 5% of outstanding shares, benefit both workers and shareholders, implying positive productivity gains. However, the effects of large ESOPs on worker compensation and shareholder value are more or less neutral, suggesting little productivity gains. These differential effects appear to be due to two non-value-creating motives specific to large ESOPS: (1) Management-worker alliances to thwart hostile takeover threats and (2) To substitute wages with ESOP shares by cash constrained firms. Worker compensation increases when firms under takeover threats adopt large ESOPs, but only if the firm operates in a non-competitive industry. (“Employee Capitalism or Corporate Socialism? Broad-Based Employee Stock Ownership”, Kim and Ouimet, SSRN, 12/1/09)


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TK Kerstetter Wrong on Board Disclosure

TK Kerstetter wrong on board disclosure proposal at the SEC. TK Kerstetter is the president and CEO of Board Member Inc. a privately held publishing, database, research, and conference company focused on corporate board issues and governance trends. Corporate Board Member is sent to all corporate directors of public companies on the NASDAQ, NYSE Euronext, and NYSE Amex stock exchanges. Usually, the publication contains excellent advice. A rare exception is Kerstetter’s Director Qualification Disclosure Will Prove Lame. (The Board Blog, 12/9/09) Continue Reading →

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CII Supports SEC Effort to Increase Potential Liability at Credit Rating Agencies

The SEC is considering a proposal to rescind an exemption that would cause Nationally Recognized Statistical Rating Organizations to be included in the liability scheme for experts set forth in Section 11, as is currently the case for credit rating agencies that are not NRSROs.

NRSROs “have generally escaped accountability for their shoddy performance and poorly managed conflicts of interest, at least in part because of their statutory exemption from liability. Rule 436(g) shields only those few rating agencies designated as NRSROs from liability as experts for making untrue or misleading statements when their ratings are included in registration statements,” according to the Council of Institutional Investors.

CII believes effective reform of the credit ratings industry hinges on the following steps:

  • Enhanced SEC oversight
  • Reduced reliance on ratings by all market participants
  • Strengthened internal controls of NRSROs
  • Expanded transparency of credit ratings
  • Heightened standards of accountability for NRSROs

See CII’s letter to the SEC in support of Concept Release on Possible Rescission of Rule 436(g) Under the Securities Act (File Number: S7-25-09) (see also Concept Release No. 33-9071A). SEC Fact Sheet. Speech by Commissioner Luis A. Aguilar.

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Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration

According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.

Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. (‘Genocide-free’ measure rejected at American Funds, AP, 11/24/09)

I suspect Broadridge claims they don’t have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to [email protected] with File 4-583 in the subject line.)

By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don’t actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.

It was supposed to be a temporary measure. Brokers were in a panic because they didn’t have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.

That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don’t want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can’t accurately count ballots because it can’t audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting… and they can do it either before or after the fact.

As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven’t seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.

A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.

I’m participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.

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Proxy Access: The Letters Are In

The deadline was August 17th, so the comment letters on proxy access have all been filed and posted. Many are well worth reading. If you don’t see yours posted, you might want to resubmit it.

TIAA-CREF, one of the more conservative shareowner activists, calls on the Commission to raise the threshold to 5% for shareowners at all companies, regardless of size. Additionally, they want to require a two year holding period and recommend instead of the “first in” approach, nominations should go to the largest owner or and (here they get creative) to the shareowner or group that has held their shares the longest. They voiced opposition to reimbursement: “Reimbursement of expenses could be used to facilitate the election of special interest directors. Reimbursement also encourages fighting and proxy contests to achieve representation at the distraction of directors rather than dialogue and productive change.” Instead, they favored “incentives for a meeting between shareholders and the board in order to identify director candidates who are acceptable to both parties… Ultimately, the best possible outcome is to avoid a proxy contest altogether… We believe that the nominee should receive at least 20% of the vote in order to be re-nominated in subsequent years.”

Cornish Hitchcock, writing on behalf of the LongView Funds warns against a state-law carve-out, praising the merits of a uniform system. Like TIAA-CREF, the LongView Funds would like to see the required holding period extended to two years and nominations going to the largest nominator.

J. Robert Brown, of theRacetotheBottom.org, offers a spirited rebuttal to comments by the Delaware Bar Association regarding their argument in favor of private ordering. “The evidence in fact suggests that in the absence of a federal requirement, companies will opt for a categorical rule denying access.” “Evidence suggests that management’s control over the drafting process and its ability to rely on the corporate treasury eliminate any real prospect of private ordering. Instead, when matters are made discretionary, they result in a categorical rule that favors management.” “The only way to ensure meaningful access to the proxy statement is to adopt a federal rule that institutes the requirement.”

Lucian Bebchuk’s letter, signed by 80 professors, favors the rulemaking and notes, “no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board. A shareholder nominee will join the board only if the nominee obtains more votes than the incumbents’ candidate in an election in which incumbents, but not the shareholder nominee or the nominator, may spend significant amounts of the company’s resources on campaign expenses.”

As expected, the Shareholder Communications Coalition, comprised of the Business Roundtable, the National Association of Corporate Directors, the National Investor Relations Institute, the Securities Transfer Association, and the Society of Corporate Secretaries & Governance Professionals sent a letter opposing the rulemaking “until the Commission: (1) completes its intended examination of the proxy system; and (2) promulgates new regulations to modernize and reform this cumbersome and expensive system.” “A shareholder nomination process that operates in a proxy voting system that cannot produce an accurate and verifiable vote count will do little to improve the overall
corporate governance system.” I just can’t help making a snarky comment. So we should just go with the current system that elects incumbents based on inaccurate and unverifiable voting results until we can ensure the system works properly

Broadridge submitted a letter discussing various technical issues. Great for those who want to get into the weeds.

Writing on behalf of Sodali, a global corporate governance consultancy, John Wilcox asks: “Is Rule 14a-11 is sufficiently deferential to the traditional role of the states in regulating corporate governance?; and (2) Does the proposal achieve the Commission’s goal of removing burdens that the federal proxy process currently places on the ability of shareholders to exercise their basic rights to nominate and elect directors?” His analysis answers with a resounding yes.

Eleanor Bloxham, of the Value Alliance and Corporate Governance Alliance notes that “having an orderly, ongoing process for shareholder to nominate directors may produce improvements in shareholder returns. Certainty, competition in the process for board seats could, I believe, produce better candidates.” She addresses the issue of affiliation and loyalty, Bloxham recommends each candidate be required to prepare a statement as part of the proxy process that would stipulate that the candidate understands that as a director, if chosen, their  obligations are to act in the best interests of all shareholders, including minority shareholders, and to act without preferential treatment related to who may have nominated them.”

As I have previously mentioned, I signed on to a letter from the United States Proxy Exchange (USPX), endorsed by members of the Investor Suffrage Movement, Robert Monks, John Harrington and John Chevedden. Glyn Holton did a great job of putting together sixty-nine pages of comments. I urge everyone to read our common sense approach outlining the democratic option, the need for deliberation and the reasons for our recommendations, which include:

  • Mandating a federal standard that take precedence over state laws.
  • Placing all bona fide candidates on a single management distributed proxy card.
  • Not encouraging a system where corporations are willing to
    reimburse expenses shareowners incur in conducting a proxy contest, since this will only escalate costs paid by shareowners.
  • Don’t place an overt limit the number of candidates shareowners are able to nominate. If limits are need to keep the pool manageable:
    • limit individuals to five for-profit corporate boards
    • charge a modest fee
    • require a system of endorsements
    • require all candidates to file pre and post election estimates and accounting of all campaign expenditures
  • Reduce the focus on control by establishing a system that will encourage diversity. “Corporate democracy will allow shareowners to take ‘control’ away from an entrenched board and not give it to any one faction.”
  • Eliminate the arbitrary and elitist proposed thresholds, opting instead for the time-tested $2,000 of stock held for a year. “The challenge should reside in winning the election, not in making the nomination.”
  • Increase candidate statements to 750 words and specified space for graphics that can address any issue related to the election, including short-comings of the current board.
  • Measures to ensure board members nominated by shareowners are not marginalized.
  • Implementation of a broad safe harbor for individual director
    communications with shareowners.

After we had already sent the USPX comment letter, I recalled a few additional issues and sent in my own letter as an addendum, recommending the following:

  • Amendments to Rule 14a-8 also clarify that shareowner resolutions can seek to collectively hire a proxy advisor, paid by for with company funds, that isn’t precluded from offering advice on board elections.
  • Require that companies must allow shareowner resolutions to be presented during the business portion of the annual meeting.
  • An override mechanism on Rule 14a-8(i)(5) (Relevance) and (i)(7) (Management Functions).

Dozens of studies in communications and organizational behavior find current corporate structures to be inefficient. Most decision-making structures, including those now governing corporations, are designed around status needs related to dominance and control over others. They are not designed to maximize the creation of wealth for shareowners or for society at large. In order to gain higher status, individuals seek to dominate more and more people. This dynamic moves the locus of control inappropriately upward. In order to generate more wealth, we need to take advantage of all the brains in our companies, as well those of concerned shareowners. We can do so by making corporations more democratic, top to bottom.

Now, we eagerly await the Commission’s action. If they are slow in finalizing the proposed rules, I hope it is because they carefully read our letters and are rewording them to require more, not less, democracy.


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A Primer for Boards

Cornelis A. de Kluyver, an academic and practitioner with global experience, has written A Primer on Corporate Governance published by Business Expert Press. While not nearly as extensive as recent textbooks by Bob Tricker or Monks and Minow, this is a quick read that provides most of the basics for future directors and those who work with them.

He very briefly reviews the history of corporations, rise of fiduciary capitalism, recent moves to federalize corporate governance, various conflicts of interest, and provides a thumbnail international sketch. However, his short explanations sometimes over simplify. For example, in reviewing director duties he states, "the primacy of shareholder value maximization wa affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company.

Unfortunately, he’s not alone in perpetuating this myth. In Why We Should Stop Teaching Dodge v. Ford (pdf, Virginia Law & Business Review, spring 2008), Lynn Stout argues more convincingly that credit for the concept that corporations exist only to make money for shareholders should go to law professors, not the courts. Dodge v. Ford is best viewed as a case that deals not with directors’ duties to maximize shareholder wealth, but with enforcing the fiduciary duty of controlling shareholders to minority shareholders. Because different shareowners have different investment time frames, tax concerns, attitudes toward risk, etc. it is impossible to discern a single, uniform measure of shareholder wealth to be maximized. Additionally:

  • Articles of incorporation typically don’t say they are organized primarily to profit shareholders but, instead, for anything lawful.
  • Similarly, state corporation codes typically provide their purpose is "to conduct or promote any lawful business or purpose" and many authorize corporate boards to consider other stakeholders.
  • Judges routinely refuse to impose any legal obligation on directors to maximize shareowner wealth.

De Kluyver does explore stakeholder theory but concludes shareholder value maximization "will continue to dominate the U.S. approach to corporate law for the foreseeable future," with the courts giving boards increasing latitude.

Elsewhere, he discusses governance reforms and concludes, "There is real danger, however, that the rise in shareholder activism, the new regulatory environment, and related social factors are pushing boards towards micromanagement and meddling." Many of us wish there had been a lot more "meddling" by boards prior to the current financial crisis, but de Kluyver is writing for board members, not shareowners.

Although he appears to reject recent moves to require specific subsets of directors to be independent, he appears to agree they should be more allied with shareowners than with management and that separating the roles of chairman and CEO "gives boards a structural basis for acting independently."

In discussing stock options, de Kluyver notes, "Until recently, many U.S. companies were not very diligent in assessing the cost and value of options and treated options as being cost-free." He says nothing about the Business Roundtable’s campaign to undermine the Financial Accounting Standards Board. An uninformed reader could be left with the impression that CEO’s had no role in this effort to hide costs. Likewise, he says "most of the pressure on boards on the last 25 years has come from shareholders." Hasn’t more pressure come from CEOs who are there providing direction at every board meeting? Even with recent steps empowering shareowners, CEOs still hold more sway over boards, including who is nominated.

In discussing shareowner proposals, de Kluyver says, "One of the most popular shareholder proposals today demands that shareholder be allowed to directly nominate and elected directors rather than work with the slate recommended by the board’s nominating committee." Popular in what sense?

The SEC allowed such proposals for many years until it looked like the proposals would obtain majority votes. Then the SEC, without changing the governing regulations, decided such resolutions violated the rules. That position stood for many years until challenged by AFSCME. When the underground regulations were overturned by the court only about three such proposals were introduced before the SEC, under Cox, banned them through new regulations. Now, under Schapiro, such proposals will again be legal, probably in 2010. To describe "proxy access" proposals in 2009 to be "the most popular shareholder proposals today," without much explanation, seems misleading.

In the book’s epilogue de Kluyver revisits the issue of "proxy access." However, rather than clarifying the issue he informs readers that the SEC considered proposed rules to allow it, but rejected them. Of course this is true, but de Kluyver gives the impression the issue is dead, whereas everyone following this issue has known for years that "proxy access" would be back on the table under a new administration. It would be important to note that majority voting requirements, the end to "broker voting" and proxy access will require boards to cooperate more closely with shareowners.

The book is at its best in borrowing liberally from thought leaders and consensus shaping organizations by providing various lists of best practices: Succession Planning is an Ongoing Process; CEO Selection: Common Board Mistakes; Succession Planning: Best Practices; Red Flags in Management Culture, Strategies, and Practices; 10 Questions About Ethics and Compliance for the Board; Five Questions About Hedging; Enterprise Risk Management: The Board’s New Tool; Executive Compensation: Best Practices, What Defines Best In-Class Boards?,; etc.

Regardless of my nitpicking, de Kluyver gets the big picture right. "The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it was on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society." De Kluyver offers readers information that can help them to become better directors and better corporate citizens.

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Proxy Access

Les Greenberg and I petitioned the SEC for proxy access back in 2002, so we both have a longstanding interest in seeing a proposal move forward. The Council of Institutional Investors said our proposal “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” (See Equal Access – What Is It?) Of course, AFSCME deserves most of the credit and nothing moved the issue like AFSCME vs AIG. The SEC’s latest attempt, File No. S7-10-09 Facilitating Shareholder Director Nominations, is by far the Commission’s best effort. I’m attempting to formulate myown comments and would welcome your thoughts. (send to [email protected])

On June 11th Greenberg, on behalf of the Committee of Concerned Shareholders, was among the first to submit extensive comments in this round. He argues mutual funds are too conflicted to run dissident director candidates, whereas large pension funds already have the resources but have stayed on the sidelines. The SEC’s proposed percentage ownership requirement are “arbitrary,” without legal basis or precedent. The thresholds will be nearly impossible to meet except “in extremely rare circumstances”… like when a company is in near bankruptcy (my interpretation). Don’t limit the number of shareowner nominees to 25% and stick with the time-tested threshold of $2,000.

Where this would result in more than two candidates per seat, borrow the “lead plaintiff” concept from the Private Securities Litigation Act of 1995 and include a “lead nominator” provision, something we suggested in amendments to our original submission.

With a ‘lead nominator’ provision, there is absolutely no need for a
percentage stock ownership threshold. The ‘lead nominator’ solution would allow Individual Shareholders to act as watchdogs of their investments at 9,000+ corporations that have publicly traded securities. Institutional Investors do not have the interest, desire and/or resources to seek Director accountability on such a scale.

I would love to see the SEC move in this direction. As far as I’m concerned, let’s have contests at every company. Retail investors might then begin to think of themselves as shareOwners, not betting slip holders. They might even begin to vote!

No government agency can match the vigilance of millions of shareowners. We have the incentive; just give us the tools. In most cases, the only extra expenditure for companies would be for slightly expanding the proxy. Mildly dissatisfied shareowners, aren’t likely to be swayed by the arguments of dissidents… unless they are spot on. If they aren’t spot on, the company will just call them nuts and won’t bother with a campaign.

The long-term result would be that many more shareowners like Les Greenberg at Lubys and Eric Jackson at Yahoo would emerge with thoughtful analysis that could benefit all shareowners. Maybe organizations like the American Association of Individual Investors would then focus just a little on how to add value as owners, instead of exclusively on how to pick and trade stocks.

Phillip Goldstein, representing Opportunity Partners L.P., goes even further in raising fundamental issues in his July 16th comments.

Consider two stockholders who are substantially identical in every respect except (1) Stockholder A did not acquire his shares for the purpose of changing or influencing the control of the issuer but has now become convinced that change is needed in the boardroom while (2) Stockholder B, who was arguably more prescient, bought her shares with the intention of eventually proposing just such a change.

Of course, both have a legal right at the meeting to nominate directors but almost all votes are cast through proxies. While page 9 of the rulemaking says “The proxy rules seek to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders,” but the proposed rules disenfranchise Stockholder B, presumably the brighter of the two.

Goldstein argues, “Consequently, the Commission should junk its quixotic attempts to create a Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections.” Instead, “The Commission can craft a simple
common sense rule to require that any proxy card that that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a).”

Goldstein’s proposal is straightforward and within the SEC’s current legal authority, whereas the SEC’s proposal may be neither.

I know of no state that requires a holding period or a minimum
investment before a stockholder can propose a nominee. Why then should the Commission discriminate between long and short-term stockholders or between large and small stockholders? More importantly, there is no legal basis to do so…

The Commission should have banned “one party” proxy cards years ago. It is obvious that such a proxy card frustrates the free exercise of voting rights because it results in the “election” of
directors who might not have otherwise been elected if a proxy card with all bona fide nominees was provided to shareholders.

A better model than the proposed “Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections,” which includes directors and management, would be to craft a rule more akin to those governing union elections requiring:

Every labor organization refrain from discrimination in favor of or against any candidate with respect to the use of lists of members, and whenever such labor organizations or its officers authorize the distribution by mail or otherwise to members of campaign literature on behalf of any candidate or of the labor organization itself with reference to such election, similar distribution at the
request of any other bona fide candidate shall be made by such labor organization and its officers, with equal treatment as to the expense of such distribution.

Goldstein concludes:

A rule requiring every proxy card to include all known bona fide nominees as well as rules modeled after Section 481 of The Labor-Management Reporting and Disclosure Act of 1959 would ensure “the free exercise of the voting rights of stockholders” and would almost certainly be upheld by a court as a valid exercise of the Commission’s rulemaking authority.

Both Greenberg and Goldstein get to the real issues. I’m afraid too many will be distracted by the hundreds of questions raised by the SEC, the labyrinth of language only an SEC attorney could love, and the need to arrive at a consensus document that all with a vested interest in the status quo can at least live with.

So far, the best start of an analysis I’ve seen in this direction is posted in bits by J. Brown at theRacetotheBottom.org. Brown goes as eagerly into the weeds as a Labrador Retriever. For example, he says language in proposed Form 14N-1, which requires the person signing to certify their shares aren’t held for the purpose of changing changing control,

is unnecessary and likely to provide grist for the litigation mill. Boards may decline to include nominees if they can develop an argument that submitting shareholder has a control purpose. The fact that the director was submitted at all is evidence of some desire to influence control. Anyone with a history of sometimes trying to get control will be an easy target. Moreover, the Commission is not limiting its analysis to the current motivation of shareholders. Instead, they must represent that when they were acquired (one year ago, five years ago), there was no intent to effect a change of control or acquire more than a ‘limited number’ of seats…

To the extent that the agency wants to reduce the use of Proposed Rule 14a-11 for any attempted change in control, it would be enough to provide that nominees may only be submitted by those shareholders who meet the ownership requirements and who are not otherwise engaged in a proxy contest (or in league with anyone who was) under Rule 14a-11. In that way, the issue wouldn’t turn on control but on the number of directors nominated in any given election.

Brown also goes into an interesting analysis of the SEC’s attempt to address exclusion of shareowner nominees through board adopted qualification requirements.

To the extent that a company uses qualifications to exclude a nominee from the proxy statement, it will be in violation of the proxy rules and risk a federal law suit. If the nominee is allowed, the company may nonetheless refuse to seat anyone elected if they violated the board imposed qualification requirements. This in turn may precipitate a law suit in state court over the validity of the qualification requirement.

In another post, Brown criticizes the rush to the courthouse approach, endorsing instead the SEC’s 2003 proposal in this area giving priority to nominees from the largest shareholders. He also express concerns about the proposed threshold, especially with respect to smaller companies.

While the release notes that many companies below $75 million have 5% shareholders, it is also likely the case that these companies more often have controlling shareholders. Thus, the 5% shareholders may already have control of the board. In those circumstances, there may be even greater need to enable minority shareholders to elect their own nominees. This may require a lowering of the percentage.

I look forward to much more from J. Brown. If anyone else is posting comments on the proxy access proposals or is willing to share preliminary thoughts, please let me know. (send to [email protected]) Comments to the SEC are due August 17, 2009. Voice your opinion by sending an e-mail to [email protected]. Be sure to include “File S7-10-09” in the subject line.

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July 2009 News Archives

Mutual Funds: Pass Through Voting?

Various studies have shown that mutual funds often place their own interest in asset gathering ahead of their fiduciary duties. After studying proxy voting by US funds, Jennifer S. Taub (of UMass) concludes one option might be to “borrow from British reforms by creating a uniform set of best practices for corporate governance. Fund Advisers would be required to report and justify any departure from casting proxy votes (related to management or shareholder proposals) in line with best practices. Ideally, this comply or explain practice would be inserted at each link of the intermediation chain – from the corporation all the way to the underlying investor.” (Able But Not Willing: The Failure of Mutual Fund Advisers to Advocate for Shareholders’ Rights, Journal of Corporation Law, Vol. 34, No. 3, 2009)

A recently published study by the Shareholder Association for Research and Education (SHARE) and Fund Votes found that while Canadian mutual funds were more likely to oppose management nominees for boards of directors in 2008, the majority of mutual funds continued to vote overwhelmingly in favor of management proposals, and against proxy items proposed by shareowners.

When it came to the voting patterns of SRI funds sold by diversified fund companies, the report found that proxy voting patterns were the same as in mainstream funds offered by the same companies. “This is often the case even for shareholder proposals asking companies to be more attentive about the impacts of their operations on human rights and the environment,” the report stated. (Canadian Mutual Funds Continue to Vote Against Shareowner Proposals, SocialFunds, 7/9/09)  

In a followup e-mail, Laura O’Neill of SHARE, said,
“We noted one exception to our overall conclusion that proxy voting decisions are uniform across all funds. Phillips Hagar & North’s Community Values Fund was more supportive than the other funds on many CSR issues. The key here is that PH&N has a specific set of voting guidelines for its SRI fund. Establishing separate guidelines for SRI funds would, we think, go a long way to bringing proxy voting into line with investment strategy within these funds.”

The other coauthor, Jackie Cook, did another study in late 2008 (Mini Survey of Mutual Funds’ Votes: 2004-2008). One of her findings was that, “Mainstream
mutual fund groups’ increased use of abstentions on both governance
and CSR resolutions is puzzling, given the increased attention to the issues
covered in the media and by the investment community and deserves
further investigation by shareholder advocates.

Maybe the best solution, if mutual funds find it too difficult to vote because of conflicts of interest, is for the funds to just pass through voting rights to beneficial owners. Computerized files could gather all the bits and beneficial owners could use a platform like Proxy Democracy to vote, largely imitating funds like CalSTRS, Florida SBA, Domini, Calvert and others who think voting is worth their while.

Say on Pay Clears House

The Corporate and Financial Institution Compensation Act of 2009 (H.R. 3269), introduced by Congressman Barney Frank, Chairman of the House Financial Services Committee, passed 237 to 185, with most lawmakers voting along party lines. The bill would give shareholders a “say on pay,” an annual, non-binding vote on top executive compensation packages and “golden parachutes.” It will also require large financial institutions with more than $1 billion in assets to report incentive-based pay packages. One feature, little reported, is that it requires a GAO study of the correlation between compensation structure and excessive risk-taking. (House Approves Limits on Executive Pay, NYTimes, 7/31/09)

ShareOwners.orgAmericans for Financial Reform (“AFR”), and The Social Investment Forum had urged the U.S. House of Representatives to support “say on pay” legislation since “(i)t is apparent from the return of ‘bonus fever’ that once again is gripping Wall Street that too many American corporations are ready to shrug off the lessons that should be learned from the current financial crisis and economic downturn.”

The joint letter sent to Capitol Hill comes roughly one month after a June 25, 2009 ShareOwners.org national survey found that 83% of investors agree that “shareholders should be permitted to be actively involved in CEO pay and other important issues that may bear on the long-term value of a company to their retirement portfolio or other fund.” (see press release, 7/31/09)

Citigroup and Merrill Lynch lost more than $55 billion combined last year, adding to the massive wreckage on Wall Street that took the nation’s financial system to the brink of collapse. Yet they were among nine big banks that combined paid out more than $32 billion in bonuses — even as the banks took in $175 billion in taxpayer aid to weather the storm, according to an analysis that provides one of the most comprehensive looks ever at Wall Street pay.

Nearly 5,000 people received bonuses of $1 million or more amid the worst financial crisis since the Great Depression, according to the report by the New York attorney general’s office, released Thursday. (Bailed-out banks paid billions in bonuses last year, study shows, LATimes, 7/31/09)

Satyam, Did it Wake Up Indian Boards?

Satyam was a wakeup call for India to clean up its act. But did India Inc wake up? Experts and industry watchers remain divided in the aftermath. While there is a set of people who believe that Satyam definitely made promoters sit up and make alterations, there is an equally strong lobby that says nothing has changed in the real sense of the term.

A study of the latest ET-50 annual reports suggests companies have made minor changes in bringing on independent directors. Since January 2009, 524 independent directors have quit boards out of 2355 companies that have submitted data to the director’s database on BSE website. However, many claim “there is a sheer paucity of good independent directors” and the few good and competent ones often have multiple assignments. Out of BSE100 companies, 66 independent directors hold five directorships and more, 40% have non-executive chairman, and only 14 have a woman on board.

Perhaps India is no unlike the U.S., where many used to believe eminent personalities established a company’s commitment towards good corporate governance. Promising is this from Anjali Bansal, of Spencer Stuart: Briefs for new board positions have undergone a sea change. Now they are far more structured. “Companies are now demanding board directors who understand the business, its drivers, domain, and also its risk. Secondly, companies are also looking at audit committee members with relevant skill sets.” (Has the Satyam scandal changed corporate governance in India?, The Economic Times, 7/31/09)

Better Governance Narrows Spreads

A study by Kee H. Chung of the State University of New York (SUNY) at Buffalo, John Elder of North Dakota State University and Jang-Chul Kim of Northern Kentucky University entitled Corporate Governance and Liquidity found that stocks of companies with better governance structure exhibit narrower quoted and effective spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading.

The estimated improvement in liquidity is economically significant, with an increase in our governance index from the 25th to 75th percentile decreasing quoted spreads on NASDAQ by about 4.5%. Results are robust to different estimation methods (including fixed effects and error component model regressions), across markets, and alternative measures of liquidity. In addition, they find that changes in our liquidity measures are significantly related to changes in governance scores over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate information asymmetries.

Governance provisions may improve financial transparency by mitigating management’s ability and incentive to distort information. (Corporate Governance and Liquidity, HLS Forum, 7/31/09)

ProxyDemocracy Keeps Growing

MMA Praxis votes in advance of corporate meetings are now reported on ProxyDemocracy.org. Proxy “season” is at something of a lull right now but you can see how several funds are voting at Schering-Plough’s meeting on their planned merger with Merck & Co., Inc. In this case all funds reporting, AFSCME, Calvert Social Index, MMA Core Stock, MMA Growth Index, and Trillium all favor the merger. On the ProxyDemocracy site you can also see MMA Praxis Funds Activism Profile and voting guidelines.

If you fund isn’t one of the 10 whose votes are reported through ProxyDemocracy, ask why. Choosing to announce votes in advance through ProxyDemocracy is simple, inexpensive and is a win-win all around. More than 90% of retail investors didn’t vote their e-proxies last year. For mail-in proxies, the numbers are only slightly better.

Overwhelmingly, investors don’t vote and don’t know how to vote even when they do vote. The ten funds listed on ProxyDemocracy spend a lot of money analyzing proxy issues before they vote to ensure their actions will benefit shareowners and plan beneficiaries. By disclosing their proxy votes in advance of meetings, these funds are beginning to influence other investors, especially retail shareowners, who increasingly rely on copying the voting behavior of their favorite brand.

If you invest in stocks or mutual funds, check out ProxyDemocracy. If you are intellectually curious about the theory behind brand voting and where this is headed, see Mark Latham’s publicationsThe Internet Will Drive Corporate Monitoring and Proxy Voting Brand Competition. Also check subscribe to his blog, where he will update activities of the SEC Investor Advisory Committee, of which he is a member.

Trouble in Proxy Access Land

“Facilitating director nominations by long term shareholders who own at least one percent of the stock would greatly help maximize long term shareholder wealth… Past directors allowed the five best paid officers of publicly held companies to increase their take of profits from 4.8 percent, in the 1993 to 1995 period, to 10 percent from 2000 to 2003. If American capitalism is to thrive, current and future directors cannot allow top executives to take an ever larger piece of the owners’ pie. Otherwise, investors will move to greener pastures.” — Excerpt from comments by Frank Coleman (Cole) Inman, Corporate Governance Adviser and Former Business Professor.  

The US leads the developed world in the use of devices like ‘poison pills’ and other anti-shareholder mechanisms which have the effect of transferring wealth away from shareholders for the benefit of managers. While the scales will still be heavily weighted in managers’ favor after this change, this rule change will be a step in the right direction. Excerpt from comments by Peter C. Kelly, Director, Determine Services Pty Ltd, and Director, Determine Consulting Ltd., Wellington, New Zealand.

While I love those comments, much more troublesome were those from James L. Holzman, Chair, Council of the Corporation Law Section, Delaware State Bar Association and Joseph A. Grundfest, William A. Franke Professor of Law and Business, Stanford Law School.

As might be expected, the comments from the Delaware State Bar Association argued the rule would “unnecessarily deprive Delaware corporations of the flexibility state law confers to deal effectively with myriad different circumstances that legislators and rulemakers cannot anticipate, and would thereby undermine a key element of the state system of corporate governance that has been largely successful for decades.”

The letter cites comments from earlier access proposals to support the suggestion that shareowners want high thresholds. “Proposed Rule 14a-11 would prohibit stockholders from exercising their state law right to adopt a bylaw incorporating any of these more demanding eligibility requirements.” The letter goes on with many other criticisms, including:

  • Stockholders would lose their state law right to adopt a proxy access bylaw that prevents a stockholder or group from making a nomination for consecutive years if the stockholder’s or group’s previously sponsored nominee were not elected or did not receive a minimum number of votes.
  • Rational stockholders may prefer limitations the Commission previously proposed to require between nominator and nominees, such as prohibiting the nominee from being a member of the immediate family, or an employee of, the nominating shareholder or group.
  • Precluding proxy access where a “traditional” election contest is underway.
  • Preventing Stockholders from Exercising Their State Law Rights to Adopt Alternative Governance Rules They Deem Appropriate, wherein they list a number of potential costs to corporations and indirectly to shareowners. Under Delaware law, stockholders and boards of directors have the right to decide that these potential costs of a mandatory proxy access procedure outweigh the potential benefits to that particular corporation.
  • Whereas the access proposal invokes “the importance of facilitating shareholders’ ability to exercise their rights to determine their own additional shareholder nomination proxy disclosure and related procedures,” it actually prohibits exercise of their rights, “including bylaws that impose more stringent requirements for proxy access than proposed Rule 14a-II.”
  • Delaware has a better dispute resolution, since no-action letters would likely be appealed to federal courts, which take a great deal more time to render decisions.

The letter discusses the move away from plurality voting toward majority voting. “This trend toward adoption of majority voting has occurred without significant controversy, or even a need for formal stockholder action.” Although many companies have caved when presented with shareowner proposals, it is clear to most, if not the Delaware Bar, they would have gone nowhere without “formal stockholder action.”

The letter advises the SEC to withdraw Proposed Rule 14a-11, focus on what disclosures would be required in exercising proxy access and the liability for material representations, and relax the election exclusion in Rule 14a-8 to permit submission of bylaw amendments on proxy access.

Grundfest’s arguments against the proposal are similar, simpler and carry a more compelling threat. If shareowers are “sufficiently intelligent and responsible to nominate and elect directors,” why would the SEC “prohibit the identical shareholder majority from establishing a proxy access regime, or from amending the Proposed Rules to establish more stringent access standards.” It certainly doesn’t replicate the annual meeting process where access could be relaxed or strengthened.

The second contradiction relates to the Commission’s assertion that the Proposed Rules replicate the physical shareholder meeting as governed by state law. Nothing in state law sets a minimum proxy access standard, defines the contours of any access proposal to be considered by shareholders, or prohibits a majority of shareholders from amending an access standard to make it more stringent while allowing the same majority to relax the standard. The Proposed Rules thus fail to achieve the Commission’s stated objective, and instead erect barriers to shareholder action that exist nowhere in state law.

Here are a few highlights from Grundfest’s comment paper:

  • The rule cites no support for the proposition that shareholders can be relied upon to nominate and vote on directors, but not to set the rules by which directors are nominated and elected. Absent a rational basis upon which to conclude that shareholders are selectively intelligent or responsible in a manner that supports discriminatory reliance on the majority’s mandate, the Mandatory Minimum Access Regime cannot withstand scrutiny under the APA.
  • Pending legislation would resolve questions regarding the Commission’s statutory authority to adopt proxy access rules, but would not affect the Commission’s obligation to comply with the APA.
  • Commission rules are subject to review under the “arbitrary and capricious” standard of the Administrative Procedure Act. “At its core, arbitrary and capricious review, or “hard look” review as it is sometimes called, enables courts to ensure that administrative agencies justify their decisions with adequate reasons… technocratic, statutory, or scientifically driven terms, not political terms.”

Like the Delaware State Bar Association, Grundfest also advises the SEC to scrap Proposed Rule 14a-11 but offers some advice to those wanting to further shareowner rights:

  • Relax the rules governing communication among shareholders seeking to organize precatory “just vote no” campaigns.
  • Impose additional disclosure and communication requirements on registrants with directors who have a majority of votes withheld, regardless of whether the corporation has a majority vote policy.
  • Impose additional disclosure and communication requirements on registrants who fail to satisfy specified majority voting standards.

“Alternatively, the Commission could conduct a series of surveys designed to identify the parameters of the proxy access regime that would authentically be preferred by the majority of shareholders if the matter were put to a vote. These surveys might indicate that different categories of corporations have shareholder bodies with different preferences regarding the design of proxy access regimes. To respect that natural variation in shareholder preferences, the Commission could adopt a family of proxy access criteria that would seek to synthesize the default rules that shareholders would prefer if the matter were put to a vote. The family of default rules could then further be subject to an opt-out rule allowing a majority of shareholders to strengthen or relax proxy access standards at individual corporations in a manner consistent with the legislative mandate.”

While I personally would like to see an access proposal move forward to be in place for next year’s proxy season, I do have to admit, Grundfest makes what appear to be good points. However, if we only end up getting disclosure requirements, liability provisions, and a relaxed Rule 14a-8, expect to see thousands of shareowner access proposals in coming years. Many won’t settle for the shareowner group thresholds currently proposed by the SEC. My aim will be much lower, especially at smaller companies where corporate governance practices tend to be worse and institutional investors are scarce. Find the latest comments to the SEC on proxy access here.

SSMII Opportunity at CalSTRS

If you are a California state employee at the SSMII level or on a list, CalSTRS has an interesting job opening in their Communications Division working on media relations, marketing publications and project management. Final filing date is 08/04/2009.

The Future of Corporate Reform

My reservation is in for the San Diego conference sponsored by The Corporate Library and I’ve got my room at the Hotel del Coronado. I’m told I can’t report on the event, so don’t expect the usual write-up. Guess I’ll just have to kick back and enjoy. Here’s a few clips from Bob Monks’ blog about just a few of the speakers:

Rich Ferlauto, director of Corporate Governance and Pension Investment for AFSCME, was recently named one of the most influential corporate governance activists by Directorship Magazine (bio). Bob writes, “Rich Ferlauto is almost an oxymoron – a seasoned governance professional. He has been a major force for more than a decade and has innovated effective strategies, including conspicuously the major litigation that marked the end of a decade of governance impotence.”

Lucien Bebchuk, Professor Harvard Law School (bio). Bob writes, Bebchuk is a home run; first he is a world class economist; second he is probably the outstanding legal corporate governance scholar; third he is the moving energy behind the Harvard Law School Governance Blog – a major information source in the governance world; and, fourth – a personal opinion – he is free from the kinds of ambition that poison much scholarship, he is honestly committed to his own sense of the truth.

Ben Stein is an economist, attorney and Hollywood personality (bio). Bob writes, “Ben Stein is a well educated polymath — with splendidly irreverent views on matters dear to the pompous.”

SEC Floods In-box

Don’t have enough in your in-box? Subscribe to Receive Free E-mail Updates from the SEC. So much to choose from. Thanks to Broc Romanek for the heads up.

Drill, Baby, Drill

Naomi Klein reflects on the rise of Sarah Palin, just before the financial melt-down. “Watching that scene on television, with that weird creepy mixture of sex and oil and jingoism, I remember thinking: ‘Wow, the RNC has turned into a rally in favor of screwing Planet Earth.’ Literally…

Capitalism will be back. And the same message will return, though there may be someone new selling that message: You don’t need to change. Keep consuming all you want. There’s plenty more. Drill, baby, drill. Maybe there will be some technological fix that will make all our problems disappear.

And that is why we need to be absolutely clear right now.

Capitalism can survive this crisis. But the world can’t survive another capitalist comeback.” (Naomi Klein: Let’s Put an End to Sarah Palin-Style Capitalism, AlterNet, 7/30)

PRI Enforcement Coming

The United Nations Principles for Responsible Investment (UNPRI) is planning to kick out around six signatories by the end of August for failing to report on whether they have taken action to implement its six environmental, social and governance principles. It is the first time the PRI has toughened its membership criteria to exclude firms that show no signs of adopting the standards despite signing up. (PRI plans to kick out six signatories for non-compliance, RI, 7/28/09)

Caution Urged: War is Good

Stephen Bainbridge (Shareholder Activism in the Obama Era) and Peter Atkins (U.S. Corporate Governance Today: A Reshaping of Capitalism) seem to think shareowner empowerment will lead to the end of capitalism as we know it. According to Atkins, “the very essence of capitalism is that it fosters risk-taking — and that ‘mistakes’ will be made.” Atkins goes on to admit, the real issue is assessing what risks are “systematically unacceptable.”

Both Bainbridge and Atkins appear to oppose proxy access and other reforms primarily because they take power from boards and give it to a more unruly mob, shareowners who are too likely to be swayed by “special interests.”

It used to be that nations could go to war for years and come out none too worse for the effort. Today, weapons of mass destruction make all out war between major powers almost unthinkable. The cost to either party would be too great. Proxy battles are also unnecessarily expensive. Too often they occur only after a company has suffered years of decline. The market is often too slow to respond to entrenched managers and boards. Proxy access, majority vote and other tools give shareowners the power to shift boards, without the cost of a bloody war or revolution.

Bainbridge wants shareowners to wait until “performance is sufficiently degraded” to “make a takeover fight worth waging.” His model is basically pre-democracy. Wouldn’t it be much more efficient to elect a better board than to wage a takeover fight?

Bainbridge relies on a study done in 1998 by Bernard Black that surveyed previous studies to demonstrate that shareowner activism doesn’t add value. Of course, Black was arguing shareowners invested too little effort to make much of a difference. That has been changing, although more effort would yield more results. Bainbridge himself argues that SEC rules “have long impeded communication and collective action” by shareowners. That’s a reason for speeding up corporate governance reforms, not slowing them down.

Because the cost of monitoring is high in relation to benefits to any one monitoring shareowner, Bainbridge says “institutional activism is likely to focus on crisis management.” Yet, what we actually see is a focus on “best practices,” especially those that guard against management and board entrenchment. Majority voting, annual elections for all board members, proxy access, a ban on broker voting, separating chair and CEO positions, granting shareowners the right to call a special meeting, even additional disclosures — all make it easier to take collective action when needed. That action is likely to be led by hedge funds, which are more likely to have a large enough percentage of their funds invested on a single firm to make monitoring and action cost-effective.

The bulk of Bainbridge’s recent argument is that shareowner activism just shifts responsibility. Quoting Kenneth Arrow: “If every decision of A is to be reviewed by B, then all we have really is a shift in the locus of authority from A to B.” Bainbridge says, “institutional investor activism does not solve the principal-agent problem but rather relocates it.” However, that characterization fails to acknowledge that when the shareowner makes the decision, there is no “agent.” When shareowners bypass the board and place their own nominees on the proxy, they are acting as principals with no agent.

Atkins’ arguments are even less cogent. While he is clear that “where the line should be drawn is often not clear,” he then asserts that “most directors… do take their jobs seriously.” “Turning the board election process into annual threatened or actual ‘vote no’ campaigns against directors based on special agendas promoted by special interest groups will further disincentivize quality directors from serving — as well as adversely influence the independent director decisions-making so avidly sought by corporate governance advocates.”

He fails to recognize the Business Roundtable and entrenched boards represents the real powerful and narrow “special interests” that too frequently lead to abuse. They can often accomplish their “special agendas” without convincing a majority of shareowners. Shareowner activist face much higher barriers and can accomplish little without consensus building among very disbursed investors. Turning board elections into real contests won’t adversely influence the decision-making of directors. Knowing they can actually turned out of office will simply make them more accountable to shareowners. It will remind them that directors work at the pleasure of shareowners and CEOs work at the pleasure of directors.

Comparing CalPERS Board Candidates

Although most CorpGov.net readers can’t vote in upcoming September CalPERS Board elections, most of you know how important CalPERS has been in the movement to increase corporate accountability to shareowners. With that in mind, I’ve included a link to a PERSWatch survey of the candidates. Download a pdf that includes their responses to ten critical questions, as well as contact information.

Three candidates failed to submit responses, even after repeated contacts. Among those who did respond, one candidate made repeated spelling and grammar errors while another didn’t adhere to the 200 word limit in responding to several questions. I personally know all the responding candidates and know each will take their duties seriously. I think the errors reflect their opinion of the limited importance of the survey as a tool in winning the upcoming election, rather than behavior we will see in their role as board members. Traditionally, candidates could essentially lock up the election by obtaining the endorsement of a few major employee unions or associations.

While I firmly believe such organizations are, and should remain, critical to the selection of Board members, I also believe we would all benefit from a broader dialogue. I sincerely hope these elections will one day be given the press coverage they deserve, considering their importance in shaping international corporate governance and the wider economy, as well as the more direct health and pension benefits of CalPERS members.

SEC Investor Advisory Committee

The SEC’s Investor Advisory Committee (IAC) held its first meeting on July 27, 2009. They had an ambitious agenda, which they didn’t get through. Some items, like proxy voting were discussed in some detail. Others, like arbitration issues, elicited virtual silence from IAC members. For the sake of those interested in issues that got passed over, I hope there will be opportunities to raise them again over the course of the next two years.

Overall, I thought the IAC made good progress. They got to know each other a bit, discussed their interests and possible subcommittees. Not bad, for a relatively brief first meeting. Interesting that some members, when introducing themselves said they represented the company or organization for whom they work. I hope this isn’t the case. I hope they are appointed to reflect a variety of backgrounds but that they are all there to represent the investing public.

Operationally, I’m curious as to when members got the staff briefing paper on Possible Refinements to the Disclosure Regime. I suspect many got it just before the meeting, perhaps while traveling. There didn’t seem to be a systematic effort to go through and respond to questions raised by staff. In future, it might be a good idea to have staff give out such papers early enough on so that IAC members could scribble responses, questions, etc., allowing for another iteration to be posted say 10 days in advance of the meeting. This would then allow the public to also provide their feedback. (Although, perhaps this one was posted well in advance and I missed it.)

All discussions were brief but some were informative. For example, during a short discussion on education, I learned of two sites aimed at elementary and high school children:

  • Jump$tart Coalition for Personal Financial Literacy, a non-profit 501c3, encourages curriculum enrichment to ensure that basic personal financial management skills are attained during the K-12 educational experience.
  • Ariel Education Initiative, created a model community school where “financial literacy is not just taught but practiced.”

And a site with a broader focus:

  • U.S. Financial Literacy and Education Commission, My Money, to coordinate the presentation of educational materials from across the spectrum of federal agencies that deal with financial issues and markets.

Some of the many issues and solutions raised during the meeting: majority voting requirements for director elections should be standard; proxy votes of all institutional investors should be disclosed, along with engagement strategies; review of proxy advisory services; OBO/NOBO issues; more timely reporting of proxy votes; blank votes; systems like Proxy DemocracyTransparentDemocracy.org, and soon MoxyVote.com that help shareowners to learn from proxy voting decisions announced by institutional investors; pilot funding for system that allows users to allocate funding to education providers; need for more guidance on Reg FD and prohibitions on investors acting in concert; split chair/CEO should be standard; and clarification needed of Staff Legal Bulletin No. 14C regarding resolutions on disclosure.

Possible subcommittees discussed for the IAC include: fiduciary duty, disclosure, education, use of technology, ESG disclosure, corporate governance. It is my understanding the two co-chairs will vet these further with members and come back with a list.

If there was any real bombshell at the meeting, it was an attempt by Stephen Davis to make a motion that the IAC recommend the Commission adopt a rule requiring all exchange listed companies require majority voting for the election of directors. There appeared to be a consensus belief among IAC members in the value of majority vote requirements, so Davis appears to have been attempting to move the agenda with what he termed a “shovel ready” proposal.

However, it soon became apparent that although other IAC members may believe in majority voting, they want more discussion around mechanics, to tie the issue to part of a larger package, or delay for some other reason. No vote was taken but expect this issue to be one of the first of many out of what appears to be a relatively dynamic committee. The SEC may actually be going back to its roots as the “investor’s advocate.” (Speech By SEC Commissioner Luis A. Aguilar: Restoring Investors’ Voices — The Launch Of Investor Advisory Committee, mondovisione, 7/27/09) (archive of meeting) SEC officialnotes of the meeting.

Board Pay

A study by Steven Hall & Partners of director pay found that total remuneration has halted its steady climb, actually falling back by 2.4% over the last year to $244,899, among the top 200 companies. In 2003, full-value stock awards represented only about 29% of the total received by directors vs. 41.5% in 2008. The use of options dropping in half from 63% prevalence in 2003 to approximately 31% in 2008. Cash retainers now comprise almost 29% of the total package. Board meeting fees and stock option awards are far less prevalent director pay elements in 2008 as compared to 2003. (Director Pay Retreats by 2.4% Says New Study, PlanSponsor.com, 7/23/09)

Should Proxy Voting at Mutual Funds be Reformed?

Various studies have shown that mutual funds often place their own interest in asset gathering ahead of their fiduciary duties. After studying proxy voting by US funds, Jennifer S. Taub (of UMass) concludes one option might be to “borrow from British reforms by creating a uniform set of best practices for corporate governance. Fund Advisers would be required to report and justify any departure from casting proxy votes (related to management or shareholder proposals) in line with best practices. Ideally, this comply or explain practice would be inserted at each link of the intermediation chain – from the corporation all the way to the underlying investor.” (Able But Not Willing: The Failure of Mutual Fund Advisers to Advocate for Shareholders’ Rights, Journal of Corporation Law, Vol. 34, No. 3, 2009)

A recently published study by the Shareholder Association for Research and Education (SHARE) and Fund Votes found that while Canadian mutual funds were more likely to oppose management nominees for boards of directors in 2008, the majority of mutual funds continued to vote overwhelmingly in favor of management proposals, and against proxy items proposed by shareowners.

When it came to the voting patterns of SRI funds sold by diversified fund companies, the report found that proxy voting patterns were the same as in mainstream funds offered by the same companies. “This is often the case even for shareholder proposals asking companies to be more attentive about the impacts of their operations on human rights and the environment,” the report stated. (Canadian Mutual Funds Continue to Vote Against Shareowner Proposals, SocialFunds, 7/9/09)

In a followup e-mail, Laura O’Neill of SHARE, said, “We noted one exception to our overall conclusion that proxy voting decisions are uniform across all funds. Phillips Hagar & North’s Community Values Fund was more supportive than the other funds on many CSR issues. The key here is that PH&N has a specific set of voting guidelines for its SRI fund. Establishing separate guidelines for SRI funds would, we think, go a long way to bringing proxy voting into line with investment strategy within these funds.”

The other coauthor, Jackie Cook, did another study in late 2008 (Mini Survey of Mutual Funds’ Votes: 2004-2008). One of her findings was that, “Mainstream mutual fund groups’ increased use of abstentions on both governance and CSR resolutions is puzzling, given the increased attention to the issues covered in the media and by the investment community and deserves further investigation by shareholder advocates.

Maybe the best solution, if mutual funds find it too difficult to vote because of conflicts of interest, is for the funds to just pass through voting rights to beneficial owners. Computerized files could gather all the bits and beneficial owners could use a platform like Proxy Democracy to vote, largely imitating funds like CalSTRS, Florida SBA, Domini, Calvert and others who think voting is worth their while.

SEC’s Proposed Rule for Audits of Investment Advisors and Hedge Funds

The SEC proposes to require registered investment advisers and hedge funds to undergo an annual surprise examination by an independent public accountant to verify client funds and securities. The proposed rule also provides a number of other provisions designed to guard against future fraud, like that of Madoff’s Ponzi scheme.

The Commission voted 5-0 in favor, so they didn’t think the rules would be controversial. However, the SEC is now being barraged with protests from advisers and funds, chiefly complaining that the audits would be disruptive and costly. As a former auditor, I think disruptions would be minimal and well worth the added security.

NAPFA suggested other measures the SEC could adopt instead, including encouraging investment advisory customers to read their statements, giving the SEC authority to pay whistleblowers who report fraud, and requiring advisory firms to give clients and employees information on how to submit anonymous tips when fraud is suspected. (see SEC’s pop-quiz proposal provokes adviser opposition, Investment News, 7/23/09)

Components on Custody of Funds or Securities of Clients by Investment Advisers File No.: S7-09-09 are due July 28, 2009. I read through all the comment form letters and many of the others. All were from advisors or funds, none from shareowners. All opposed the audit portion of the rulemaking.

Right now, I’m leaning in favor. As an auditor, I always got a lot more out of my own spot checks than I did through hot tips. On the other hand, I had a lot of computerized data to sort through, which allowed me to find various statistical abnormalities. I didn’t audit everyone, only those that looked statistically strange. What do readers think?

CorpGov Bites

SEC Gives ‘Wish List’ of 42 Changes it Wants in Securities Law (FoxBusiness, 7/16/09) Most of these are great and make you wonder why they don’t already have the requested authority, like being able to pay awards to individuals who provide information to the agency leading to the successful enforcement of the federal securities laws(see also, SEC Chairman Requests Broad Investigative Power, Washington Post, 7/16/09)

Exclusive Interview with the Chair of the New Pecora Commission (The American Prospect, 7/17/09) Former California Treasurer Phil Angelides outlines what he hopes to accomplish and his concerns that the commision may be rendered ineffective by partisan quarrels. He discussed other historical investigations: the Pecora Commission after the 1929 crash; the 9/11 Commission, highlighting the failures that made America vulnerable to a terrorist attack; the Kerner Commission in the 1960s, important moment in delineating the racial divide in this country.

The best guidepost for the commission is to seek the truth, like that all old dragnet line, ‘just the facts.’ And the facts will speak for themselves. If facts are on the table, what happened, not speculation, not political tilt, if facts are on the table about what has occurred, people will come to reasonable and rational judgments.

Does Corporate Governance Matter? (Eric Jackson, TheStreet, 7/22/09) Jackson reviews an academic study, which found, even with several problems, that “better corporate governance led to better future financial and stock performance. However, the study still raises the question of, if this link exists, why hasn’t corporate governance become more widely used by investors as a variable to consider when making investment decisions?”

Ratings agencies need to do a better job at ensuring each variable that goes into their scores actually predicts future performance. It all comes down to what you measure and how you measure it… It’s not likely that you’ll find one type of board fits all types of companies.

The investors (or insurance companies or banks) which “crack the code” to effectively track effective and ineffective governance factors that strongly predict performance will have an enormous advantage in modeling an element of risk that most investors disregard — even after the last 18 months. That smells like a great opportunity to me.

ICCI president asks family-owned firms to adopt corporate governance (TradingMarkets, 7/21/09) Only 15 percent family owned businesses survive till the third generation due to lack of good governance, rise of disputes and other factors, said Mian Shaukat Masud, President, Islamabad Chamber of Commerce & Industry (ICCI). In a statement issued here on Sunday, he said, however, creating and applying a system of corporate governance, succession planning, transparency and control is crucial for long-term survival of family owned businesses.

S’pore tops governance (The Straits Times, 7/21/09) Sinapore companies ranked first for corporate governance in Asia, excluding Japan, helped by their management, track record and ‘shareholder-oriented principles.’ Singapore obtained an average score of 5.1 out of 10 on a scale devised by GovernanceMetrics International. Thailand and India were second and third in the region, with scores of 4.7 and 4.5 respectively.

Corporate Governance in India: Is There Any? (Shiv Kapoor’s Instablog, 7/19/09) Provides a good discussion of evaluating corporate governance:

  • First we look at the values, morals and ethics of society in general.
  • Then we look at corporate charter, bylaws, formal policy, internal controls, which guide corporate behavior.
  • Then we look at the laws.
  • Finally, we look at the conscience.

Kapoor goes on to discuss several recent scandals.

UNEP Hones Legal Argument for ESG Incorporation in Investments in New Study (SocialFunds, 7/22/09) Whether asset managers have a fiduciary, and even legal, responsibility to incorporate environmental, social, and governance (ESG) issues into the investment decisions they make on behalf of their clients has long been a matter of debate. Fiduciary Responsibility: Legal and Practical Aspects of Integrating Environmental, Social and Governance Issue into Institutional Investment (Fiduciary II), the report argues that consultants may well have a legal duty to proactively raise ESG issues with their clients. The report also recommends that ESG issues be embedded into legal contracts between asset owners and asset managers.

Conclusions include that “research to determine the financial materiality of these criteria should use longer time spans than is currently the norm for financial analysis” and that “Governments can reduce barriers to environmental, social and corporate governance analysis by mandating and standardizing the inclusion of these criteria in national and international financial disclosure frameworks.”

SEC Proposes to Curtail “Pay to Play”

The measures are designed to prevent an adviser from making political contributions or hidden payments to influence their selection by government officials at public pension plans, retirement plans in which teachers and other government employees can invest, and 529 plans that allow families to invest money for college.

Under the proposed rule, an investment adviser who makes a political contribution to an elected official in a position to influence the selection of the adviser would be barred for two years from providing advisory services for compensation, either directly or through a fund.

The rule would apply to the investment adviser as well as certain executives and employees of the adviser. Additionally, the rule would apply to political incumbents as well as candidates for a position that can influence the selection of an adviser.

There is a de minimis provision that permits an executive or employee to make contributions of up to $250 per election per candidate if the contributor is entitled to vote for the candidate. (SEC Proposes Measures to Curtail “Pay to Play” Practices, 7/22/09) At first glance, the provisions look stricter than those adopted by CalSTRS in 2007.

Governance Exchange

Governance Exchange provides an innovative, secure and high-quality online environment designed to facilitate communication between the primary stakeholders involved in corporate governance – exclusively institutional investors, board directors and corporate executives. Members also have access to a diverse range of corporate governance viewpoints and research through webcasts, white papers, surveys, and expert analysis. Learn more about the Exchange by listening to a brief podcast. (Inside Track with Broc: Jill Lyons and Stephen Deane on RiskMetrics’ Governance Exchange (7/13/09))

Apparently, directors were initially the most active members on the platform, representing themselves as individuals, rather than representatives of their companies. Institutional investors soon requested a subgroup on the proxy voting process.

Walmart and Sustainability

Bill Baue does a great job of looking their Sustainable Product Index. He’s “keenly skeptical of the Goliath’s conversion to the religion of sustainability, and cautiously hopeful of the promise of grander conversions that Walmart’s change of heart heralded.”

For Baue the question always returns to first principles: “is product consumption really the path to sustainability, or is it more through de-materialization — products not consumed, sold, or produced in the first place?” “Walmart ain’t going away any time soon, so I also root for it to change the world for the better, if it can, he concludes. (The Latest Corporate Social Responsibility News: Walmart and Sustainability: Oxymoron or Salvation – or Both?, CSR press release, 7/21/09)

China & India

Yan Zhang and Nandini Rajagopalan examine the evolution of corporate governance reforms in the emerging economies of China and India. They examine how privatization and globalization are driving reforms. They identify four major obstacles that impede their implementation in both countries, namely:

  1. lack of incentives,
  2. power of the dominant shareholder,
  3. underdeveloped external monitoring systems, and
  4. shortage of qualified independent directors.

They conclude that foreign firms that are sensitive to context-specific challenges are more likely to put in place appropriate contractual or other safeguards, as well as identify more practical and meaningful forms of participation in the governance of their ventures. (Corporate Governance Reforms in China and India: Challenges and Opportunities, HarvardBusiness.org)

Twitter-Based Petitions

I’m posting this as much for my own future reference as anything, since I used Internet based petitions in the past to drum up support for shareowner reforms, such as proxy access. How to: Start a Petition on Twitter reviews several sites that facilitate the process.

Say on Auditors

Eight major audit firms have been named in nearly a dozen securities class action suits related to the Bernie Madoff scandal. Six have been named in cases related to the credit crisis, and those cases likely are just the beginning, says Mark Cheffers, CEO of Audit Analytics.

Audit Analytics sorted out the top 50 accounting malpractice settlements since 1999 and said Ernst & Young has paid the largest amount in settlements related to those cases at $1.92 billion. KPMG follows with settlements totaling $1.42 billion, followed by PricewaterhouseCoopers at $1.27 billion and Deloitte & Touche at $1.25 billion, the firm said. (Audit Firms Sure to Face New Litigation, Experts Say, Compliance Week, 7/22/09)

After Andersen and Enron, how can we still believe appointment of an auditor is “routine.” Maybe it is time shareowners had a “say on auditors.” Better yet, let them make the actual pick from a qualified group.

Suit Anticipation Accurate

Researchers find the more likely a firm is to be sued, the larger is the partial anticipation effect (shareholder losses capitalized prior to a lawsuit filing date) and smaller is the filing date effect (shareholder losses measured on the lawsuit filing date). Their evidence suggests that previous research that typically focuses on the filing date effect understates the magnitude of shareholder losses, and such an understatement is greater for firms with a higher likelihood of being sued. (Shareholder Lawsuits and Stock Returns, HLS Forum, 7,22,09)

Green Century: First With Carbon Footprint Disclosure

The Green Century Balanced Fund is the first U.S.-based mutual fund to disclose its own carbon footprint. Based on measuring the tons of carbon emissions per million dollars of revenue of the companies held by the Balanced Fund and those of the companies included in the S&P 500® Index, Trucost found the carbon intensity of the Balanced Fund is two-thirds less than that of the S&P 500® Index.

According to Green Century Funds President Kristina Curtis, “This information will better inform investment decisions and will strategically enhance our efforts to encourage companies to further measure, report, and reduce their carbon emissions.”

Other key findings of the carbon audit include:

  • The majority of the Green Century Balanced Fund’s low carbon intensity is attributable to the Fund’s underweighting or avoidance of the utilities, oil and gas, and basic resources sectors. Being free of fossil-fuel production or manufacturing companies contributed to the relative positive environmental impact of the Fund.
  • The carbon footprint of the Green Century Balanced Fund (126 tons of carbon per million dollars of revenue of each of the Fund’s portfolio holdings) is almost half the average footprint of 16 other sustainability and socially responsible investing funds (226 tons of carbon per million dollar of revenue of each of those funds’ portfolio holdings) analyzed by Trucost.

Let’s hope that others soon follow their lead.

Pre-paid Variable Forward Contracts

A recent Gradient Analytics report found that many of these contracts, which protect executives from declines in their company share holdings, are often are struck not long before “unusual levels of negative corporate events” resulting in price declines. In November 2006, Chief Executive Charles Raymond entered forward contracts in which he committed shares at a price of about $27, according to regulatory filings. In exchange, he was given $5.3 million. By the time the contracts matured in early 2009, the stock had fallen to below $5 a share.

Some companies, such as Pitney Bowes Inc., have banned the arrangements. Investing in Corporate Governance: Forward Sales, from The Corporate Library offers advice for shareholders who wish to identify companies that prohibit forward sale contracts and lists the names of several companies that allow them and those that have banned them.

Two directors at Freeport-McMoRan. Both B.M. Rankin, who is a member of the company’s public policy committee, and James Moffett, the current chairman of the board and former CEO, have engaged in pre-paid forward contracts via a limited liability company and a limited partnership, respectively, of which they are members or sole partners. (Forward sales – why lose your own money when you can lose someone else’s?, The Corporate Library Blog, 7/22/09)

SEC Investor Advisory Committee (updated 7/21/09 evening)

I’ve discussed the newly appointed SEC Investor Advisory Committee previously. The Committee will hold its first meeting on Monday (7/27/09). They’re inviting input. Comments were due 7/19/09 but the work of the Committee certainly won’t be completed at this first meeting. Therefore, I’m hoping they will review all comments… even those that are late. Of course, I’d like to get the issue of “blank votes” on their agenda.

You might want to get a statement of your own priorities to the Committee. See posted comments. Some of the existing comments address:

  • Get a real representative of individual investors on the Committee.
  • Get rid of mandatory arbitration for stockbrokers and brokerage firms and, more broadly, protect the legal rights of defrauded shareowners.
  • Better definitions and disclosure re mutual funds, financial advisors, and brokerages.
  • Better disclosure of executive pay.
  • Expand SEC’s role in education.
  • Strengthen regulation of the markets.
  • Increase the accountability of boards and corporate executives.
  • Improve financial transparency, including disclosure of climate change-related risks and material environmental, social and governance risks in securities filings.
  • Reexamination of XBRL requirements to ensure user friendly.
  • Extend proxy vote disclosure requirements to include all institutional investors.
  • Product neutral disclosure requirements to consumers.
  • Better disclosures for municipal securities, credit rating agencies, and target retirement funds.

Written statements can be submitted using the Commission’s Internet submission form or by send an e-mail message to [email protected]. Include File Number 265-25 on the subject line.

Here’s my own draft wish list:

  • Support increased intelligent proxy voting by individual investors by encouraging development of information infrastructures that will help individuals vote by providing them with better information on the specific issues. The best efforts I’ve seen in this area are those by ProxyDemocracy.org, TransparentDemocracy.org, and Moxyvote.com.
  • Develop educational programs that would be posted on the SEC Internet site and would be widely distributed through brokers, investor associations, and retirement plan vehicles (such as 401(k) plans), that explain the importance of proxy voting, how it relates to corporate governance, and how proxy voting provides an opportunity to influence both the earning power and social/environmental values of companies.
  • Require better disclosure of proxy votes and policies by all institutional investors in a uniform format for posting to the Internet. Encourage disclosure of votes, including the reasons for each specific vote, prior to annual meetings. Retail shareowners and beneficial owners should be able to see how institutional investors are voting and why. In voting their own proxies, they should be able to copy from a combination of trusted “brands.” In monitoring institutional investors who vote on their behalf, they should be provided ample opportunity to influence those votes.
  • Review the integrity of the proxy voting process to ensure it truly reflects the wishes of the electorate. Get rid of “blank vote” mechanisms (see rulemaking petition File 4-583), share lending that may extend to votes, etc. Consider a self-regulated “proxy exchange” that would hold all proxies and would ensure proxies are cleared and counted properly, without interference by corporations. Corporations and shareowners should have the same access to proxy votes and counts.
  • Encourage funds to pass through votes to beneficial owners. This is especially critical at Employee Stock Ownership Plans (ESOPs) to ensure they are not used as management entrenchment devices. Given that mutual funds are increasingly voting abstentions, they may embrace this option if it is specifically sanctioned by the SEC. Alternatively, examine how funds are structured to obtain input from beneficial owners in corporate governance issues.
  • End the ability of stockbrokers and brokerage firms to require mandatory arbitration.Support proxy voting by individual investors by encouraging development of information infrastructures that will help individuals vote intelligently.

I congratulate Mark Latham, one of the Advisory Committee members assigned to represent individual investors, who is already posting the Committee’s agenda and his own thoughts about where it should be headed. Although it looks like a lot of work, I hope he will continue to keep investors informed of the Advisory Committee’s happenings and progress.

I’m a little concerned that he will get so much feedback that he won’t be able to read it all. However, at least initially, the apathy of individual investors may turn out to be underwhelming. I’ve created a permanent link to Latham’s VoterMedia Finance Blog on my Links page under Government/Securities and Exchange Commission/Investor Advisory Committee/VoterMedia Finance Blog. If I learn of other Committee members posting blogs, I’ll post links to them as well. I certainly hope they follow his example in reaching out to the investing public.

Words Create Worlds

Stephen Viederman, former president of the Jessie Smith Noyes Foundation, begins a useful discussion of responsible investment terms with the quote from civil rights leader Rabbi Abraham Heschel that I use for the title of this post. “Confusion over terminology describing an investment approach that considers environmental, social and governance (ESG) factors obscures the point of our work linking investing and corporate change.” If you’ve ever been confused about the differences between SRI, RI, SI, etc. you’ll find his discussion useful. (The semantics of RI: what are we talking about?, responsible investor, 7/6/09)

Demand for More ESG Disclosure

More than 50 major investment firms and professionals, including CorpGov.net, joined the Social Investment Forum (SIF) in calling on the SEC to strengthen financial markets and foster sustainable business practices by requiring publicly traded companies to report annually on a range of environmental, social and corporate governance (ESG) matters. The organizations are asking the SEC to require companies to report:

  1. Standardized sustainability disclosures: First, we are asking the SEC to mandate that companies report annually on a comprehensive set of sustainability indicators comprised of both universally applicable and industry-specific components. To ensure consistent reporting, we would like issuers, after an appropriate implementation period, to adhere to the highest reporting level of the current version of the Global Reporting Initiative (GRI) guidelines.
  2. Materiality guidance and risk disclosures: In addition, we ask the SEC to issue interpretative guidance to clarify that issuers are required to disclose short- and long-term sustainability risks in the Management Discussion and Analysis section of the 10-K (MD&A). This would give companies guidance on reporting in general and particularly on emerging issues that GRI might not directly address. It would also require companies to highlight their most pressing sustainability challenges and opportunities for investors.

Given the current economic crisis and developments in ESG disclosure globally, we believe that the time is right for the SEC to explore and institute requirements for corporate sustainability reporting. (full text of 7/21/09 letter)

SIF is also one of the sponsors SRI in the Rockies. Learn more about the 20th Anniversary 2009 Conference to be held October 25–28, 2009 at the JW Marriott Starr Pass Resort & Spa in Tucson, Arizona.

Shareowner Forums

More than a year ago, the SEC adopted amendments to the proxy rules to facilitate the creation and use of electronic shareholder forums. Communication on such forum aren’t deemed proxy solicitationas, as long as certain conditions are met, and operators aren’t liable for content posted by others (the users). Abe Wischnia has apparently facilitated several and asks, IR 2.0 Wake Up Call: Why Aren’t You Using Web 2.0 in Your Shareholder Communications? (IRalert, 7/20/09)

Wischnia cites Oxygen Biotherapeutics, Inc. as one example. What do you think? (Thanks to Dominic Jones for bringing this to my attention.)

“A February survey by Thomson Financial found only 4 percent of 42 public companies surveyed planned to create a shareholder e-forum or were seriously considering it. Another 56 percent were not considering the idea, and 40 percent said they were only beginning to think about it.” (Companies shrug off shareholder e-forum idea, Reuters, 5/16/09)

Apparently, most don’t see the point, since retail shareowners are the ones who typically show up on these forums and they don’t vote. Therefore, at this point such forums appear destined to serve only small companies with few institutional investors.

Broadening Fiduciary Duty

Janice J. Sacldey posts a good discussion regarding the Obama administration’s goal to widen the applicability of fiduciary duty to establish a fiduciary duty for broker-dealers. Sacldey makes a substantial contribution to the dialogue when she suggests investment professionals be clearly in one of three camps:

  1. The first group would be advisers who are held to the highest fiduciary standards such as those of a trustee, not merely the SEC fiduciary standard of “best interests,” but one in which the adviser solely represents the interests of the client as discussed above. Positive client consent would be required (absent statutory authority) for all self-dealing.
  2. The second camp would be brokers who sell products, clearly disclosing to the consumer that they aren’t fiduciaries and don’t represent solely client interests, and that they get paid based on commissions from products or securities sold. This is somewhat equivalent to insurance agents who represent their firms, make commissions and don’t have a fiduciary obligation to customers.
  3. The third camp would be the broker order-taker who isn’t authorized to give any advice, isn’t permitted to push products and is relieved of any duty to establish suitability. This level of broker is paid a salary by his or her firm and not a commission, and has no obligations to the consumer other than to follow their instructions for trade execution in a prompt and fair manner. (What, exactly, does fiduciary really mean?, InvestmentNews, 7/19/09)

ShareOwners.org (updated 7/20/09)

Since its debut, I’ve posted several times about the new social networking site, ShareOwners.org. Given my near complete devotion to corporate governance and some would say nonexistant personal life, I’ll rarely be checking Facebook, Linkedin, etc. with this option. The conversation is just so much more interesting.

The Corporate Boardmember, a trade publication aimed at corporate directors, has taken note of the site and has a very good interview with Rich Ferlauto, chairman of ShareOwners.org/the ShareOwner Education Network. (“It’s Time That Directors Step Up To The Plate”) Here’s a few things he says that are noteworthy:

  • We’re working with a number of institutions to organize and reach out to their memberships. (I’d love to see the site include the ability to setup subgroups… like those who are members or or are interested in CalPERS, Fidelity, TIAA-CREF or shareowners in specific companies.)
  • 17% of investors surveyed (24 million people) are interested in joining an organization that would educate them and give them a voice. (As I post this, almost 300 have signed up; only 23,999,700 to go. Plenty of room to grow.)
  • Also see the site as a vehicle for shareowners to talk with boards, as well as their financial intermediaries and financial professionals— brokers and mutual funds, to ensure they put the interests of the clients first.
  • Advocating for ownership rights and educating shareowners and beneficial owners.

He ends the interview with a plea for board members to use the site as a way of reaching out directly to their shareowners. OK progressive board members, here’s your chance to be on the vanguard. Register on shareowners.org and start a conversation about your company and how it might be improved.

Listen to a great interview of Ferlauto by Broc Romanek of CorporateCounsel.net. (Inside Track with Broc: Rich Ferlauto on Launch of Shareowners.org (7/16/09)) Another reason to subscribe toCorporateCounsel.net. Good on history and where the site is headed.

Proxy Access

Les Greenberg and I petitioned the SEC for proxy access back in 2002, so we both have a longstanding interest in seeing a proposal move forward. The Council of Institutional Investors said our proposal “re-energized” the “debate over shareholder access to management proxy cards to nominate directors.” (See Equal Access – What Is It?) Of course, AFSCME deserves most of the credit and nothing moved the issue like AFSCME vs AIG. The SEC’s latest attempt, File No. S7-10-09 Facilitating Shareholder Director Nominations, is by far the Commission’s best effort. I’m attempting to formulate myown comments and would welcome your thoughts. (send to [email protected])

On June 11th Greenberg, on behalf of the Committee of Concerned Shareholders, was among the first to submit extensive comments in this round. He argues mutual funds are too conflicted to run dissident director candidates, whereas large pension funds already have the resources but have stayed on the sidelines. The SEC’s proposed percentage ownership requirement are “arbitrary,” without legal basis or precedent. The thresholds will be nearly impossible to meet except “in extremely rare circumstances”… like when a company is in near bankruptcy (my interpretation). Don’t limit the number of shareowner nominees to 25% and stick with the time-tested threshold of $2,000.

Where this would result in more than two candidates per seat, borrow the “lead plaintiff” concept from the Private Securities Litigation Act of 1995 and include a “lead nominator” provision, something we suggested in amendments to our original submission.

With a ‘lead nominator’ provision, there is absolutely no need for a percentage stock ownership threshold. The ‘lead nominator’ solution would allow Individual Shareholders to act as watchdogs of their investments at 9,000+ corporations that have publicly traded securities. Institutional Investors do not have the interest, desire and/or resources to seek Director accountability on such a scale.

I would love to see the SEC move in this direction. As far as I’m concerned, let’s have contests at every company. Retail investors might then begin to think of themselves as shareOwners, not betting slip holders. They might even begin to vote!

No government agency can match the vigilance of millions of shareowners. We have the incentive; just give us the tools. In most cases, the only extra expenditure for companies would be for slightly expanding the proxy. Mildly dissatisfied shareowners, aren’t likely to be swayed by the arguments of dissidents… unless they are spot on. If they aren’t spot on, the company will just call them nuts and won’t bother with a campaign.

The long-term result would be that many more shareowners like Les Greenberg at Lubys and Eric Jackson at Yahoo would emerge with thoughtful analysis that could benefit all shareowners. Maybe organizations like the American Association of Individual Investors would then focus just a little on how to add value as owners, instead of exclusively on how to pick and trade stocks.

Phillip Goldstein, representing Opportunity Partners L.P., goes even further in raising fundamental issues in his July 16th comments.

Consider two stockholders who are substantially identical in every respect except (1) Stockholder A did not acquire his shares for the purpose of changing or influencing the control of the issuer but has now become convinced that change is needed in the boardroom while (2) Stockholder B, who was arguably more prescient, bought her shares with the intention of eventually proposing just such a change.

Of course, both have a legal right at the meeting to nominate directors but almost all votes are cast through proxies. While page 9 of the rulemaking says “The proxy rules seek to improve the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual in-person meeting of shareholders,” but the proposed rules disenfranchise Stockholder B, presumably the brighter of the two.

Goldstein argues, “Consequently, the Commission should junk its quixotic attempts to create a Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections.” Instead, “The Commission can craft a simple common sense rule to require that any proxy card that that excludes the name of any bona fide nominee known to the soliciting party is materially misleading and hence a violation of rule 14a-9(a).”

Goldstein’s proposal is straightforward and within the SEC’s current legal authority, whereas the SEC’s proposal may be neither.

I know of no state that requires a holding period or a minimum investment before a stockholder can propose a nominee. Why then should the Commission discriminate between long and short-term stockholders or between large and small stockholders? More importantly, there is no legal basis to do so…

The Commission should have banned “one party” proxy cards years ago. It is obvious that such a proxy card frustrates the free exercise of voting rights because it results in the “election” of directors who might not have otherwise been elected if a proxy card with all bona fide nominees was provided to shareholders.

A better model than the proposed “Rube Goldberg-like mechanism to balance the interests of various special interest constituencies that are less than committed to truly free corporate elections,” which includes directors and management, would be to craft a rule more akin to those governing union elections requiring:

Every labor organization refrain from discrimination in favor of or against any candidate with respect to the use of lists of members, and whenever such labor organizations or its officers authorize the distribution by mail or otherwise to members of campaign literature on behalf of any candidate or of the labor organization itself with reference to such election, similar distribution at the request of any other bona fide candidate shall be made by such labor organization and its officers, with equal treatment as to the expense of such distribution.

Goldstein concludes:

A rule requiring every proxy card to include all known bona fide nominees as well as rules modeled after Section 481 of The Labor-Management Reporting and Disclosure Act of 1959would ensure “the free exercise of the voting rights of stockholders” and would almost certainly be upheld by a court as a valid exercise of the Commission’s rulemaking authority.

Both Greenberg and Goldstein get to the real issues. I’m afraid too many will be distracted by the hundreds of questions raised by the SEC, the labyrinth of language only an SEC attorney could love, and the need to arrive at a consensus document that all with a vested interest in the status quo can at least live with.

So far, the best start of an analysis I’ve seen in this direction is posted in bits by J. Brown attheRacetotheBottom.org. Brown goes as eagerly into the weeds as a Labrador Retriever. For example, he says language in proposed Form 14N-1, which requires the person signing to certify their shares aren’t held for the purpose of changing changing control,

is unnecessary and likely to provide grist for the litigation mill. Boards may decline to include nominees if they can develop an argument that submitting shareholder has a control purpose. The fact that the director was submitted at all is evidence of some desire to influence control. Anyone with a history of sometimes trying to get control will be an easy target. Moreover, the Commission is not limiting its analysis to the current motivation of shareholders. Instead, they must represent that when they were acquired (one year ago, five years ago), there was no intent to effect a change of control or acquire more than a ‘limited number’ of seats…

To the extent that the agency wants to reduce the use of Proposed Rule 14a-11 for any attempted change in control, it would be enough to provide that nominees may only be submitted by those shareholders who meet the ownership requirements and who are not otherwise engaged in a proxy contest (or in league with anyone who was) under Rule 14a-11. In that way, the issue wouldn’t turn on control but on the number of directors nominated in any given election.

Brown also goes into an interesting analysis of the SEC’s attempt to address exclusion of shareowner nominees through board adopted qualification requirements.

To the extent that a company uses qualifications to exclude a nominee from the proxy statement, it will be in violation of the proxy rules and risk a federal law suit. If the nominee is allowed, the company may nonetheless refuse to seat anyone elected if they violated the board imposed qualification requirements. This in turn may precipitate a law suit in state court over the validity of the qualification requirement.

In another post, Brown criticizes the rush to the courthouse approach, endorsing instead the SEC’s 2003 proposal in this area giving priority to nominees from the largest shareholders. He also express concerns about the proposed threshold, especially with respect to smaller companies.

While the release notes that many companies below $75 million have 5% shareholders, it is also likely the case that these companies more often have controlling shareholders. Thus, the 5% shareholders may already have control of the board. In those circumstances, there may be even greater need to enable minority shareholders to elect their own nominees. This may require a lowering of the percentage.

I look forward to much more from J. Brown. If anyone else is posting comments on the proxy access proposals or is willing to share preliminary thoughts, please let me know. (send to [email protected]) Comments to the SEC are due August 17, 2009. Voice your opinion by sending an e-mail to [email protected]. Be sure to include “File S7-10-09” in the subject line. (linkhttps://www.corpgov.net/news/news.html#ProxyAccess until sometime in August)

Dell (Updated 7/17)

Dell’s annual meeting was held on July 17th. I see Proxy Democracy gathered the votes of AFSCME Employees Pension Plan, CBIS, Calvert Social Index Fund, CalSTRS, Trillium Asset Management and Florida SBA. CalSTRS withheld votes on all directors, voted against ratifying the auditor, and favored both shareowner proposals:

  1. Reimburse Proxy Contest Expenses
  2. Reduce Supermajority Vote Requirement (my proposal)

Supermajority requirements are most often used to block initiatives supported by shareowners but opposed by management, such as entrenchment. Eight of our directors use “Accelerated Vesting” of stock options to avoid recognizing related costs. Additionally, we have no shareowner right to: An independent Board Chairman or To call a special meeting by 10% of shareholders. Vote along with CalSTRS to send a clear message. (Disclosure: The publisher of CorpGov.net owns shares in Dell.)

All company recommended directors were elected. Shareowner proposal 1 by AFSCME won a very respectable 35%. My proposal, #2, won 69%, so we now hope each shareowner voting requirement in our charter and bylaws that calls for a greater than simple majority vote will be changed to a majority of the votes cast for and against related proposals. This includes each 67% shareholder provision in our charter and/or bylaws. Thanks to John Chevedden for all his work on the proposal with me and to Scott Adams of AFSCME for presenting it at the meeting.

Institutional Investor Complicity with Bad PE Governance Practices for IPOs?

Posted by Andrew Shapiro (Lawndale) on July 15, 2009 at 3:38pm to ShareOwners.org: The recent June 10, 2009 Corporate Library and IRRC Institute study entitled What Is the Impact of Private Equity Buyout Fund Ownership on IPO Companies’ Corporate Governance? examined whether private equity buyout firms institute more shareholder-friendly corporate governance structures in their IPO companies than non PE-backed IPO companies.

One question I have posed at several past meetings of the Council of Institutional Investors (CII) is – “Why do Public and Private pension plan CII members, who spend substantial resources to fight to implement shareholder-friendly corporate governance structures in public portfolio companies, invest monies with ANY private equity firm that take their portfolio companies public with the very poor and shareholder-UNfriendly corporate governance structures these same plans spend resources to remove?”

Corpgov.net: Andrew, your point is excellent. CalPERS, CalSTRS, Florida SBA and others who have shown leadership should take the lead on this issue and should limit their investments to private equity firms with a good governance policies. Are other CII members also members of ShareOwners.org? If so, I don’t see them.

Shapiro: I believe most if not all CII member funds (eg. CalPERS, CalSTRS) presently participate in PE funds that bring out unshareowner friendly IPO as their investment groups don’t extend public investment policies into PE area to limit their investments to private equity firms adhering to a good governance policy. These funds may argue (though I think it a bunk argument) that best mgmt is only attracted to start-ups that provide job security and entrenchment protections. Yet before the company is even brought public these managers don’t have such protections from the controlling private equity principals. So why do these mechanisms suddenly become needed in their new to go public form?

Just a flavor of the kind of dialogue you’ll find at ShareOwners.org. As I reported earlier, 80.6% of polled delegates at The International Corporate Governance Network conference in Sydney agreed that investors encouraged the risky behavior that led to the the global financial crisis. (Forum finds investors responsible for GFC, InvestorDaily, 7/15/09) Now it looks like they’re complicit with poor IPO practices by PE funds. Let’s help them fix it. What drives corporate governance? Good practices by investors.

Being a Director Should be Considered a Real Job

Jonathan Drance and Edward Waitzer compare and contrast private-equity and public boards and conclude we should Make directors work. (National Post, 7/16/09) I’ve seen the comparisons before; it’s the conclusion that is novel.

In private equity, CEOs are clearly subordinate to their board. This contrasts with many public companies where, absent a crisis, directors often effectively view themselves as virtual employees of the CEO. Private-equity boards tend to be smaller and comprised of individuals with or representing substantial ownership stakes — many of whom would not be considered “independent” under the regulatory frameworks governing public company boards. The primary focus for board selection tends to be effectiveness. The issue, when it comes to independence, is on a director’s ability to bring informed and objective judgement to their role. Conflicts of interest tend to be faced and managed (rather than pretending they can be avoided). Private-equity directors devote more time, and receive better information and more (and longer-term equity-based) compensation. Social customs tend to differ as well, with discussions at the board level and between directors and management being more forthright and focused.

While private-equity directors devote 40-60 mostly hands-on days a year, public company directors average of 18-25 days, largely at or preparing for board and committee meetings. “What if, instead of spending 25 days, public company directors were expected to dedicate 80-100 days a year to their responsibilities?”

When I first ran for the CalPERS Board in 1986 it was a part-time job. The Government Code limited CalPERS to reimbursing the employers of directors elected by state, school or public agencies to 25% their salary. The implication was, they were expected to spend no more than 25% of their yearly time on CalPERS related matters.

Over the years, CalPERS adopted various internal policies, which I believed were in conflict with that limitation. I understood directors couldn’t do the job working only 25% time. However, I felt CalPERS should be clearly in compliance with the law. My advice was, “Admit the job is bigger than it once was. Go to the Legislature to get the law changed.” To urge them down that path, in December 2000 I filed apetition with the Office of Administrative Law, arguing their policies constituted underground regulations. Language operative in 2003 removed that restriction from Section 20092 of the Government Code.

Isn’t it time shareowners, CEOs and corporate boards admit, if we really want directors of public companies do their jobs they need to be reimbursed for more than 20 days a year? If serving on the CalPERS Board is practically a full-time job, why isn’t that the case for the directors serving on the board of GM or Exxon Mobil? For years, CalPERS was in denial. Then they finally woke up and got clear legal authority to allow directors to devote far more than 25% of their time to their work. CalPERS had to go to the Legislature, so they were reluctant. What’s the excuse for public corporations?

Barriers Remain

Chris Mallin, Professor of Corporate Governance and Finance & Director of the Centre for Corporate Governance Research at the University of Birmingham, argues that “companies do not always take as much notice of the votes cast as one would like,” citing a largely ignored vote at Marks and Spencer. She points out that withhelds in the UK are not counted as votes cast and may facilitate sitting on the fence, whereas in the US such votes have meaning where majority vote requirements are in place.

Mallin goes on to note our “blank vote” petition to the SEC. “Clearly the area of voting is a complex one and changes are being brought in over time to remove barriers to voting and to help ensure that votes are cast in a way which fairly reflects the owners’ intentions.” (Voting and Corporate Governance: Having a Say, OUPblog (7/16/09) and Corporate Governance (7/13/09)

Preventing Failed Director Elections

Georgeson offers excellent advice regarding “the increased risk for a failed director election in the wake of the elimination of the broker discretionary vote, particularly in the circumstance of a company with majority voting or a director resignation policy in place.” Everyone involved in director nominations or proxy voting, especially re directors, should read the post.

On item caught my eye. “We recommend that companies take steps to analyze its impact based on a number of factors, including: …The likelihood that some brokers may adopt ‘client directed voting’–a system in which the shareholder would give standing instructions to brokers on how to vote their shares on director elections and other issues.” (SEC Approves Elimination of Broker Discretionary Voting in Uncontested Director Elections, 7/14/09)

Those of you who are developing systems to help retail shareowners vote intelligently should start working with brokers now. We sure don’t want options for “client directed voting” to be limited to what was proposed in A modest proposal? Speak for yourself (Corporate Secretary, 6/2007)

  1. vote as management recommends
  2. vote against management
  3. abstain on all matters
  4. vote in accordance with the brokerage firm’s published voting policies
  5. vote proportionally with the firm’s other clients’ instructed votes on the same issue.

We’ve made too much progress building intelligent vote gathering systems since then. Brokers shouldn’t expect these limited options either. Contact me if interested. If you are a shareowner, don’t sign anything your broker offers you with regard to “client directed voting.” We already have Proxy Democracy andTransparentDemocracy.org. Both systems are improving and much more is on the way to help you vote easily.

Corpgov Bites

The Sustainable Endowments Institute (SEI), a special project of Rockefeller Philanthropy Advisors, seeks highly motivated and reliable individuals for part-time fellowship opportunities this fall. The work will build on the success of the last three College Sustainability Report Cards, which have been viewed by more than 350,000 people.

“There’s a lot of widely accepted evidence that good corporate governance pays off.” Chris Jones at the Motley Fool tries to convince his readers it is worth looking at governance scores. (Does Good Governance Make Great Stocks?, 7/15/09) Not easy when most of his readers are probably focused on the next quick pick tip.

The long-awaited review of UK corporate governance by Sir David Walker, former chairman of Morgan Stanley, has proposed a raft of recommendations including a requirement for fund managers to reveal whether they have a policy on engagement with investee companies under a set of Principles of Stewardship. The review says the Principles would also oblige fund managers to vote their shares and then disclose their voting record. (Engage and vote or explain, Walker tells investors in major UK governance review, Responsible Investor, 7/16/09)

Barack Obama’s plan to give the Federal Reserve extensive powers over all large US financial groups is attacked by a coalition of investors, analysts and ex-regulators who say the Fed’s credibility has been “tarnished” by its role in contributing to the crisis. The Systemic Risk Oversight Regulator, proposed by the investors, would have a full-time staff led by a chairman and four members appointed by the president and confirmed by the Senate, and would be accountable to Congress. (Coalition to attack plan for Fed powers, FT, 7/15/09; see also President’s Financial Regulatory Plan Comes Under Attack, Washington Post, 7/16/09) In theory the Federal Reserve is accountable to Congress. Let’s hope the proposed Systemic Risk Oversight Regulator would be more so.

Timothy Smith of Walden Asset Management sent a thoughtful letter to the SEC on 7/14/09 in support of the Commission’s proposal to mandate Shareholder Approval of Executive Compensation of TARP Recipients. The letter is detailed and summarizes some of the history of work on the Advisory Vote, as well as calling for the SEC to move to mandate the vote to companies beyond TARP recipients. I might just write in and say, “me too.” (Thanks to the Social Investment Forum for alerting me to this item.)

80.6% of polled delegates at The International Corporate Governance Network conference in Sydney agreed that investors encouraged the risky behavior that led to the the global financial crisis. (Forum finds investors responsible for GFC, InvestorDaily, 7/15/09)

Democrats named former California State Treasurer Phil Angelides to serve as chairman of the Financial Crisis Inquiry Commission. Republicans named former Ways and Means Committee Chairman Bill Thomas as vice chairman. The Commission will have wide-ranging subpoena power to investigate the financial crisis and must release a report by Dec. 15, 2010. (Congress announces financial commission members, The Hill, 7/15/09; Thanks to the Social Investment Forum for alerting me to this item.)

Considering the fact that most disclosure instruments are sophisticated and disseminate information to a selected group of individuals (such as institutional investors and analysts), Twitter enables a wider dissemination to all public through a cost-free mechanism, which is a good reason for the in (Investor relations community to adhere to the tool. Twitter certainly does not eliminate the use of standard communication instruments, but rather compliments a company’s communication effort. (Twitter, the New Investor Relations Communication Tool, IR Global Rankings, 7/15/09) And from Dominic Jones, viaTwitter, “All those IR consultants advising pubcos to use Twitter, do you tell clients about Twitter’s security & stability history?”

A “legislative backstop” would be “helpful.” During a House of Representatives hearing on Tuesday, SEC chair Mary Schapiro said she would support legislation that would confirm the authority of the commission to issue a proxy access rule. (Schapiro Welcomes Legislation on Proxy Access and Rating Firms, Ted Allen, RiskMetrics Group Blog, 7/15/09)

TIAA-CREF, the nation’s largest pension system, proclaims itself a leader in corporate/social responsibility, as well as in customer satisfaction. And yet, some of its members question its practices. (At the CREF Annual Meeting, Shareholder Say “How Hypocritical can You be? Let Me Count the Ways,” CSRwire, 7/14/09)

So much is good at the HLS Forum on Corporate Governance and Financial Regulation but Delaware’s Art of Judging deserves special mention. 7/14, 2009

A recently published study by the Shareholder Association for Research and Education (SHARE) and Fund Votes found that while Canadian mutual funds were more likely to oppose management nominees for boards of directors in 2008, the majority of mutual funds continued to vote overwhelmingly in favor of management proposals, and against proxy items proposed by shareowners. Also of note, when it came to the voting patterns of SRI funds sold by diversified fund companies, the report found that proxy voting patterns were the same as in mainstream funds offered by the same companies. (Canadian Mutual Funds Continue to Vote Against Shareowner Proposals, SocialFunds, 7/9/09) Thankfully, most SRI funds now recognize that corporate governance and proxy voting matter. Why would anyone put money in an “SRI fund” that doesn’t recognize that basic fact?

“Stakeholders” will have diminished rights under the Philippines Revised Code of Corporate Governance, which has essentially dropped references to individuals and entities — apart from stockholders — with legal and business standing to ensure that companies are well-managed. The SEC “seems to have lost the heart and just decided to go back to the old corporate maxim that the duty of the Board of Directors of every corporation is to maximize its profits,”said Ateneo Law School Dean Cesar L. Villanueva. (New governance code ‘abandons’ stakeholders, BusinessWorld, 7/15/09)

Jamie Allen, secretary general of the Asian Corporate Governance Association, said the bulk of corporate governance action occurs outside of Asia because within the region institutional investors have not been supportive. (Corporate governance needs national voice, FinancialStandard, 7/15/09) Agreed, if Asia wants to play a major role in shaping global governance standards, institutional investors need to be involved in organizations like ACGA.

York University’s Richard Leblanc, a professor of Corporate Governance, Law and Ethics, suggests directors often poorly understand risk management. A competencies and skills matrix would combat this lack of understanding by exposing areas where a board lacks expertise. Canadian firms are ahead of those in the US in this area as well as in splitting CEO and Chair positions and assessing individual directors. (US corporate governance reforms should follow Canada’s lead, Exchange, 7/13/09)

The Society of Corporate Secretaries and Governance Professionals is broadcasting a special program from the NASDAQ MarketSite on Wednesday, July 15, 2009. The program will feature the Society’s former Chairman, William Mostyn, who will host a panel discussion highlighting the most compelling themes from this year’s Society National Conference held in San Diego, June 25 – 28, 2009. Webcast link.

Auditing Governance

The July 3rd edition of Compliance Week contained an article by Dan Swanson entitled Internal Audit’s Seat At The Governance Table that discusses the Institute of Internal Auditors’ global position statement regarding organizational governance on the many roles that internal auditing can play in an organization’s governance effort. Key takeaways:

“Auditors provide independent, objective assessments on the appropriateness of the company’s governance structure and the operating effectiveness of specific governance activities. Second, they act as catalysts for change, advising or advocating improvements to enhance the organization’s governance structure and practices. By providing assurance on the risk management, control, and governance processes within an organization, internal auditing is one of the cornerstones of effective organizational governance.”

“When there is much to do in formalizing and strengthening governance efforts, internal audit will likely focus more on providing advice regarding best structure and good practices to consider. Where governance is very structured and operating relatively effectively, the audit would likely focus on identifying further improvement opportunities and assessing the performance of key controls and practices. Benchmarking the company’s governance practices to similar organizations could be very beneficial. “

Internet Evolution and TCL’s 2009 Public Funds Forum

The Internet Will Drive Corporate Monitoring. Mark Latham wrote a paper by that title about ten years ago before the dot.com bust and now it finally seems to be unfolding. I’ve been raving for several years about Proxy Democracy and the Investor Suffrage Movement. Both are making substantial progress. New entries are Shareowners.orgTransparentDemocracy.orgVoterMedia.orgMoxyVote.compromises to take it to a new level. Right when individual investors have just about stopped voting entirely, new internet platforms are being developed to make sharing and obtaining advice from others easy. Initially, this movement came from grassroots efforts by concerned people who toiled the fields selflessly. Now, others are beginning to recognize that individual investors and beneficial owners must have a role in corporate governance. Who will influence how they vote and how they pressure their funds to vote.

Two primary sources in providing advice that may populate the data sets of such platforms are theSocial Investment Forum, the Council of Institutional Investors, and the individual members of these organizations. Individual investors used social networking concepts because they had no alternative. Now, we see another new and interesting development in The Corporate Library’s use of social networking tools to promote and enhance its upcoming conference, The Future of Corporate Reform. In some ways, this upcoming conference comes from the other end of the spectrum, not grassroots but global. The goal of providing solutions “through changes in investment strategy, litigation and public policy to restructure the public corporation and ensure that it delivers on the promise of wealth creation for shareholders and society” is much the same as what drives grassroots efforts. Now we see them beginning to use some of the same internet tools.

TheCorporateCouncsel.net and CompensationStandards.com have long been leaders in sponsoring conferences and making lots of deep content available on their web sites to enhance the experience. However, The Corporate Library is the first I know of (I’m sure readers will correct me, if I’m wrong.) to use a social networking site (in this case, Linked in). Registered attendees can begin networking before the conference. News is being posted. Discussions have already started. Will we see subgroups developing? While others will probably be checking with friends on Linkedin to see if they are yachting or riding hot air balloons, I’ll be using it to try to find a roommate at the Hotel del Coronado.

Shareowners.org at 250

Checking in at Shareowners.org on Friday 7/10/09 and I see this social networking community on shareowner issues has already grown to 250 members. That seems like quite a few on a relatively obscure subject in two weeks time. However, it isn’t just the numbers, it’s the quality. A lot of these folks are policy wonks and activist who will have significant influence in the Obama Administration.

Take the 250th member, Bob Laux of Redmond Washington. Google him and learn that he’s the Director of External Reporting at Microsoft Corporation. He’s a member of the Accounting Standards Executive Committee (AcSEC), authorized to set accounting standards and liaisons with the Financial Accounting Standards Board (FASB), the Governmental Accounting Standards Board (GASB), the Federal Accounting Standards Advisory Board (FASAB), the Securities and Exchange Commission (SEC), and the International Accounting Standards Board (IASB). You can see his comments to the SEC on “Allowing U.S. Issuers to Prepare Financial Statements in Accordance With International Financial Reporting Standards” and his SSRN paper (with others) on “Acceptance from Foreign Private Issuers of Financial Statements Prepared in Accordance with International Financial Reporting Standards Without Reconciliation to U.S. GAAP.” And, of course, you can find much more on Laux.

Going back halfway through the list is Tim Smith, Senior Vice President, Environmental, Social and Governance Group at Walden Asset Management. Prior to joining Walden and Boston Trust, Tim served as Executive Director of the Interfaith Center on Corporate Responsibility (ICCR). Until recently, he served as the Chair of the Social Investment Forum, an industry trade group. Smith is fellow who got me interested in proxy voting.

Keep the exercise up and you’ll find an amazing list of who’s who. And in the few minutes it took to write this, there’s another new member. At 251 is Joshua Humphreys of the Center for Social Philanthropy. Humphreys has advised numerous organizations on issues in social and environmental finance, including the Environmental Grantmakers Association, Green Harbor Financial, Proxy Democracy, Rockefeller Philanthropy Advisors, the Social Investment Forum, Sustainable Endowments Institute, and the World Bank Group.

All this to say, “sign up.” Act quick and you can be member #252.

UK Advice of Note

David Wilson, Director, Policy and Strategy at the Institute of Chartered Secretaries and Administrators, offers UK companies recommendations going forward in Setting the New AgendaGovernance, June 2009:

  • Consider putting less emphasis on the role of board committees and more on the role of the board, so it is better aware of its collective responsibilities.
  • Consider an independent external appraisal of risk management and internal control systems.
  • Consider limiting the number of directorships board members can accept, increasing their pay, and requiring a specified course of instruction on their duties and obligations.
  • Consider continuing education requirements.
  • Consider not only an annual review of each member, but reporting results to shareowners.
  • Consider a specified course of instruction.
  • Consider an adequately resourced company secretariat, reporting to the board, not to management.

WorldBlu

BusinessWeek profiles the open book management practices of WorldBlu List awardees Tracer Corporation, Menlo Innovations, and SRC Holdings Corporation in “To Beat the Recession, Open Your Books.”

Workplace democracy advocate Rune Kvist Olsen released a paper entitled The DemoCratic Workplace: Empowering People (demos) to Rule (cratos) their own workplace. The paper discusses preliminary steps for designing and transitioning to a democratic workplace and key topics personnel should explore in order to create a shared vision of their desired workplace. Olsen also elaborates on the power dynamics intrinsic to a vertically-structured workplace, and differentiates between leadership and leading-ship and Inner Democracy versus Outer Democracy.

Boardroom Insider

Ralph Ward is telling his readers, “Many of the same outcomes we saw for audit committees are now in the works for pay panels. Greater professionalism in operations, strict standards for independence, resources allowing the committee to seek outside counsel, and direct, confidential links between the committee and its main external resource (in this case compensation consultants).”

At Boardroom Insider, he goes on with more specifics and offers several pages of tightly packed advice, including that “if your board wants to stay informed on who’s saying what about your company, visit (and bookmark)” this: Shareowners.org. I would add, if you want to see how shareowner activists are voting, visit Proxy Democracy.

BRT Seeks Delay for Proxy Access

In a comment letter dated June 30, 2009, the Business Roundtable requests the SEC extend the 60 day comment period to at least 90 days due primarily to the rule’s complexity (including more than 500 questions) and to the fact that the rules weren’t released until about a month after the open meeting. BRT also claims “the Commission has shifted the burden of data collection and analysis to the public in many respects.”

While the proxy access proposals are lengthy, I’m not sure they are really all that complex. Given BRT’s historic opposition to proxy access, I’m concerned their letter mey be more of a delaying tactic than a real need.

Governance Standards Slipping

In Australia, the 2009 WHK Horwath Large Cap and Mid-Cap Corporate Governance reports show a marked increase in the number of listed companies that were totally lacking in corporate governance structures and policies based on their 2008 annual report disclosures. There was a sharp contrast between large caps and mid caps with 5.6% of large caps scoring only one star, whereas 15.6% of mid caps were low ranked.

“At the top end our companies would have governance standards that they can be proud of on an international level and would match standards anywhere in the world, but at the bottom end some of our companies are being run like the local tuck shop,” said Associate Professor Jim Psaros of the University of Newcastle.

On a positive note, the study found that most of Australia’s top 250 listed companies are making quite reasonable attempts to inform their stakeholders of their carbon emission actions and future intentions, even though there are no legal requirements or established guidelines. (Reports find corporate governance standards slipping across large and mid-caps sectors, seekingmed!a, 7/8/09)

A Primer for Boards

Cornelis A. de Kluyver, an academic and practitioner with global experience, has written A Primer on Corporate Governance published by Business Expert Press. While not nearly as extensive as recent textbooks by Bob Tricker or Monks and Minow, this is a quick read that provides most of the basics for future directors and those who work with them.

He very briefly reviews the history of corporations, rise of fiduciary capitalism, recent moves to federalize corporate governance, various conflicts of interest, and provides a thumbnail international sketch. However, his short explanations sometimes over simplify. For example, in reviewing director duties he states, “the primacy of shareholder value maximization wa affirmed in a ruling by the Michigan State Supreme Court in Dodge vs. Ford Motor Company.

Unfortunately, he’s not alone in perpetuating this myth. In Why We Should Stop Teaching Dodge v. Ford(pdf, Virginia Law & Business Review, spring 2008), Lynn Stout argues more convincingly that credit for the concept that corporations exist only to make money for shareholders should go to law professors, not the courts. Dodge v. Ford is best viewed as a case that deals not with directors’ duties to maximize shareholder wealth, but with enforcing the fiduciary duty of controlling shareholders to minority shareholders. Because different shareowners have different investment time frames, tax concerns, attitudes toward risk, etc. it is impossible to discern a single, uniform measure of shareholder wealth to be maximized. Additionally:

  • Articles of incorporation typically don’t say they are organized primarily to profit shareholders but, instead, for anything lawful.
  • Similarly, state corporation codes typically provide their purpose is “to conduct or promote any lawful business or purpose” and many authorize corporate boards to consider other stakeholders.
  • Judges routinely refuse to impose any legal obligation on directors to maximize shareowner wealth.

De Kluyver does explore stakeholder theory but concludes shareholder value maximization “will continue to dominate the U.S. approach to corporate law for the foreseeable future,” with the courts giving boards increasing latitude.

Elsewhere, he discusses governance reforms and concludes, “There is real danger, however, that the rise in shareholder activism, the new regulatory environment, and related social factors are pushing boards towards micromanagement and meddling.” Many of us wish there had been a lot more “meddling” by boards prior to the current financial crisis, but de Kluyver is writing for board members, not shareowners.

Although he appears to reject recent moves to require specific subsets of directors to be independent, he appears to agree they should be more allied with shareowners than with management and that separating the roles of chairman and CEO “gives boards a structural basis for acting independently.”

In discussing stock options, de Kluyver notes, “Until recently, many U.S. companies were not very diligent in assessing the cost and value of options and treated options as being cost-free.” He says nothing about the Business Roundtable’s campaign to undermine the Financial Accounting Standards Board. An uninformed reader could be left with the impression that CEO’s had no role in this effort to hide costs. Likewise, he says “most of the pressure on boards on the last 25 years has come from shareholders.” Hasn’t more pressure come from CEOs who are there providing direction at every board meeting? Even with recent steps empowering shareowners, CEOs still hold more sway over boards, including who is nominated.

In discussing shareowner proposals, de Kluyver says, “One of the most popular shareholder proposals today demands that shareholder be allowed to directly nominate and elected directors rather than work with the slate recommended by the board’s nominating committee.” Popular in what sense?

The SEC allowed such proposals for many years until it looked like the proposals would obtain majority votes. Then the SEC, without changing the governing regulations, decided such resolutions violated the rules. That position stood for many years until challenged by AFSCME. When the underground regulations were overturned by the court only about three such proposals were introduced before the SEC, under Cox, banned them through new regulations. Now, under Schapiro, such proposals will again be legal, probably in 2010. To describe “proxy access” proposals in 2009 to be “the most popular shareholder proposals today,” without much explanation, seems misleading.

In the book’s epilogue de Kluyver revisits the issue of “proxy access.” However, rather than clarifying the issue he informs readers that the SEC considered proposed rules to allow it, but rejected them. Of course this is true, but de Kluyver gives the impression the issue is dead, whereas everyone following this issue has known for years that “proxy access” would be back on the table under a new administration. It would be important to note that majority voting requirements, the end to “broker voting” and proxy access will require boards to cooperate more closely with shareowners.

The book is at its best in borrowing liberally from thought leaders and consensus shaping organizations by providing various lists of best practices: Succession Planning is an Ongoing Process; CEO Selection: Common Board Mistakes; Succession Planning: Best Practices; Red Flags in Management Culture, Strategies, and Practices; 10 Questions About Ethics and Compliance for the Board; Five Questions About Hedging; Enterprise Risk Management: The Board’s New Tool; Executive Compensation: Best Practices, What Defines Best In-Class Boards?,; etc.

Regardless of my nitpicking, de Kluyver gets the big picture right. “The tug of war between individual freedom and institutional power is a continuing theme of history. Early on, the focus was on the church; more recently, it was on the civil state. Today, the debate is about making corporate power compatible with the needs of a democratic society.” De Kluyver offers readers information that can help them to become better directors and better corporate citizens.

Best Boards

They operate in a virtual black box, so taking a stab at which boards are best is a shot on the dark. Eric Jackson, the CEO of Ironfire Capital and a co-filer of our blank vote petition to the SEC, courageously offered his on TheStreet.com. (Best in Class: America’s Top Boards, 7/7/09) Ric Marshall, of The Corporate Library, was quick to agree with two of Jackson’s picks (Berkshire Hathaway and Amazon.com) but disagreed with the choice of Johnson & Johnson because CEO William C. Weldon’s compensation “seems not only excessive in absolute terms but is poorly aligned with sustainable shareholder interests as a matter of policy. In particular Weldon’s ‘long-term incentive compensation’ is based on too short a period to be considered long-term (three years) and is not tied to any performance metrics.” (Best In Class?, 7/7/09, with a rebuttal from Jackson)

Looking at the ratings given to these companies by RiskMetrics it seems obvious they wouldn’t be in total agreement either. As of 7/1/09 Berkshire Hathaway’s Corporate Governance Quotient was better than 87.5% of all companies and 52.5% of insurance companies; Amazon’s Corporate Governance Quotient is only better than 18.4% of the S&P 500 and 69% of retailing companies; J&J’s Quotient was better than 38% of S&P companies but 95% of pharma, biotech and life sciences companies (a group with very low ratings).

More important than his picks is Jackson’s process, weighing such factors such as equity ownership, director independence, diversity (including business experience), time availability, and disclosure. However, Marshall’s point is also valid. CEO compensation is another important factor which is increasingly outside the black box and is often a good demonstration of the board’s decision process. (Disclosure: I own very small portions of Amazon.com and Berkshire Hathaway)

SEC Posts Colorful Comment

Colorful language regarding Madoff in proxy access comment. I’m not sure why Mr. Paul thinks the rulemaking is “useless information.” I guess commenting has become an avenue for venting. Who can blame him. However, as one who plans to read through these, I hope most are more focused. (Thanks to Phillip Goldstein of Bulldog Investors for drawing the comment to my attention.)

Expanding Fiduciary Duty

Writing for The Corporate Board, John C. Bogle says that all money managers should be governed by a federal fiduciary standard. (Building a Fiduciary Society, July/August 2009)

He argues that money managers too often place their own interest above that of customers and fund beneficial owners. Whereas turnover of stocks ranged from 20-30% during his first twenty years in the business, they reached about 300% in 2008. “Such turnover is not investment, focused on long-term cash flows and intrinsic values. It is speculation, focused on short-term bets on stock prices.”

We need an education program to help citizens understand this difference. “Investors must care about corporate governance. Speculators, however, do not care, and arguably should not care.” If we turn speculators into investors, we’ll get better corporate governance, better returns and more responsible corporations.

Bogle reprises Supreme Justice Harlan Fiske Stone’s 1934 warning, “Those who serve nominally as trustees, but relieved, by clever legal devices, from the obligation to protect those whose interests they purport to represent… consider only last the interests of those whose funds they command.”

Beta Sites Facilitate Voter Branding

Beta versions of TransparentDemocracy.org and VoterMedia.org facilitate civic and proxy voting by brand reputation. Much of the information listed on both sites is most directly related to past elections. However, both systems allow users to input information for upcoming contests.

TransparentDemocracy.org (partially funded by SEIU) publishes sample ballots and corporate proxies, encouraging individuals and groups to publish their recommendations so that voters and shareowners can easily see how people and organizations they trust recommend they vote. Currently featured communities range from various state elections to corporate proxies from Abbott Labs to Yahoo! to elections at Stanford University. In theory, you be able to view how a trusted source is voting and will be able to use thier choices to influence your own.

VoterMedia.org allows you to vote on media that cover elections. It’s designed to have a page of voter-ranked media (blogs and others) for each voter community in the world. You can add new communities and new media to this voting system. Currently featured communities are Vancouver, British Columbia. Canada, Iran, UBC AMS, U Calgary Students, Fair Voting BC, CBC, Microsoft, Chattanooga, and CalPERS. In theory, your vote will reward better information providers with a higher rating and more traffic, leading to a virtuous circle of better reporting.

Both sites need a little work and welcome feedback from beta testers. Both are ambitious and promising.

Get Your Union Involved

I’m very fortunate to collect a pension from CalPERS and to have input into their policies, both directly as an individual and indirectly as a member of my CSEA Retirees, Inc., which is loosely affiliated withSEIU. CalPERS has long been a leader in corporate governance but that hasn’t stopped me from suggesting additional measures they could take to improve both corporate governance and their own internal governance. I’m submitting two resolutions at CSEA’s General Council this fall and thought I’d post them here, in case readers want to consider introducing similar resolutions to their own unions.

  1. Resolution 1 (download in Word) seeks to increase the availability of information on CalPERS proxy votes and encourage CalPERS involvement in organizations like Investor Suffrage Movement & Proxy DemocracyShareowners.org and TransparentDemocracy.
  2. Resolution 2 (download in Word) seeks to increase the availability of information during internal elections at CalPERS so that members have a better understanding of where their own board candidates stand on the issues.

If you know of governance resolutions being introduced at other unions, please let me know so that I can share the information. For tips on how to organize, see Why David Sometimes Wins: Leadership, Organization, and Strategy in the California Farm Worker Movementby Marhall Ganz, architect of the Obama Field Program; lead organizer of the United Farm Workers for 12 years. Join him in the Los Angeles July 16: 6-9pm or San Francisco Bay Area July 19: 6:00-9:00pm.

Stocks Down, Advisor Pay Up

Financial advisers earned $215,345 this year, up from $195,394 in 2008, and have shifted more toward fees, rather than commissions, according to a study by Cerulli Associates Inc. and the College for Financial Planning. “As people watch their retirement savings or a child’s college fund shrink, they are increasingly asking advisers for solutions to help live their lives, rather than simply grow their stock investments,” said Bing Waldert, director of Cerulli Associates. (Advisers’ paychecks rise in dismal year, Investment News, 7/6/09)

Golden Peacock Award Nominations Due

Here is your opportunity to apply for the following Institutional Awards of the year 2009.

  1. Golden Peacock Global Award for Training
  2. Golden Peacock Global Innovation Award
  3. Golden Peacock Global Award for Excellence in Corporate Governance

The completed applications with all enclosures should reach Director General, GPA Secretariat, IOD House, M- 64 G K Part-II, New Delhi- 48 by 30th July 2009 or through email at [email protected].

The Training Award identifies excellence in training practices and shows how effective training improves business and individual performance. All corporate training departments / institutions industries and independent training establishments are eligible to apply.

The Innovation Award identifies innovations in the form of new ideas, new products, patents, inventions, services, processes, new financial techniques or business structures at your organization. This Award has been instituted to encourage greater commitment among employees to achieve competitive edge. Any organization, however large, medium or small, whether in manufacturing, trading, service or profession or in govt, public or private, research organization, NGOs and any sector is eligible to apply.

The Corporate Governance Award, which looks for transparency and excellence in Corporate Governance, is not merely for meeting legal and financial requirements, but for bringing out the role of non executive directors and social & environmental commitments. All listed companies in India and abroad, whether public or private in any sector are eligible to apply.

This year’s above Golden Peacock Awards will be presented in Mayfair London during the 10th International Conference on Corporate Governance being held on 8- 9 October 2009. Details atwcfcg.net.

The application form and guidelines can be downloaded directly from goldenpeacockawards.com.

Results of SEC July 1 Meeting

Say on Pay for TARP Companies. The Commission voted 5-0 to release a proposal implementing a statutory requirement that TARP bailout recipients provide an advisory shareowner vote on executive compensation.

Corporate Disclosure Amendments. The Commission voted 5-0 on a package of corporate disclosure enhancements related to:

  • compensation policies;
  • director nominee qualifications;
  • company leadership structures (e.g. separation of Chairman/CEO roles);
  • the board’s role in a company’s risk management process;
  • potential conflicts of interest involving company compensation consultants.
  • a new rule to require a company to report the voting results from a shareholder meeting within 4 business days;
  • several amendments to the proxy solicitation process.

Rule 452 Amendments. The Commission voted 3-2 in favor of approving the NYSE proposal to ban brokers from voting in contested or uncontested corporate board elections on behalf of customers who did not return voting instructions, effective in most instances January 1, 2010. (Final Order, which discusses the comments received by the agency and the Commission’s rationale for approving this NYSE proposal: http://www.sec.gov/rules/sro/nyse/2009/34-60215.pdf) The dissenting votes were from Commissioners Casey and Paredes. Both Commissioners voted against the NYSE proposal because, in part, of their view that this issue should be one component of a broader review of the proxy voting and communications system. Commissioner Paredes also mentioned in his remarks the 93 comment letters received (out of a total of 136) that urged a comprehensive review of the proxy system. (This was due to a big push by the Chamber backed Shareholder Communications Coalition, while shareowner interests slept, knowing they already had the votes.) All Commissioners acknowledged the importance of studying proxy “plumbing” issues and committed to undertake such a review during the balance of this year. I hope this will include consideration of our petition on “blank votes.”

Broc Romanek, who’s coverage is excellent (see The Big Kahuna: SEC Approves NYSE’s Elimination of Broker Discretionary Voting, TheCorporateCounsel.net Blog, 7/2/09), says elimination of broker vote “is the biggest of the reforms that companies face – bigger than proxy access, say-on-pay, etc.”

Beth Young noted Broadridge’s estimate that broker votes accounted for 16.5% of votes at shareholder meetings in 2008. (It’s About Time: SEC Votes to Change NYSE Broker Vote Rule, The Corporate Library, 7/2/09) Loss of those votes will certainly make it more difficult for management to win without real shareowner approval. Great summary of the proceeding by Ted Allen of RiskMetrics at A Momentous Day for Investors, 7/2/09.

Chamber Sponsored Study Agrees with Chamber

Nell Minow uses her typically colorful language to attack Chamber sponsorship of another Navigant Consulting study that purports to show “key-votes” by the AFL-CIO haven’t improved stock prices. The Chamber claims companies “have driven the American economy to unparalleled heights.” (apparently they haven’t noticed the economic plunge). Minow says, “The Chamber of Commerce should draw a lesson from Johnson & Johnson’s response to the Tylenol poisonings and devote its efforts to restoring the brand of American capitalism. Instead, the Chamber of Commerce is once again confusing what is best for American corporations with what is best for American corporate executives, engaging in its usual subversion of public policy with thuggishness, subversion, name-calling, and bait and switch.”

She goes on to note the Chamber is spending $100 million of shareholders’ money for a what they, themselves claim is a “sweeping national advocacy campaign encompassing advertising, education, political activities, new media, and grassroots organizing to defend and advance America’s free enterprise values in the face of rapid government growth and attacks by anti-business activists.”

For those interested in refuting the Chamber’s recent efforts and the Navigant study, Minow’s post contains excellent citations. (Another Shell Game from the Chamber of Commerce, The Corporate Library, 7/2/09)

I analyzed last Navigant study back in July 2008 under the heading Chamber Attacks Resolution Process. bs I said then, 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, but they keep us in touch with what is coming. For example, ICCR filed resolutions on subprime loans for years. Too bad banks didn’t listen.

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 universal health insurance to put an end to our competitive disadvantage due to rising health care costs. They could 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.

Support Petition to Keep Blank Votes Blank

This morning, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to [email protected] with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as “broker voting,” which has already been repealed on “non-routine” matters and, we hope, will soon be repealed for so-called “routine” matters, such as the election of directors. For example, even though “broker voting” has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company’s soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can seeProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVoteplatform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority “provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.” (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating “voting instructions” to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to “forms of proxy,” not the “voting instruction form,” there is no violation. However, subdivision (1) refers to the “person solicited” and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox… Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, are:

Again, please submit comments on the petition to [email protected] with File 4-583 in the subject line. (posted 5/20/09; link https://www.corpgov.net/news/news.html#BlankVotes)

Continue Reading ·

Support Petition to Keep Blank Votes Blank

This morning, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to [email protected] with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company’s soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as “broker voting,” which has already been repealed on “non-routine” matters and, we hope, will soon be repealed for so-called “routine” matters, such as the election of directors. For example, even though “broker voting” has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company’s soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority “provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.” (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating “voting instructions” to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to “forms of proxy,” not the “voting instruction form,” there is no violation. However, subdivision (1) refers to the “person solicited” and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox… Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, are:

Again, please submit comments on the petition to [email protected] with File 4-583 in the subject line.


Continue Reading ·

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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Icarus in the Boardroom

Icarus in the BoardroomAmerica loves risk-taking CEOs, but when such behavior crosses over to boardrooms it could have massive consequences because of the growing scale of businesses and society’s greater dependence on equity markets. Icarus in the Boardroom: The Fundamental Flaws in Corporate America and Where They Came From (Law and Current Events Masters), by David Skeel draws on Greek mythology to present a candid warning aimed at corporate directors and anyone concerned with our economic future.

Trapped in a labyrinth of his on construction, Dedalus made wings for himself and his son Icarus. He warned Icarus not to fly to close to the sun but Icarus got carried away, failed to heed the warning, and plunged to his death after the sun melted the wax that held his wings together. Similarly, the corporation is a powerful human innovation, but is dangerous if not used properly. Continue Reading →

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Archives: December 1997

Delaware Court of Chancery has made important rulings concerning stock option plans for directors and the issuance of stock to directors in Noerr v. Greenwood and Linton v. Everett. According to Edward P. Welch and Andrew J. Turezyn, the cases “counsel directors and their legal advisors to consider carefully such issues as fairness, disclosure to shareholders and approval by disinterested directors and/or shareholders after full disclosure.” (The National Law Journal via Law Journal Extra, 10/13)

The Florida State Board of Administration, the nation’s fourth-largest public pension fund, sued Sears, Roebuck & Co. for $3.5 billion, saying the retailer’s executives should have known about the company’s controversial handling of bankrupt debtors. “The people that are home free are the directors and the CEO, who caused Sears that loss,” said Horace Schow II, the Florida fund’s general counsel. “They ought to cough up something.” (see Houston Chronicle, 12/22)

SEIU Master Trust filed a resolution with Columbia/HCA to give all candidates for director equal access to the proxy. The binding resolution would amend Columbia’s bylaws. Currently, only candidates who have been nominated by the board are listed in the annual proxy statement. Shareholder nominees are not disclosed. (for more info. contact: Joni Ketter, SEIU, 202-898-3374.)

CalPERS reported 1996 costs of 13.7 basis points for investment operating costs. The fund also indicated it earned a 24.3% return during the year ended 9/30. Domestic stocks, which comprise two-thirds of the $126 billion fund’s assets, earned a 38.9% during the 12-month period compared to the benchmark of 38.4% for the Wilshire 2500 Index.

The Communications Workers of America announced that Walt Disney Co agreed to elect its board members every year instead of every three years as it does now. Before agreeing to the change, Disney tried to block a CWA proposal and urged the SEC to allow it to omit the proposal from their proxy statement for the 1998 annual meeting. Business Week, recently ranked Disney as the nation’s worst corporate board.

Rift at IRRA reported by IRRC, as William and Kenneth Steiner have distanced themselves from the organization due to what seem to be questions of continued independence.

Business Week joins the chorus calling for the SEC to “return to what it started to do in the first place: reverse the Cracker Barrel policy and review employment-related resolutions on a case-by-case basis, as it once did. Everything else should stay the same.” (see 12/29 edition) The Business Rountable and theAmerican Society of Corporate Secretaries both generally endorsed the proposal. Opposition comes from a broad shareholder coalition of religious, environmental, labor and social investment groups, joined by Nell Minow of LENS and Ralph Whitworth of Relational Investors, according to IRRC(12/12).

John Gilbert is interviewed by CNNfn. At 83 he’s still going strong, although he’s cut back from 75 meetings every year to “only” about 35 or so. Charles Elson, professor of corporate law at Stetson Law School discusses the Gilbert brothers role in the landmark 1947 case, S.E.C. vs. Transamerica, that helped define shareholder rights.

Molly Ivins brings corporate governance news to her readers. Her Dec. 17, 1997 column mentions Doug Henwood’s book,Wall Street: How It Works and For Whom and the SEC’s “proposed new rules that will damage the tiny move for corporate democracy.”

Bernard Black’s Shareholder Activism and Corporate Governance in the United States reviews a wealth of unpublished sources and provides needed insight to a struggling field but fails to give much of a glimmer of hope to those of us who believe corporate governance monitoring efforts could yield substantial rewards. (See Black)

Disclosure of Corporate Governance Practices by Australian Companies, a report by the Center for Corporate Law and Securities Regulation, University of Melbourne is noted in our bibliography. (see Ramsay)

Catalyst survey found the number of women holding a place among the top five earners at Fortune 500 companies more than doubled since 1994. But only 20% of female corporate officers — the people in the senior ranks of a corporation — hold “line positions,” compared with 41% of male corporate officers. Line positions are jobs that directly involve corporate profits and losses and that traditionally lead to the highest positions in business. (see PBS)

Guy P. Wyser-Pratte, president of Wyser-Pratte & Co. Inc., announced today that he has filed amended preliminary proxy materials for the Pennzoil Company meeting, including a proposal to elect himself to the Pennzoil board. As a result of Pennzoil’s cumulative voting system, Mr. Wyser-Pratte may be elected to the board by slightly more than 20% of the shares that vote. Wyser-Pratte’s by-law proposals would require a unanimous board vote for anti-takeover defensive actions taken by the board, unless such actions have been approved by a shareholder vote. Other proposals by Wyser-Pratte would reportedly allow the holders of 10% of the shares to call a special stockholders meeting, would make it easier for shareholders to make proposals and nominations at shareholder meetings, and would facilitate business combinations with large shareholders and their affiliates.

Calvert has posted a press release on their response to the SEC Shareholder Proposal regulations.

Masters’ Select International fund will ask five highly regarded international investment managers to pick 8 to 15 of their favorite stocks. Masters’ Select Equity used this technique for domestic stocks and gained 23.4% from 1/31 through 12/11. That was better than the 17.3 % gain for its peer group of large growth funds. Such a strategy would also facilitate closer monitoring of governance issues. However, this possibility wasn’t addressed by 12/14 New York Times article “When Mutual Fund Stars Converge.”

Hong Kong’s coming Mandatory Provident Fund is the major subject of December’s Company Secretary. Total pension assets in Hong Kong, currently estimated at US$15 billion are expected to rise to $75 -$300 billion in ten years. The MPF will require every employer to provide a qualifying retirement scheme if enabling legislation is enacted during this session. In addition, the issue describes an Institute-funded research project currently being conducted. Over 6,000questionnaires were sent out to company secretaries and directors. Many of the questions address the Consultancy Report on the Review of the Hong Kong Companies Ordinance.

December’s Corporate Agenda includes a profile of Eli Lilly. In 1993 their board ousted its CEO of 32 years. Four years later market capitalization has risen from $12-13 billion to $70-75 billion. The active board and members of senior management go on a 2-3 day annual retreat to review the year and discuss strategic planning.

The issue also includes an article by Lucy Alexander on poison pills. She cites Georgeson’s study finding that pills have resulted in an 8% premium for take-over targets over the last 5 years. IRRC’s Robert Newbury questions their methodology and TIAA-CREF’s Peter Clapman says “the economic evidence is still very ambiguous.” The Corporate Governance Advisor includes a related article by Terence Gallagher and Walter Gangl on Pfizer’s TIDE (Three-year Independent Director Evaluation) plan. Incorporated into the plan are requirements that the board maintain its majority of independent directors, that the pill will be reviewed every 3 years by the corporate governance committee (comprised solely of independent directors), and that the committee may review a number of listed factors such as shareholder opinions, relative valuations academic studies, etc. The author’s believe the TIDE plan represents “a new generation” addressing investor concerns. While that view may be questioned by institutional investors, the plan does encourage dialog between investors and corporations.

Women now hold almost 9% of board seats in the Fortune 1000 (up from 6% in 1992 and 7.6% in 1994), according toDirectorship.

Criticism of Business Week’s recent board ranking is rampant. Many thought the survey questionnaire was a guessing game. Another criticism was that respondents were asked to use corporate performance as one measure to rank boards…then the evaluation announces that “good governance appears to pay off”…circular reasoning. (IRRC’s CG Highlights 12/5/97) The same issue carries continuing coverage of the SEC proposal to overhaul rule 14A-8.

Ira Millstein and Paul MacAvoy have completed a study based on 1991-95 data which demonstrates that corporations with active and independent boards appear to have performed much better than those with passive boards. (see Millstein)

A recent Stanford study found that interlocking directors have less influence in large firms and in those firms whose chief executive belongs to a Business Roundtable or Business Council. (see Business Wire)

Global Proxy Watch reports that Proxinvest and Andre Baladi &Associates will launch a fund aimed at European shareholder-friendly firms. They expect to start with $34 million from French institutional investors and to attract additional funds from U.S. and U.K. once the fund is up and running. Selection criteria include an assessment of whether a company structures its board and motivates directors to produce shareholder value, discloses sufficient information to investors, and produces exceptional shareholder returns. (contact Stephen M. Davis of Davis Global Advisors) Davis also reports there have been over 85 corporate governance conferences this year so far.

Election results are out for the CalPERS at-large directors. Incumbents Charles P. “Chuck” Valdes and William B. Rosenberg were reelected by wide margins.

Unions are examining the voting records of 91 money managers to identify practices which conflict with AFL-CIO proxy voting guidelines. “While some union fiduciaries have been activists in corporate governance, many others have been virtually asleep on the subject until now with no idea of how money managers have been casting proxy votes for plan assets, some union officials said.” (Pensions &Investments, 12/8)

In another storey from P&I the Swiss Pensionskasse Schweizerischer Elektrizit?tswerke (PKE pension fund) will post its investment management structure, asset mix, manager mandates, performance results and volatility quarterly on itsinternet site.

Directors & Boards editor James Kristie has created the first corporate governance timeline with 100+ entries. Sure to be a useful reference, the timeline starts with Morgan’s appearance at the Pujo hearings of the U.S. Congress in 1912 and ends with this year’s SEC’s announcement of potential significant modifications to its shareholder proposal rules. Complementing the timeline in the latest issue of Directors &Boards are several historical-oriented features including:

  • An examination of the all-time top 10 legal cases that have impacted the way boards operate. Charles Elson takes us through the cases that confirmed business is carried on primarily for the profit of shareholders, director decisions must be made on an informed basis, action against director requires causation, exec compensation must bear some relation to services performed, the rights of shareholders and the power of the board, judicial review of takeovers, director duties regarding compliance, the private enforcement of proxy rules, and the applicability of insider trading;
  • A 10-year quest for director accountability. John Wilcox takes us through 3 stages of institutional activism from defining a role, to reform of the proxy rules, to a focus on financial performance and board accountability. Wilcox calls for a compilation of reports from all a board’s standing committees as an effective accountability mechanism for boards to shareholders;
  • Louis Lowenstein argues that although U.S. mechanisms to motivate shareholder groups and those which facilitate control of the board are weak, disclosure systems more than make up for these weaknesses; and
  • A history of executive compensation (with its own timeline from the 1800s to the present). The recent emphasis here is on the mega-grants of stock options which may bring about a rank and file uprising, government intervention shareholder resistance or an expanding pool driving pay levels down.

For more information on Directors &Boards see their listing on our Stakeholders page or call James Kristie at 215/405-6081.

The SEC has extended the comment period on charitable giving by public companies. The SEC is studying these issues in connection with HR 944 and 945. One bill would require public companies to disclose their charitable contributions; the second would require each to allow its shareholders to participate in deciding which charities the company should contribute to and how much to contribute…much like the system developed at Berkshire Hathaway. See comments to date as well as Washingtonpost.com. Another option, not being studied, might be a similar requirement for political contributions…of course, to be fair, the same limitation would need to apply to labor as well.

To stimulate discussion on the SEC Shareholder Proposal regulations we have uploaded comments submitted by CalPERS. To facilitate communication, we have created a Corporate Governance Bulletin Board.

Stephen Davis, of Davis Global Advisors, reports that in a 1996 survey of European shareholders by the Centre for European Policy Studies and Davis Global Advisors “none of the respondents – including those who said they vote up to 100 per cent of their domestic securities – cast ballots for more than 10 per cent of the shares they hold in outside markets.” To address this issue and others the International Corporate Governance Network voted to convene two working groups charged with drafting best-practices principles by June 9, 1998, 30 days prior to their next annual conference held in San Francisco. (Company Secretary, 10/97)

Catching up on other news from Stephen Davis, the National Association of Pension Funds (NAPF), representing about 30% of institutional investment in Britian, called for a number of reforms including:

  • Shareholders should vote each year on the report of a corporate board’s remuneration committee.
  • Nonexecutive directors serving more that 9 years should no longer be considered independent.
  • Confidential voting.
  • Directors should be required to undertake formal training within 12 months of appointment.

For a more complete list of highlights and commentary, see the Global Proxy Watch (10/3/97).

A binding anti-pill proposal by the Union of Needletrades, Industrial and Textile Employees hit a setback when U. S. District Court dismissed a lawsuit from UNITE challenging the use by May Department Stores of discretionary authority to vote down the proposal. The proposal apparently would have won approval if the company was denied discretionary voting authority. Judge Koeltl notes, the case “provides a clear example of the disruption and confusion that would be created by an interpretation of SEC Rule 14a-4(c)(1) that forced the company to include any and all potential shareholder proposals in its original proxies.” For a much more complete report see IRRC’s CG Highlights 11/21/97. In the same issue, IRRC reports that “smaller, more active boards that meet less frequently were held up as the ideal at a Nov. 18 American Society of Corporate Secretaries issues seminar in New York.”

Investor Business Relations (12/1 e-mail: [email protected]) reports Ameritech is 1st company to offer shareholders a completely paperless alternative for reports and voting.

Czech Republic enacted law establishing country’s 1st securities commission. (The ISS Friday Report, 11/28)

Forbes ran a cover article on 12/1 on Turning employees into stakeholders which focuses on Science Applications International Corp. in San Diego. “Employees own 90% of the company; the other 10% is held by consultants or employees who left in the early days before SAIC instituted a requirement that departing owners sell their shares back to the company…Its four different employee-ownership programs are among the most sophisticated in the country.”

Graef Crystal writes “If ever there were a case for indexing stock options to the market (i.e., causing the price that must be paid to exercise an option to rise and fall with changes in the broad stock market), that case exists with Fisher at Kodak. Assuming that he has not made any option exercises thus far in 1997, his option shares, on Nov. 11, 1997, contained a paper profit of $21 million. That’s a lot of money for performing at only 34 percent of the market during your tenure as CEO and for destroying 23 percent of your shareholders’ wealth in the last year alone.” (The Business Journal, Portland 12/1)

Investor Relations Magazine will hold its first annual Canadian awards ceremony on Thursday, February 26, 1998. Winning companies will be chosen for their outstanding performance in key areas of investor relations including financial reporting, corporate governance, takeovers and other areas. (see Canadian Corporate News)

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