Tag Archives | shareowner

What is Corporate Governance For? Yale Governance Forum

Stephen Davis

The second session of the second day of the Yale Governance Forum 2011 was held under Chatham House Rule. Panelists were announced in advance, so that is no secret, but under the rule those reporting must not attribute what was said to specific individuals on the panel or in the audience. Stephen Davis was the moderator. Kerstin Jorna, Bernadette Kelly and Gregory Lau were panelists.

What you’re getting here is largely my take-away, complete with all my own personal bias, rather than an accurate reflection of what actually was said.

Who is corporate governance meant to serve? We all know it is not a national affair but is Continue Reading →

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Breaking the Hold on Rating Agencies

Into the second day of the Yale Governance Forum 2011 and I began to relax among friends, not being quite as conscientious about taking notes but here are a few tidbits from an interesting discussion between Kurt Schacht and Jules Kroll.


Jules Kroll

Schacht introduced Kroll by noting that everyone has taken aim at the credit rating agencies. Questions were raised about internal controls, professional standards for analysts, failure to disclose how they arrive at ratings, “Chinese walls” that failed to hold. Yet, business seems to be back to usual. The issuer pays model is still in question.

Kroll made a name and a Continue Reading →

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Governance in the Cloud

Fay Feeney

The fourth session of the Yale Governance Forum 2011 was was a breakout. All four sessions looked great. I choose the one on social networking held under Chatham House Rule. Under the rule those reporting must not attribute what was said to specific individuals on the panel or in the audience. This discussion was especially interactive, with a great deal of participation from the small audience, as well as the panel. And, just to mix it up, I also added my own thoughts and commentary to these notes.

The panel, moderated by Fay Feeney, started with a YouTube video from Socialnomics on the Social Media Revolution. The message was clear. Social media represents a fundamental shift in how we communicate. They will find you. Will you shape Continue Reading →

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Corporate Governance Challenges

This was the third session of the Yale Governance Forum 2011, one that I’ve already noted was the best yet of the several I’ve attended. Like the first session, the third was held under Chatham House Rule. There’s no secret as to who the panelists were, but under the rule those reporting must not attribute what was said to specific individuals on the panel or in the audience.

With this group, I found that difficult, since discussions of specific countries are readily (if sometimes mistakenly) attributable to panelists from that country. The Continue Reading →

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Can Investors Behave Long Term?

The second session, Can Investors Behave Long Term?, of the Yale Governance Forum 2011 was held “on the record.” In some respects, that makes it even more difficult to report. I’m not a quick note taker, so would welcome comments from any who attended the forum, especially panelists, concerning what transpired.

Marco Becht

Keith Ambachtsheer

As I recall, Keith Ambachtsheer, author of Pension Revolution: A Solution to the Pensions Crisis, started us out after a brief introduction from Marco Becht, who served as the moderator. Ambachtsheer noted that all shareonwers are not the same. The wealthy, insurance industry, pensions, and others should be contrast with “guns for hire” who seem to need to be active. There is growing realization by many investors, such as  Keith Johnson Continue Reading →

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What is Short Term? A Conversation Retesting Assumptions


Ira Millstein




The first session of the Yale Governance Forum 2011 was held under Chatham House Rule. Panelists were announced in advance, so that is no secret, but under the rule those reporting must not attribute what was said to specific individuals on the panel or in the audience. This was a discussion where, often, members of the audience were as assertive as those on the panel.

Be forewarned, what you’re getting here is largely my take-away, complete with all my Continue Reading →

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Increased Investor Engagement

The first comprehensive analysis of the engagement between investors and public U.S. corporate issuers finds a notably high and increasing trend of engagement.  Yet, there is a disconnect between investors and issuers in basic areas such as the time frame of engagement, the definition of a successful engagement and, by implication, what engagement itself means.

“The State of Engagement Between U.S. Corporations and Shareholders,” commissioned by the IRRC Institute and conducted by Institutional Shareholder Services Inc., reveals that engagement is either a priority or a non-event for investors:  asset owners and asset managers were most likely to report either that they had engaged with more than ten companies in the previous year, or that they had not engaged at all.

A power shift is underway and issuers are now more willing to engage.  Nearly nine out of ten public companies report having had at least one engagement with its investors during the prior year. Previously, routine engagement referred to quarterly discussions about earnings and corporate strategy that occurred in company-designed forums such as conference calls and analyst meetings.  Today, engagement has become a year-round exercise involving dialogue on topics such as executive compensation, boardroom independence, and sustainability through a variety of channels including conference calls, meetings, e-mails, public announcements, telephone calls, and regulatory filings. The report’s key findings are as follows:

  • The level of engagement between issuers and investors is high. Approximately 87% of issuers, 70% of asset managers and 62% of asset owners reported at least one engagement in the past year.
  • The level of engagement is increasing. Some 53% of asset owners, 64% of asset managers, and 50% of issuers said they are engaging more.  Virtually none of the investors and only 6% of issuers responded that engagement is decreasing.
  • Amongst investors, engagement is either a priority or a non-event.  A bimodal, or “barbell,” distribution was evident, with 28% of asset owners and 34% of asset managers reporting engagements with more than ten companies. On the other hand, about 45% of asset owners and 43% of asset managers indicated they did not initiate any engagement activity whatsoever.
  • Despite the headlines that result from high-profile conflicts between issuers and investors, the vast majority of engagements between issuers and investors are never made public. About 80% of issuers said most engagements remain private, as did 72% of asset owners and 62% of asset managers.
  • Asset owners, asset investors, and issuers do not always agree on what constitutes “successful” engagement. While all three groups believed constructive dialogue on a specific issue was a success, issuers were materially more likely than investors to think that establishment of a contentious dialogue was a success. An even more dramatic difference was that about three quarters of both asset managers and asset owners defined either additional corporate disclosures and/or changes in policies as a “success” while only about a third of issuers agreed.
  • Engagement is most likely to lead to concrete change by issuers in areas where shareholders are broadly in agreement, such as declassification of the board of directors or the elimination of poor pay practices, than in areas where shareholders’ views diverge, such as the need for an independent board chair.

The study was conducted as an online survey of approximately 161 institutional investors and 335 issuers based in the United States from March to May 2010, followed by in-depth follow-up telephone interviews with 21 investors and 22 issuers in August and September 2010. For each respondent, the level of engagement was assessed in terms of subject matter, frequency, participants, measurements of success, and impediments. The study also evaluated how the volume and the success of engagement have changed over time and are likely to change in the future. The survey defined engagement broadly – as direct contact between a shareowner and an issuer allowing each respondent some flexibility to define the term. Interview participants were provided anonymity to encourage candor. The full report is available at irrcinstitute.org and issgovernance.com.

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Shareholder Activism in U.S. Public Companies, 1900-1949

“Offensive shareholder activism” involves buying up sizeable stakes in underperforming companies and agitating for changes predicted to increase shareholder returns. Though hedge funds are currently highly publicized practitioners of this corporate governance tactic, there has been no analysis of the extent to which managers of U.S. public companies were faced with challenges of this nature during the first half of the 20th century. This paper correspondingly examines instances during this period where investors engaged in offensive shareholder activism, based on a hand collected dataset of proxy contests occurring between 1900 and 1949. Our findings indicate that offensive shareholder activism, while not commonplace, did occur and was considerably more prevalent in the 1930s and 1940s than in earlier decades. We explain our results by reference to a simple model of offensive shareholder activism and argue that the ebb and flow of takeover activity may have been the primary determinant of the trends we observe…

It is widely assumed that with respect to corporate governance historically “market control over the allocation of U.S. corporate resources stands out as a recent phenomenon.”67 Under this view, it was not until the 1980s that an “expansion and empowerment of the shareholder class” shifted “interest group power from managers to shareholders.” It was at this point, according to the received wisdom, that the norm of shareholder primacy achieved pre-eminence, fostered initially by the rise of the hostile takeover bid and reinforced in the 1990s by the growing influence and power of institutional investors.

The rise of institutional investors, combined with a strong corporate governance counter-reaction to the building of conglomerate empires in the 1960s and revelations of widespread corporate kick-backs and bribes in the 1970s, no doubt reshaped relations between executives, directors and shareholders of U.S. public companies.70 This does not mean, however, that those running U.S. public companies in earlier eras were entirely insulated from investors inclined to take aim at firms with the intention of orchestrating changes designed to improve returns. The activist hedge funds of today lacked direct antecedents during the first half of the 20th century, as only rarely did collective investment vehicles initiate activism campaigns. Nevertheless, our research into shareholder activism during this period has uncovered numerous instances where investors targeted public companies and built up a sizeable stake with the intention of either launching a proxy contest or seeking to obtain outright voting control. Underperforming public companies no doubt have faced in recent times investor-driven discipline that is more robust than would have been the case during the period we have focused on. However, our research indicates the difference may have been one of degree rather than kind.

Cheffins, Brian R. and Armour, John, Offensive Shareholder Activism in U.S. Public Companies, 1900-49 (February 11, 2011). University of Cambridge Faculty of Law Research Paper No. 11/09. Available at SSRN. Hat tip to Jason Schloetzer.

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"Low-Cost" Activism More Effective Since Enron

Ferri, Fabrizio, ‘Low Cost’ Shareholder Activism: A Review of the Evidence (December 1, 2010). Research Handbook on the Economics of Corporate Law, Claire Hill & Brett McDonnell, eds., Elgar Publishers, Forthcoming. Available at SSRN.  Ferria looks at studies of shareholder proposals filed under Rule 14a-8 and shareholder votes on uncontested director elections. He finds that “collectively, these studies suggest that low-cost activism has become a more powerful tool, capable of driving governance changes at target firms, promoting market-wide adoption of governance practices, and influencing key policy reforms.”

The decisions of proxy advisors appear to be key in many of the outcomes. Here are a few interesting tidbits:

  • A puzzling result in Choi et al. (2009) is that proxy advisors do not seem to take into account the conduct that led to a withhold recommendation for a director at firm A in issuing a recommendation for the same director at the annual meeting of firm B. Consistent with this result, Ertimur et al. (2010a) report that none of the directors of firms involved in the backdating scandal received a WH (withhold) recommendation from ISS/RM when up for election at another firm (and they were not penalized in terms of votes withheld), even when ISS/RM recommended to withhold votes from them at the backdating firm. If proxy advisors and shareholders do not take into account directors‘ conduct at other firms when, respectively, issuing recommendations and casting votes, then the reputation penalties for monitoring failures are limited.
  • Studies suggest that shareholder dissatisfaction expressed through director elections is followed by value-enhancing choices and a reduction in agency costs.
  • Ertimur et al. (2010b) find significant voting support for proposals aimed at affecting the pay setting process (e.g., proposals requesting shareholder approval of large severance payments), lower support for proposals aimed at micromanaging pay (e.g. proposals to adopt specific levels and structure of pay) and almost no support for more  ̳radical‘ proposals arguably reflecting objectives other than shareholder value (e.g., proposals to link executive pay to social criteria or to abolish incentive pay).
  • Shareholder proposals have become an effective activism tool in prompting firms to modify their governance practices. Firms are more likely to expense stock options (Ferri and Sandino 2009), declassify boards (Guo Kruse and Noel 2008; Cai et al. 2009), and remove poison pills (Akyol and Carroll 2006; Cai et al. 2009) after receiving a shareholder proposal requesting these actions.

  • Ertimur et al. (2010c) report an implementation rate of 31% for proposals winning a majority vote and only 3% for proposals receiving between 30% and 50% of the votes cast.

  • Ertimur et al. (2010c) report a rate of implementation of 40-42% of majority vote proposals in 2003-2004 versus 16%-24% in 1997-2002.

  • There is little doubt that shareholder proposals and shareholder votes have become a more effective tool in the post-Enron period (see also Section 2.2), with boards listening to shareholder ―voice‖ more than ever before.
  • Cuñat et al. (2010) find that approved shareholder proposals yield an abnormal return of 1.3% over the ones not approved, with a more pronounced price reaction for proposals related to anti-takeover provisions.

A recent example of such activism can be found at Zoran: Shareholder Activist as Catalyst, SeekingAlpha, 1/23/2011.

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ProxyMonitor.org: Database of Shareowner Proposals

The Manhattan Institute for Policy Research’s Center for Legal Policy, a conservative, market-orientated think tank, launched a new proxy monitoring resource: ProxyMonitor.org. This searchable database of shareowner proposals at the 100 largest U.S. companies over the past three years could be a valuable resource for management and shareowner activists alike. Sort through the data by company, industry, proponent and proposal type.

The Center intends to expand the database over time. For example, in three mouse clicks you can see that there were 32 shareholder proposals on executive compensation submitted to companies in the health care industry between 2008 and 2010. Want to know what proposals John Chevedden, Ray Chevedden and the Chevedden Family Trust have placed in front of shareowners? ProxyMonitor.org allows you to quickly identify 32 and to pull them up with a few clicks. Interested in reviewing the resolutions on executive compensation? You can quickly identify 217 and read each.

I found ProxyMonitor.org such a valuable tool, I’ve added it to our links page under both Proxy Voting/Monitoring and Shareowner Action.

Hat-tip to ProxyMonitor: A New Shareholder Proposal Proxy Access Monitoring Tool, 100 F Street, 1/20/2011.

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7 Habits of Successful Shareholders

V. Ramesh, Head, Asia-Pacific, CurAlea, Bangalore provides a short guide on habits that would help shareowners successfully manage risks. His audience is mostly Indian, but his advice is universal. In very abbreviated form:

  • Learn to think like an owner
  • Get familiar with the numbers
  • Check if your company is well-governed
  • Understand your company’s key risks:
  • Read the fine print
  • Place a premium on transparency
  • Be an active shareholder

And know your rights! via The Hindu Business Line : 7 habits of successful shareholders.

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Global Research on Shareowner Activism

Corporate Governance: An International Review has been one of our “stakeholders” from the beginning. The July issue, which I just got around to reading, provides excellent articles around the general theme of research on shareholder action.

Antecedents of Shareholder Activism in Target Firms: Evidence from a Multi-Country Study, by William Q. Judge, Ajai Gaur, and Maureen I. Muller-Kahle, looked at shareholder activism targeted at firms located in three common law countries (i.e., USA, UK, and Australia) and three civil law countries (Japan, Germany, and South Korea) during the 2003–07 time period.

Findings: Activists target firms with two motives (a) to improve the financial performance, and (b) to improve the social performance of the firm. Firm size is unrelated to financial activism, but positively related to social activism; ownership concentration is negatively related to both financial and social activism; and prior profitability is negatively related to financial activism, but positively related to social activism. These relationships in the case of financial activism are generally stronger in common law legal systems, whereas those in the case of social activism are generally stronger in environments with a greater level of income inequality.

Takeaway: Boards need to understand the motivations of shareowners and open two-way lines of communication. Expect social activism to rise with growing income inequality. Continue Reading →

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Reign of the Shareholder is Over?

I just returned from ICGN 2010 (and will post on that next week). Among the thousands of e-mails I received during my week of absence, one stands out (although I haven’t gone through them all). Brendan Sheehan, the usually thoughtful Executive Editor of the Corporate Secretary, posits the “Reign of the Shareholder is Over” because 36 members of Congress wrote to BP protesting the company’s announced intention to pay a dividend.

Sheehan argues “that members of Congress are showing their true colors: they care about whatever the hottest topic of the day is. After two years of fighting for the rights of shareholders everywhere, they have turned on them almost overnight.” “So it now appears that the message from Congress is ‘Shareholder be damned.’”

First, when did a “reign” of shareowners begin? If there ever was such a phenomenon during my lifetime, I missed it. True, we are finally to the point where at about 2/3 of S&P 500 shareowners can vote against directors and if those incumbents don’t get a majority of the vote, when running unopposed, they are supposed to turn in a letter of resignation, which boards so far have more frequently refused than accepted. The vast majority of companies still operate under a plurality vote system, much like the old Soviet Union… vote for the party but if you don’t they are in anyway. Congress and the SEC are still moving forward on proxy access, so it isn’t as if Congress has all of a sudden turned against trying to rebalance, in a small way, the huge advantage given CEOs over shareowners.

Of course Congress cares about the hottest topics of the day. They are elected to represent the public. Too often, they are more concerned with taking money and advice from lobbyists. On issues as huge as the Gulf spill, they can’t duck out completely. Congress needs to at least attempt to get BP to hold on to cash needed to pay for cleanining up the oil spill and damages, although it is hard to imagine that any amount of money will undue all the damages to people and to nature.

BP also faces political pressure on their home-front, since dividends funded a good portion of British pensions. Apparently, BP may hold off on paying the dividend, placing the money in an escrow account “until the full scale of the company’s liabilities” from the spill are clear. (BP plans to defer dividend after pressure from Obama, Times of London, 6/1/10)

After purporting to show that Congress has turned against shareowners, Sheehan goes on to argue that giving more power to shareowners is a mistake because in speaking before the Financial Crisis Inquiry Commission, Warren Buffett, the largest shareowner at Moody’s, defended their lack of foresight regarding the risk of subprime loans. Since Buffett made the same mistakes and assumptions as the rest of management, “it is a slap in the face to all those who argue that greater shareholder representation on boards would have mitigated some of the problems.”

Sheehan mistakenly lumps all shareowners into a single class. Buffett is widely known for the passivity of his management style, once a company has entered the Berkshire Hathaway fold. Members of the Interfaith Center on Corporate Responsibility (ICCR) aren’t nearly as passive as Buffett. As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. According to ICCR Executive Director Laura Berry:

When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy. For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments.

Of course, it would be nice if proxy access empowered long-term responsible shareonwers like the members of the ICCR. Unfortunately, even a best case scenario is likely to leave ICCR members mostly out of the loop because of the high thresholds that will be required to nominate a small portion of board members.

The government has a role to play in regulating companies and in ensuring corporations are operated more democratically. Certainly, they capture of regulators by businesses doesn’t help avert disasters such as the Gulf spill. Even before Citizen United, active shareowners like ICCR sought to limit the political influence of not just the companies whose stock they own, but all companies. Now, that task is even more urgent.

The reign of shareowners has yet to begin. If it ever does come about, let’s hope activists like ICCR are empowered, rather than pacifists like Buffett. Buffett may make lots of money, but don’t count on shareowners like him to foresee or forestall housing bubbles, oil spills or global climate change. Of course, according to organizations like the Business Roundtable, governance reforms, like even a mild for of proxy access, will only empower “special interests” that will “hurt the U.S. economy.”

It may take a little hurt in the short-run to address long-term problems. I hope Brendan Sheehan and the corporate governance professionals he works for aren’t too short-sighted.

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Common Law Power Struggle

The Rising Tension between Shareholder and Director Power in the Common Law World by Jennifer G. Hill, available at SSRN, explores the rising tension between shareholder and director power in the common law world. First the article analyzes key arguments in the shareholder empowerment debate, and current US reform proposals to grant shareholders stronger rights, from a comparative corporate law perspective, examining how traditional US legal rules diverge from other common law jurisdictions. Secondly, the article discusses power shifts in the opposite direction – namely toward the board – in some parts of the common law world.

The article shows that US shareholders have traditionally possessed significantly fewer participatory rights than their counterparts in other common law jurisdictions, and examines particular legal rules that contribute to this divergence. Indeed, the current reform proposals to enhance shareholder rights, despite being the subject of great controversy in the US, fall far short of rights already held by shareholders in other common law jurisdictions, such as the UK and Australia.

The article also identifies an important tension between legal rules designed to enhance shareholder power, and commercial practices designed to subvert it. It shows how strategic commercial responses to regulation can affect the operation of legal rules. The existence of commercial pushback of this kind suggests that, even if US shareholder powers are significantly strengthened, that will by no means be the end of the story.

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Apache v Chevedden: More Comments

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

    Dear Mr. McRitchie

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

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

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

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

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

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


    Allen Nelson

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

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

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    How to Govern Corporations So They Serve the Public Good: Wrong Title, Right Book

    William Sun’s excellent book is less on how to govern corporations to serve the public good than it is an analysis of corporate governance from the perspective of ontology, epistemology, and sociology of knowledge. Sun does an absolutely fascinating job of tracing the development of two pre-Socratic cosmologies that continue to shape modern thought. Heraclitus emphasized the primacy of a fluxing, changeable and emergent or processual world. Parmenides insisted on the permanent and unchangeable nature of reality… a homeostatic and entitative conception of reality.

    Sun favors a processual perspective, since it allows us to understand corporate governance as is is socially constructed. By stripping away the semiotic mask, he reveals how much of what is known in shareowner and stakeholder models of corporate governance is based on political power.

    Reading his book was a personal joy to me, since my mind was transported back to graduate school days as a student of Peter Berger during his all too brief tenure at Boston College. I found Berger and Luchmann’s The Social Construction of Reality a liberating work, since it implied that reality could be reconstructed to diminish coercion and domination.

    However, Berger and Luchmann excluded from their treatise on the sociology of knowledge epistemological problems which they felt “belong” to the discipline of philosophy. “The sociology of knowledge must first of all concern itself with what people ‘know’ as ‘reality’ in their everyday, non- or pre-theoretical lives…” In other words, they didn’t seek to explore the possibility of obtaining a better approximation of the “truth,” but rather a better explanation as to how commonsense knowledge is externalized, internalized and institutionalized.

    The failure of Berger and Luchmann to weigh historical factors and their abandonment of ultimate concerns left no grounding or basis for analyzing coercion, long-term trends or future possibilities. Instead, through his body of work we are largely provided a description of how social reality constructed in the past is maintained in the present. The resulting static relativism limited Berger’s emancipatory potential, since a critical theory must evaluate whether the naive realism of everyday life is a necessity due to biosocial needs or a mere justification of false consciousness, necessary to maintain the status quo.

    Berger lays blame for society’s ills largely on the state, which he sees as “devoid of personal meaning.”

    One of his most liberating works, To Empower People, stresses the need for increasing the individual’s political efficacy through the mediating structures of neighborhood, family, church and voluntary associations. The only institutions not viewed by Berger as political are businesses. Failure to include that sphere may serve Berger from the “trap of politicizing all of life” but it largely dooms his efforts to empower people to failure.

    William Sun’s offering suffers no such limitations. While the book speaks only indirectly to how corporations can be governed to better “serve the public good,” implicit is that such positive changes will follow once people realize how the corporate governance we know as “real” was socially constructed and once we employ a processual framework of time, space and context, leading to reflexive dialogue.

    Sun is under no delusions. He writes, “living in a processual reality, we cannot ‘mirror’ corporate governance practices accurately, and cannot construct corporate governance ideally.” “To improve corporate governance we should not force-fit corporate reality into the established abstract templates… we need to turn away from the current dichotomized, entative and static way of theorising… We need to dive into the underlying living experiences and processes that comprise corporate practices to understand the internal impetuses and environmental dynamics that drive the processes and changes of corporate reality.”

    After leading the reader through an exceptional deconstruction of Cartesian dualism, Locke’s empiricism, Kant’s objective idealism, the fallacy of representationalism, the realities of shareholder and stakeholder perspectives, the myth of market and economic efficiency, and much more, Sun focuses on the value of a processual view of knowledge, borrowing from a bevy of resources, including Richard Rorty.

    Rorty aimed for a “philosophy without mirrors,” believing that what we need “is the ability to think about science in such a way that its being a ‘value-based enterprise’ occasions no surprise.

    All that hinders us from doing so is the ingrained notion that ‘values’ are ‘inner’ whereas ‘facts’ are ‘outer.'” In his seminal work, Philosophy and the Mirror of Nature, Rorty wrote that “Hermeneutics is not ‘another way of knowing’ – ‘understanding’ as opposed to (predictive) ‘explanation.’ It is better seen as another way of coping.”

    If we see knowing not as having an essence, to be described by scientists or philosophers, but rather as a right, by current standards, to believe, then we are well on the way to seeing conversation and the ultimate context within which knowledge is to be understood. Out focus shifts from the relation between human beings and the objects of their inquiry to the relation between alternative standards of justification, and from there to the actual changes in those standards which make up intellectual history. (p. 389)

    Likewise, Sun has a similar aim for what he terms the processual approach, which is “not a denial of substance; rather, it views substance as merely stabilized clusters or patterns of variable processes.” “Processism tends to be ontologically realistic; yet, it is not a ‘being’ realism, but a ‘becoming’ realism.” Those who rail against a “one-size fits all” approach to corporate governance will find a strong advocate for structures that contextually emerge, rather than are pre-designed.

    The shareowner model may be waning, because as Sun notes, physical assets and financial resources used to be more important than human resources and social capital. In the stakeholder perspective public corporations must be aware of their social obligations, such as fairness, social justice and the protection of employees. Human-capital intensive firms are more likely to move in the direction of the stakeholder model. Under a processual approach, political institutions, indeed all institutions, cannot take human nature as a given but must accept some responsibility for their involvement in its creation.

    “Unlike the current theoretical models that rest their solutions on scientific measures and universal recipes, we suggest the explicit change of corporate governance to be initiated and triggered in the sense of collective construction and discourse formation.” “The key factor in context-making is to find or create a more powerful ‘attractor’ to compete with the dominant ‘attractor’ and to shift the old one to the new one to create a new context.” “Corporate governance and control must be realised through our collective representations – representations of our will, desire and sense-making, representation of a specific mode of thought and social convention, and the representation of social negotiation, selection endorsement and rationalism… in an ideal construction process, corporate governance is not seen as universally good, but as partial, selective and interested.”

    While Sun appears relatively certain that a processual approach will bring new insights and open dialogue, he is less certain about the criteria for judging governance, “all of which depend on the social construction of ‘faith.'” Ultimately, he aims for “balanced and pluralistic thinking.”

    “Although the damage caused by corporate violations is far more serious than the individually perpetrated crime, it is regarded by the public as less of a crime.” To get people to understand that requires a change in conciousness. Corporate governance is best understood in the context of capitalism, where Sun finds three dilemmas:

    1. The conflict between self-interest and others’ interest, or private interest and public interest. Capitalism presupposes the sacredness and inviolability of private property rights as its first principle. Other interests must be considered within that context.
    2. The conflict between the economic interest and the social interest. All other possible principles and values such as justice, equity, humanity, and religion are subsumed to protecting capitalist interests. This rationality leads to its own contradiction and such notions as “the only responsibility of the corporation is to make profit.”
    3. The conflict between shareowner and manager interests. How capitalist interests are protected from management’s manipulation is a serious concern of politicians, academics and corporate owners. Agency theory, will it hold back the coming pitchforks?

    Perhaps Sun will shake up the world of corporate governance like Werner Karl Heisenberg shook up physics. But, as Robert Chia notes in the book’s introduction, “despite the advent of quantum mechanics the assumption regarding the primacy of substance and entities over patterns and relationships remains pervasive and overwhelming.” Our conceptions of reality take a long time to change. Unfortunately, time for central issues like corporate governance may be running out, given the moral and environmental challenges we face.

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    Does Corporate Governance Matter to Economic Development?

    The editors of Corporate Governance and Development: Reform, Financial Systems and Legal Frameworks (The Crc Series on Competition, Regulation and Development), Thankom Gopinath Arun and John Turner answer with a resounding yes. As they indicate in their introduction,

    If finance matters for economic development, then corporate governance must also affect economic development for at least two reasons. First, corporate governance affects how and at what cost firms finance their real investments… Secondly, the quality and nature of corporate governance can affect the structure of the financial system.

    If shareowners are poorly protected, finance through bank loans will be more expensive.

    This collection of essays provides a broad outline of recent scholarship around the world. Chisari and Ferro suggest that unintended consequences of reforms in Argentina could impinge on consumers. Based on experience in Botswana, Gustavson, Kimani and Ouma also argue reforms originating in Anglo-American models must tailored better when imported to other cultures. Goyer and Rocio also find that corporate governance is mediated by the larger institutional framework in their study of electricity sectors in Britain and Spain.

    Other authors focus on corporate governance relative to the banking sector, finding a correlation between debt and poor performance, the need for prudent regulatory reforms for divestiture of government ownership and good governance practices, while two chapters on Bangladesh also argue for strong legal and regulatory institutions to protect minority shareholders, creditors and depositors.

    Three additional chapters focus on legal frameworks in Ireland, UK and the EU, as well as more broadly. It is that broader focus of developing a “shareholder protection index,” which I found most interesting. Building on prior work by La Porta and others, Priya P. Lele and Mathias M. Siems construct a much more elaborate index of shareowner rights based on a “leximetric” (quantative measurement of law), rather than econometric approach.

    They endeavored to include the variables which best reflect shareowner protections developed in the UK, US, German, France and India over the last 35 years. Aggregate scales for each of these countries trend upward. Shareowner protections have increase, especially in the last five years. On a number of scales, the US comes out at or near the bottom but that doesn’t mean the authors recommend redirecting capital from the US to France, for example. Other aspects, such as financial disclosure, the rule of law and socio-economic attitudes have not bee considered. Neither have factors such as blockholder control and other variables. They didn’t examine whether a better score leads to better governance or economic development but will be examining these questions in the future.

    Overall, the volume offers a good cross-section of essays reflecting current scholarship in field of growing importance.

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    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.

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