Tag Archives | shareowners

Science of Stock Manipulation

Unless current shareowners suffer a penalty for having CEOs who engage in earnings manipulation and insider trading they are likely to encourage such unethical and damaging behavior, finds a study by Ramy Elitzur, since choosing less ethical managers may be in the best interests of current shareholders, but not future ones.

Many accountants believed that markets are efficient and as such, Continue Reading →

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Boards of the Future: A Conversation With Richard W. Leblanc

Professor Richard W. Leblanc recently posted an article to his blog titled The Boardroom of the Future: Changes that will reshape corporate governance that merits wide exposure. Leblanc is a tenured, award-winning teacher and researcher, consultant, lawyer and specialist on boards of directors… a recipient of Canada’s Top 40 Under 40™ award. His research expertise is in corporate governance, specifically in the effectiveness of boards of directors.

At first read, I loved the post… but then got thinking the devil is in the details. My questions and comments are in italics. Professor Leblanc is a provocateur, setting us thinking and perhaps taking necessary action now. A day later, here is an updated version with Leblanc’s responses below my questions and comments.

Democratization of governance

Your shareholders will nominate and elect your directors by electronic voting Continue Reading →

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Proxy Access for the 99% – Open for USPX Member Comment

The time has come for shareowners to be allowed to include their own nominees for corporate boards in the proxy materials their corporations send out every year—so-called “ballot” or “proxy access.”

The current system—that only allows shareowners to vote for candidates nominated by the current board—is absurd. The SEC has finally reaffirmed shareowners’ right to submit proposals to corporations that, if adopted, would allow proxy access for those corporations’ shareowners.

A number of such proposals will be submitted for votes at 2012 annual Continue Reading →

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GMI & Si2 Offer Combined ESG Proxy Research

GMI and Si2 announced a strategic partnership to provide seamless
subscription access, account management and special pricing to the firms’ ESG Board Briefing Research, Shareholder Proposal Analysis, and Executive Pay Scorecards. The combination of GMI’s compensation analysis with Si2’s expert insights into key environmental and social issues and proposal analysis may create a vital new resource for Continue Reading →

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Current Monopoly Costs Shareowners Millions

The Securities Transfer Association (STA) released a study, 2011 Transfer Agent Survey to Estimate the Costs of a Market-Based Proxy Distribution Systemthat evaluates the costs to public companies of beneficial owner proxy processing services over providing those same services to registered shareowners.

The study concluded that public companies could save more than 42% if proxy services were subject to free market competition instead using a Continue Reading →

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Shareowners Too Busy But Hamermesh Offers Wrong Solutions

Lawrence A. Hamermesh, Widener University School of Law, Wilmington, Delaware gave the Keynote Speech to the Practical Law Institute’s Ninth Annual Directors’ Institute on Corporate Governance on September 7, 2011. In Too Busy to Think, Spread Too Thin to Matter: Making a Rational Stockholder Voting System an Agenda Item for Management/Investor Dialogue, he runs over some interesting territory and concludes we need to limit the number of shareowner meetings and votes to make them more meaningful.

Prof. Lawrence A. Hamermesh

One option is to “require a stockholder vote on the election of directors once every three years, unless owners of more than, say, 3% of the voting power demand a meeting in the meantime.” Another would be to “dispense with annual meetings” but substitute “some enhanced stockholder right to ballot access and to convene stockholder meetings.”

I agree there are problems but these “solutions,” especially the first, could lead to even less accountability than we have now. Hamermesh reminds his audience of Chancellor William T. Allen’s 1988 opinion in Continue Reading →

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Audio Friday: BBC Discussion on Corporate Governance

Peter Day asks what’s wrong with corporate governance. Business leaders make a lot of fuss about corporate governance, but the scandals keep on coming. In this programme, Peter Day hears from some leading authorities who makes several observations concerning nonexecutive directors, ownerless corporations, and the need for shareowners to sit on the nominations committees, a stewardship proposal for shareowners, and ratcheting CEO pay even when a company isn’t paying the cost of its capital. The program, entitled Bad Company, hit a number of topics quite squarely.  Well worth a listen.

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Support Rulemaking Petition on Corporate Political Spending

A group of ten very prominent corporate and securities law experts submitted a formal rulemaking petition to the SEC last week urging the Commission to develop rules requiring public companies to disclose the use of corporate resources for political activities to shareowners. Please take a few minutes to join with me writing an e-mail to the SEC in support of their petition and the important issue seeks to address.

The petition was submitted by the Committee on Disclosure of Corporate Political Spending, co-chaired by Lucian A. Bebchuk, Professor of Law, Economics, and Finance at Harvard Law School and Robert J. Jackson, Jr., Associate Professor of Law at Columbia Law School. Bebchuk and Jackson are co-authors of Corporate Political Spending: Who Decides?, and prior posts about the subject of Continue Reading →

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Will Netflix Listen to Shareowners?

eBay moved to eliminate supermajority requirements in its bylaws at its first regularly scheduled meeting after shareowners approved a ballot measure by John Chevedden. So far, no real word from Netflix on whether or not they will heed the will of shareowners.

It is great to see this issue covered by Bocco Pendola in Seeking Alpha.

This push to move from a supermajority to simple majority vote came after shareholder activists, led by John Chevedden, got the proposal on the ballot at eBay’s recent annual meeting of shareholders. If you follow the link to the official SEC filing of eBay’s proxy statement, you’ll see that the company opposed the proposal. eBay shareholders, however, voted in favor of it, prompting the eBay board to adopt the proposal just two months after it held the meeting.

This move by eBay puts considerable pressure on Netflix (NFLX)… Netflix notes it “will consider” ratifying the proposal ” in due course.” Like an online auction, the clock is ticking.

via Will Netflix Follow eBay’s Lead in Heeding Its Shareholders? – Seeking Alpha, June 29, 2011.

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Ouch! Don't Sue Me

Bob Verdun, the former publisher of the Elmira Independent has been ordered to pay $650,000 as a result of a defamation suit.

In 2004, Verdun alleged Robert Astley’s involvement with the Clarica Life Insurance Company and its role in the development of a controversial recreation complex made him unfit for the board of BMO Financial Services.

After denouncing Astley at shareholders’ meetings and in emails to BMO executives — among other places — things turned about as bad as they could for Verdun, the recipient of a prestigious Michener Award for meritorious public service journalism in 1990.

The jury found Verdun acted with malice.

via Bank director wins $650,000 in defamation suit against shareholder activist – Toronto Star, 5/31/2011.

Ouch! To borrow from Abraham Lincoln, concerning whatever statements I make on the CorpGov.net blog, I now adopt the following policy:

With malice toward none, with charity for all, let us strive to finish the work we are in, … to do all which may achieve and cherish a just and lasting form of corporate governance.

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Directors Should Thank Dodd-Frank

Eleanor Bloxham, a contributor to Fortune magazine, tells readers Why corporate directors should thank Dodd and Frank. With investors focused on “say-on-pay,” ISS recommendations against directors are down substantially.

Ture, but this isn’t likely to last. Most institutional investors seem to be taking a year off from voting against compensation committee members, giving them a free pass this year. Personally, I haven’t joined them. In fact, this is the first year I’ve been conscientiously voting against pay enabling compensation committee members. Expect an increase in such votes by institutional investors next year if companies ignore “say-on-pay” votes this year.

Directors should thank Dodd-Frank, not for temporarily distracting investors but for bringing better focus to their jobs… requiring that compensation committees be composed solely of independent directors and reducing conflicts of interest in compensation consultants, among many other reforms.

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Bainbridge Draws False Analogy Between Speech & Access

Stephen Bainbridge, in an uncharacteristically sloppy argument, rails against Lucian Bebchuk and his “acolyte” Robert Jackson for continuing to spread the claim that shareholders ought to be actively involved in an ever-expanding array of corporate decisions, by giving shareholders “a greater role in corporate political speech decisions.”

I can understand that Professor Bainbridge resents interference by shareowners, since he believes boards should have exclusive domain over such activities.  Fair enough. However, he then argues the SEC’s change in position regarding proposals influencing Continue Reading →

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Five Game Changers

CTPartners (AMEX: CTP), a leading global retained executive search firm, reported five major forces impacting corporate Boards, which include:

  1. The power shift from the Board to the shareholder. If Boards don’t take the lead on big issues like CEO compensation, Board structure, director competence and succession planning, shareholders will.
  2. Social media activism. Boards need to engage with new technologies or become their victims.
  3. The 40-something board. The average age of directors, 62 years, will shift downward because Boards need fresh ideas and faster-paced, tech-savvy directors to energize the boardroom.
  4. The impact of culture – Corporate and Board. Boards have to identify cultural barriers – entrenched behavioral patterns and deeply-held beliefs that are bogging companies down and inhibiting change – because corporate culture can sink or save a company.
  5. The power of talent and the rise of the CHRO on Boards. HR execs are upping their game, with many companies hiring Chief Human Resources Officers with high-profile business experience and skills.

From the Activist Shareholder to the 40-Something Board, Second Annual Board of Directors Human Capital Institute Names Five Big Changes Impacting Directors | Press Releases- TradersHuddle.com.

Next they’ll recognize that “human capital,” is based in the skills and knowledge not only of corporate managers but of boards, employees and shareowners alike.

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Texas Secession Led by Apache, KBR and Kinetic Concepts

The American Civil War began on April 12, 1861 or 150 years ago today. Texas companies now appear to believe they are again outside the United States with respect to federal laws regarding proxies, based on the flawed decisions of Judge Lee H. Rosenthal. As reported at theCorporateCounsel.net on April 5th:

KBR filed a lawsuit in the Federal District Court for the Southern District of Texas seeking a declaratory judgment that would allow the company to exclude a shareholder proposal submitted by John Chevedden due to his alleged lack of eligibility. Yesterday, the court ruled in KBR’s favor, upholding the Apache decision from last year (which had been filed in the exact same court). We have posted the court’s memorandum and order in our “Shareholder Proposals” Practice Area.

Like Apache, KBR filed a lawsuit rather than attempt to exclude the proposal through the normal SEC channels (and thus challenging the Hain Celestial position of the Staff regarding the use of introductory letters from brokers as evidence of ownership under Rule 14a-8(b)).

Ted Allen, reporting for RiskMetrics (ISS), went into more detail, which I abbreviate here (Federal Judge Allows KBR to Omit a Shareholder Proposal, 4/5/2011):

Following the litigation strategy used by oil company Apache in 2010, KBR bypassed the SEC’s no-action process that is used by hundreds of companies each proxy season and filed a lawsuit in federal court in Houston, where the engineering company is based.

While the court’s ruling is not legally binding outside Texas, this case may inspire other companies to bypass the no-action process and file their own lawsuits. Chevedden has been a magnet for omission requests in recent years, in part because he and his network of retail investors typically file more than a hundred proposals each season on popular governance topics like declassification and the repeal of supermajority voting rules. This year, more than a dozen companies have raised a variety of eligibility challenges against Chevedden network proposals, but few have obained no-action relief from the SEC.

In its lawsuit, KBR argued that Chevedden’s ownership letter from Ram Trust Services (RTS), a Maine-chartered non-depositary trust company, failed to satisfy the requirements of SEC Rule 14a-8(b)(2), which requires investors to provide a statement  from a “record” holder, which can be an “introducing broker” or a bank, according to the SEC staff. KBR argued that RTS is not a record holder, because it is an investment adviser and is not a participant in the Depository Trust Co. (DTC), a nationwide clearing agency that holds most of the shares that are owned by U.S. retail investors.

The KBR lawsuit was heard by U.S. District Judge Lee H. Rosenthal, the same judge who ruled for Apache in a relatively narrow decision in March 2010. In the Apache case, Rosenthal said a similar RTS letter was not sufficient to comply with Rule 14a-8(b)(2), but the judge did not address a second ownership letter from Northern Trust because it was submitted too late.

Since the Apache decision, the staff of SEC’s Corporation Finance Division has rejected similar arguments raised by Devon Energy, Prudential Financial, and Union Pacific to omit proposals filed by Chevedden and affiliated investors.

Notwithstanding those staff decisions, Judge Rosenthal concluded that the Apache decision was still good law, in part because of the eligibility requirements the SEC adopted in August for its proxy access rule, Rule 14a-11. In that rule, the SEC said an investor whose broker is not a DTC participant must “obtain and submit a separate written statement from the clearing agency participant through which the securities of the nominating shareholder . . . are held, that (i) identifies the broker or bank for whom the clearing agency participant holds the securities, and (ii) states that the account of such broker or bank has held, as of the date of the written statement . . .”

I contacted Jay Robert Brown, Professor, University of Denver Sturm College of Law, who blogs at theRacetotheBottom. Here’s his quick response. (I hope he takes up the subject further.):

The reigning principles of administrative law is that courts are obligated to defer to agency interprestations of their own rules.  In this case, the staff of the SEC has made its position clear and the court should have followed it.  Had it been litigated with someone having the necessary resources, the outcome likely would have been different.  Some of the analysis also is wrong.  The analysis that the SEC simply defers to courts in this area is not supported by the citations in the case.  All of this means that its an unfortunate result for John Chevedden but not likely to be followed by other courts.

It may not be followed by other courts but there are a lot of companies in Rosenthal’s jurisdiction. Apache, for example, issued its definitive proxy on April 7 without including a proposal from Chevedden. Although they had warned the SEC earlier this year of their intention, the SEC did not issue a no-action letter and Apache did not go to court. They simply waited for the KBR decision as a go-ahead.

Now I learn that Kinetic Concepts, also based in Texas, informed the SEC on April 5 that despite the SEC’s March 21 denial of their no-action request, Kinetic will also move forward without a proposal from Chevedden, based on the KBR decision.

However, even a quick glance at page 6 of her decision (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order) reveals the judge didn’t base it on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she bases her decision on evidence of ownership requirements adopted in 14a-11, which are provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, since the SEC put a stay on the rules pending a court decision!

Now Apache and Kinetic Concepts no longer feel compelled to even go to court. They are simply citing the flawed decision, which goes against several SEC failed no-action requests, assuming that no one will bother to enforce the law.

Chevedden files a lot of resolutions on core corporate governance issues and they are frequently supported by a majority of shareowners. It is no wonder that those who oppose more democratic corporate governance are so ready to attack. However, this latest court decision stretches the bounds of credulity. With last week’s budget agreement behind us, maybe the SEC will finally wake up to this usurpation of power and will enforce the law.

When the SEC issues a no-action letter, it is merely stating that it will not bring an enforcement action against the company.  Since the SEC has not issued no-action letters to either Apache or Kenetic the SEC is free to bring an enforcement action against them but such action would, of course, be a matter of administrative discretion.

I recommend readers help raise the profile of this failure to act by sending e-mails to the Office of Chief Counsel at [email protected] and the Chairman at [email protected]. Also, fill out the form at https://tts.sec.gov/oiea/QuestionsAndComments.html since this will go to the Division of Enforcement, which would be the office actually taking action, if anyone does at the SEC.

It could be something as simple as the following:

I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from John Chevedden and further they will do so without the SEC issuing letters indicating it would take no action on such an omission. In fact, the SEC rejected such a request from Kinetic Concepts on March 21. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact, the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp. and Kinetic Concepts.

I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.

Lewis Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC vTransamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”

It took until 1988 for a shareowner proposal by Richard Foley to finally get a majority vote. Rights, which have taken many decades to win could be gone very quickly if we simply do nothing to defend them. The SEC’s rules are not self-enforcing but depend on shareowner vigilance. “All that is necessary for evil to triumph is for good men to do nothing.” While we aren’t sure who said it first, Edmund Burke or Leo Tolstoy, we all know it to be true.

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We Must All Be Activist Shareowners

Shareholders – mainly large institutions running pension funds – are supposed to invest for the long-term on behalf of their ultimate owners: you and me.

They are also charged with channelling funds into businesses that will grow, boost the UK economy and so generate a decent retirement income for tomorrow’s pensioners.

The reality is they do none of those things. As the well-known US fund manager Bill Gross said this week, no fewer than four out of five active money managers underperform the market, despite the large fees they charge for their supposed expertise.

The core of the problem is that big institutional investors and company managements are co-worshippers at the discredited shrine of shareholder value. This notion, that a company’s duty is to pander to the short-term needs of large shareholders, led to a headlong rush to maximise profit at any price.

It came at the expense of employees, millions of whom lost their jobs or had their wages curbed in cost-cutting drives, and of consumers. Taken far enough, it is a self-defeating concept as it drives down people’s spending power and depresses demand for products. (read more at SUNDERLAND ON SATURDAY: Why we must all be activist shareholders | Mail Online, 2/4/2011.

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Fix AGMs: 100 Words or Less

A message from Jim Kristie, editor and associate publisher of Directors & Boards:

Annual meetings can be a frustrating and often futile exercise — in meeting statutory requirements, yes, but not much else as a worthy vehicle for demonstrating corporate leadership and enhancing shareholder relations.

Thus, the cover story for the first Directors & Boards issue of 2011 will be: “What’s Wrong with the Annual Meeting . . . and How to Fix It.” It comes out later this month.

The seed of this idea was planted this past summer when I was a peripheral participant in a study group looking at “Electronic Participation in Shareholder Meetings” — i.e., the pros and cons of virtual annual meetings and the practices necessary to satisfy the needs of all parties. This group was organized by a close colleague, Gary Lutin, through The Shareholder Forum initiative that he chairs.

The virtual annual meeting will be a dimension of the discussion, and possibly factor in as a key fix. And there will be other fixes that we should focus on for recrafting the annual meeting for a coming governance era of heightened transparency and disclosure.

Perhaps you participated in the survey that we sent last month to our e-Briefing audience. The results of that survey will be presented in this cover story.

Whether you participated in the survey or not, I welcome you to hit me with your best idea — in 100 words or less — for what could and should be done to bring the annual meeting of shareholders into the 21st century. Email me at [email protected].

Depending on editorial space, I will group the responses into a “The e-Briefing Readers Speak” sidebar piece of the cover story. Do it quickly, because the article is being wrapped up this first week of February.

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Shareowners Speak Louder in 2011

Passive or apathetic investors, take vote [note] : Now your votes  have actually begun to mean something. More so than ever, shareholders can truly feel like they’re part owners of public companies.

That makes now the perfect time for a push for better corporate governance policies. As it turns out, large institutional shareholders are striking while the iron’s hot this year. (In 2011, Shareholders Speak Louder Than Ever, Fool.com, 1/26/2011). See also: Don’t Toss that Proxy.

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KBR Channels Apache: Chevedden Sued Again

It’s a case of legal déjà vu for John Chevedden. The retired aerospace worker and shareholder activist is once again facing a legal challenge in his attempt to submit a proposal to shareholders of a public company. This time, it’s KBR.

Last year, Chevedden was sued by Apache Corp., which rejected his shareholder proposal because it said it couldn’t confirm he owned the company’s stock. Chevedden is an annual meeting gadfly, and companies view him with disdain. He owns small stakes in a host of companies, and he’s a prolific filer of shareholder proposals.

(KBR channels Apache, sues activist investor | Loren Steffy | Chron.com – Houston Chronicle, 1/20/2011.) Steffy goes on to note that Chevedden’s “proposals are reasonable.” “The disturbing thing about the legal bullying being employed by KBR and Apache is that it could be applied to almost any individual shareholder.” (See notification to SEC.)

Steffy doesn’t mention it but Apache has also challenged Chevedden again. “Apache Corp. has renewed its battle with shareholder activist John Chevedden over the proof of ownership required to file shareholder proposals.” (Apache Plans to Exclude a Chevedden Proposal Again, RiskMetrics Group, 1/7/2011) Apache is attempting to again bypass the SEC’s no-action request process.

If KBR and Apache succeed, all shareowners will lose because this tactic of intimidation will be copied over and over again. How many shareowners will be willing to risk an expensive lawsuit with the largest corporations in America by simply filing a shareowner proposal? Who will defend them or Chevedden?

I’m hoping the United States Proxy Exchange will again take up Chevedden’s cause but these efforts take time and money. If you think shareowner rights are a cause worth defending, please consider joining USPX. For $3.95 a month you’ll help them defend the rights of all shareowners. (See also,
Rejected No-Action Request Clarifies Required Ownership Evidence and Apache v Chevedden: Postmortem.

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Non-Shareowner Standing to Sue in Corporate Elections

In Haah v. Kim, 2009 DJDAR 9071 (June 22, 2009), two individuals who entered into agreements to acquire shares were able to bring action seeking to invalidate an election of directors under California Corporations Code Section Section 709. The Court of Appeal took a broad interpretation of the term “shareholders.”

California’s statute applies to foreign corporations when the election or appointment of a director occurs in California. (Court of Appeal Holds that a Non-Shareholder has Standing to Challenge the Election of Corporate Directors, Allen Matkins Leck Gamble Mallory & Natsis LLP)

Although some may consider this a stretch, it seems reasonable, since the plaintiffs should be able to show they suffered injury in fact based on their contracts.

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Turned Down at WFMI Again: Still, There is Progress

John Chevedden helped me draft and defend a resolution at Whole Foods Markets that requests the Board to adopt a policy establishing an engagement process with proponents of shareowner proposals supported by a majority of the votes cast, excluding abstentions and broker non-votes, at any annual meeting. It seemed like a rather straight-forward and simple request to me.

If shareowners vote in favor of a proposal and the board doesn’t implement it, such as the simple majority-voting proposal which won our 57%-support at our 2009 annual meeting, Whole Foods would set up an independent board committee, schedule a telephone meeting with the proposal proponent, and would present the proposal with the committee’s recommendation to the full Board.

Well, I guess this type of proposal is a little new or maybe I’m viewed as a bomb-throwing radical by some for proposing that a company at least discuss a shareowner proposal with the proponent before deciding not to implement it after it is passed by a majority of votes cast. The proposal only got 39% of the vote.

Another simple-majority voting proposal this year from John Chevedden won 58% this year. Will they ignore it again?

The proposal for CEO succession planning from the Central Laborers’ Pension Fund fared worse, only got 30% of the vote. Even living on a diet of whole foods, Mackey won’t be forever. Isn’t it good to plan ahead?

In addition to passing a second simple-majority proposal, shareowners also approved a resolution from Amalgamated Bank’s LongView Funds would roll back a bylaw change that Whole Foods directors put in place a few months after the SEC closed an investigation into the online chat activities of  John Mackey in April 2008. The proposal would permit sharewners to remove a director either “with or without cause.”

When they lowered their standards to with cause only, the board redefined “cause” narrowly as covering only a criminal indictment or a judicial finding that a director had breached his or her fiduciary duties to the Company or was not capable of performing a director’s responsibility.

I’m glad to see this proposal won 53% support. “We are pleased that investors have supported this call for the Board to reinstate fundamental shareholder rights,” said Scott Zdrazil, Director of Corporate Governance for Amalgamated Bank. “We encourage the Board of Whole Foods to be responsive to shareholders and to take the necessary steps to implement the proposal.”

All the proposals were reasonable and deserve full consideration by the board.

When Mackey was pretending to be someone else in the Yahoo! chat room, he said shareowner proposals turn annual meetings into “a circus.” Yet, I understand, it was Whole Foods employees who applauded management and heckled at least one shareowner for speaking during the Q&A portion of the meeting. Did Canadians suddenly become less polite after the Olympics (the meeting was held in Vancouver) or were these imported Americans, specially trained by Mackey in how to misbehave?

In part, I’m teasing but I also believe shareowners should be treated with respect. Discussing the issues should be a major portion of any annual meeting, especially one like WFMI, which has chosen to ignore the expressed will of the owners.

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Apache vs. Chevedden Takes Dramatic Turn

The drama of a retail investor fending off a sweeping lawsuit by a $33 billion corporation took a dramatic turn today, as the United States Proxy Exchange (USPX) intervened, filing an amicus curiae (friend of the court) brief in Federal District Court in Houston.

John Chevedden, a retail investor and champion of shareowner rights, is known for filing insightful shareowner proposals, which frequently win majority votes at shareowner meetings. Over his career, he has filed more than a thousand. Corporations, viewing his populist form of corporate governance as an irritant, have tried to shut him down before. None, however, has done so as aggressively as Apache Corp, which filed suit against Chevedden earlier this year.

The lawsuit is in response to a shareowner proposal Chevedden filed to be voted on at this year’s Apache Corp. annual meeting. Apache is seeking a decision in federal court that they may ignore the proposal, and they are asking the court to force Chevedden to cover their legal expenses. (Apache’s Brief on the Merits)

Largely frivolous, the suit centers on a poorly written SEC rule about how to document share ownership for the purpose of submitting a proposal. Chevedden followed standard procedure accepted by shareholders and corporations over many years. He forwarded to Apache a letter from his broker confirming he had held at least $2,000 of Apache stock for a year. Apache did not accept that. Technically, SEC Rule 14a-8 says that a beneficial shareowner can prove ownership by submitting “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.”

Apache’s lawyers have advanced the position—contrary to standard practice followed with shareowner proposals for years—that a letter from a shareowner’s broker is not acceptable evidence of share ownership. They define the term “record holder” so narrowly that it would be largely impossible for proponents of shareowner resolutions—even large institutional investors—to ever actually “prove” they own shares. This leads quickly into murky questions of what it actually means to “own” shares and how one might go about proving such ownership.

The questions aren’t academic. An adverse ruling in the case could shut down most shareowners’ ability to file proposals. With Chevedden representing himself against a high-priced Houston law firm, an adverse ruling was highly likely.

That outcome became more remote today with the filing of the USPX amicus curiae brief. The brief is a tour de force, exploring all aspects of the at-issue SEC rule—its history, practical implications, accepted interpretation and treatment in recent SEC staff legal bulletins and no-action letters.

James McRitchie, who publishes the CorpGov.net blog, helped write the brief. Glyn A. Holton, executive director of the USPX, was the lead author. McRitchie commented today

Wow!  I’m so proud to be a signatory to this brief … I feel almost like it is part of the Declaration of Independence or something. A $33 billion company… able to hire the most expensive attorneys in the world and our side with no legal counsel …

The clock is ticking. Apache Corp has to send their proxy materials to be printed soon, and the lawsuit must determine if Chevedden’s proposal will be included. Apache’s lawyers will be scrambling this weekend to prepare a response to the USPX brief by Monday. Trying to continue with a frivolous lawsuit in the face of a compelling brief from the USPX, it is not clear what they can accomplish. This may turn into one of those rare events where a small retail investor turns the tables on a large corporation and their expensive lawyers … and actually wins. We will find out in a few days. For further information, please contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected].

OK, so maybe the quote from me was a little over the top, but I really do feel that corporations, run largely by management – not by regular employees or shareowners, have too much control… especially after Citizens United. Let’s hope the judge has enough sense to recognize this case as a SLAPP suit aimed at intimidating shareowners. I’m not ready to roll over and play dead!

In contrast to Apache, whose CEO, G. Steven Farris, argued to the SEC that non-binding resolutions should be banned outright, when AmerisourceBergen received a 2010 proposal from Ken Steiner on the same topic as the one Chevedden proposed at Apache (eliminating all supermajority vote requirements), they put the proposal on the ballot as a binding company proposal and it was approved by shareowners on March 4, 2010. (AmerisourceBergen Re-Elects Three Board Members and Reaffirms Fiscal 2010 Expectations at Annual Meeting of Stockholders, Press Release, 3/4/10)

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David vs Goliath

The 2-15-10 court brief from Apache includes the following statement: “When it comes to shareholder proposals, Apache is the ‘David’ and Chevedden is the ‘Goliath.’ ” That seems strange to me coming from a company with a $33 billion market cap. I know John Chevedden and he is no Warren Buffet, when it comes to assets. The last I heard, Apache was represented by multiple attorney’s while Chevedden was representing himself. Yes, David vs Goliath but Apache has it reversed.

This is a case involving basic shareowner rights. At the heart of the slapp suit against Chevedden is Apache’s contention that he must provide evidence that he is the beneficial owner of the appropriate amount of Apache stock to file a resolution. Normally, that wouldn’t be a problem. Every company I have ever filed a resolution with has been fully satisfied with a letter from my broker.

However, my understanding is that Apache has refused to acknowledge the adequacy of evidence provided by Chevedden’s broker and with their further attempt to follow the chain of custody a further level up. Since the shares are held in “street name,” Apache appears to want the letter to come from Cede & Co., which holds the vast majority of corporate stock. Of course, Cede & Co. does not know if Chevedden is a beneficial owner, since their records don’t go that far down.

Have others had a similar demand from Apache or any other company.  Or, if you have a resolution at Apache this year, what evidence of ownership did they require from you or your fund?  Please e-mail me (James McRitchie) if you have any information on these practices.

As I indicated in my earlier post, Apache v Chevedden: SEC Rules Don’t Reflect Reality, part of the problem stems from the language of Rule 14a-8 (b)(2)(i).  “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.”

The SEC rules assume that brokers and banks are “usually” record holders. They are not; at least not technically. Brokers and banks also largely hold “security entitlements,” once transactions are completed. Cede & Co. holds the actual immobilized registered securities. Here’s how attorney Jonas Kron (building from arguments made by Professor Paul Neuhauser in Clear Channel Communications (February 9, 2006)) puts it in a letter to the SEC dated 1/10/2008 regarding a no-action request by McGraw Hill. Although Kron didn’t succeed in this case for other reasons, I understand Neuhauser did.

As is known among securities professionals but not by the typical investor, the ownership structure between the multiple securities intermediaries and beneficial owners is complex. To begin, street name shares are owned by the broker or bank. The broker or bank then deposits the shares in an account at the Depository Trust Corporation. The Depository Trust Corporation, however, is not the record owner.

Rather the shares are held of record by Cede & Co., a nominee of the Depository Trust Company. Therefore, in order to determine the identity of the street name owner one must go first through the depository to the brokers and banks depositing shares, then through the broker or bank to the beneficial owner. This also means that the record owner in the case of brokers and banks is almost invariably Cede & Co, or some other nominee and not the broker or the bank itself. Furthermore, Cede & Co has no knowledge as to the ultimate beneficial ownership of the stock that it holds of record for brokerage firms… Cede & Co. merely knows the gross securities position of each participant in the Depository Trust Company.

Kron also notes this situation is confirmed in footnote 21 of Rel 34-50758A (December 7, 2004) in which the SEC observes:

The relationship between various levels of securities intermediaries and beneficial owners is complex. There may be many layers of beneficial owners (some of which may also be securities intermediaries) with all ultimately holding securities on behalf of a single beneficial owner, who is sometimes referred to as the ultimate beneficial owner. For example, an introducing broker-dealer may hold its customer’s securities in its account at a clearing broker-dealer, that in turn holds the introducing broker-dealer’s securities in an account at DTC. In this context, DTC or its nominee is the registered owner and DTC’s participants (i.e., broker-dealers and banks) are beneficial owners, as are the participants’ customers. However, DTC, the clearing broker-dealer (the DTC participant), and the introducing broker-dealer are all securities intermediaries.

The reality is that the name of the beneficial owner, John Chevedden, will not appear in the company’s, DTC’s or Cede’s records, but only in the records of his broker, Ram Trust. Consequently, his broker is in the best (if not only) position to document who the ultimate beneficial owner is.

SEC Staff Legal Bulletin No. 14B (CF), section C,1, provides guidance to companies on how companies should notify shareowners of defects by providing “adequate detail about what the shareholder proponent must do to remedy the eligibility or procedural defect(s).”

Instead of instructing Chevedden on how to remedy eligibility (or allowing the otherwise universally accepted letter from his broker), Apache seems to have attempted to send Mr. Chevedden on a wild goose chase by implying that he must obtain a letter from the actual holder of record, Cede & Co. As already explained, Cede has no idea who the ultimate beneficial owners are for the stocks they hold. As noted in the Jonas Kron letter to the SEC dated 1/10/2008 quoted extensively above, “Staff has rejected 14a-8f claim when the registrant seemed to demand proof from Cede Co. See Equity Office Properties Trust March 23 2003.”

In a footnote Kron also notes, “See also Clear Channel Communications (February 9, 2006) in which the company also argued that neither the proponent or its broker were record holders. In that case, the proponent made the same argument we are making here leading the Staff conclusion in that case was “that Clear Channel failed to inform the proponent of what would constitute appropriate documentation under rule 14a-8(b) in Clear Channel’s request for additional information from the proponent.”

Also of note, The SEC staff rejected a similar argument made by Dillard Department Stores, Inc. (Mar. 4, 1999). There, the proponent submitted a written statement that the proponent’s shares were held of record by the Amalgamated Bank of New York through its agent, Cede & Co. (“Cede”), the nominee of DTC. Dillard’s argued that the proponent was required to submit a letter from Cede, which Dillard’s argued was the true record owner. The SEC staff disagreed and declined to allow exclusion.

From all the above, it appears that Apache bypassed a “no-action letter” request to the SEC in hopes that Chevedden would be intimidated by a slapp suit that could potentially cost him a small fortune in attorney’s fees if they can convince the federal district court in Texas to rule in their favor. The case should be very simple. Like 99.99% of shareowners holding in “street name” presenting a resolution, Chevedden has met the reasonable requirement that he provide evidence of ownership from his broker.  Only a court dumbfounded by hundreds of pages of largely irrelevant legal argument, or one predisposed to rule in favor of rich and powerful managers, would require a shareowner to document every entity involved in the chain of custody from his broker to Cede & Co. and to get each to sign off on that chain.

Finally, I find it interesting to see how the case is being played out in the limited press coverage it has been given. I posted some thoughts on this early on at Apache Files Slapp Suit: More Support for DRS and Apache v Chevedden: More Comments. I’d now like to point to two examples since then. The first is by a trade publication, Westlaw Business (Proxy Disclosures: Activist’s Last Act in Court?, 2/5/10). It is somewhat obvious from the title that the attention grabber to the largely corporate counsel audience is. Will Apache shut down “John Chevedden’s one man shareholder rights band”?

The author of the article, Erik Krusch, appears somewhat knowledgeable about proxy issues and the idea that most shareowners don’t actually hold registered shares.

Many investors’ shares are held for them by their broker, known as holding a share in “street name”. Under these arrangements, the broker is the record holder and a proponent needs to have introduction letter sent from its broker to the company to which it has made a proposal.

Unfortunately, it is not so simple, as explained above. The broker is not the record holder; Cede & Co. is. Although the article goes on to present some balance, revealing that Apache CEO Steven Farris advised the SEC to abolish non-binding shareholder proposals, it is easy to surmise that Krusch knows who his audience is.

Apache may think Chevedden’s proposal calling for a simple majority vote “already had a lot stacked against it,” but Krusch fails to note such resolutions typically get 70% and 80% support. Again, “Apache decided to try its luck in court and if Chevedden has to foot the legal bills…he might not make quite as many proposals in the future.” Does Krusch think owners of corporations should have to foot legal bills to have issues presented on the proxy?  He doesn’t let us know, so I suppose you could say the reporting is “fair and balanced,” mostly from the view of corporate interests.

The Houston Chronicle is no Mother Jones, but Loren Steffy, their business columnist, seems to have a far better grasp of central issues. His article, When companies know better than shareholders (2/6/10) opens with the following:

I own a few shares of stock, but I’m not sure I can prove it.

I don’t have the certificates. The only proof I have is that my brokerage service tells me I have the shares and tracks the value of my portfolio.

Most shares that investors claim they own are actually held through a chain of custody involving a string of brokers and clearing firms and ultimately residing in a central depository trust.

Technically speaking, none of us actually owns the stock we think we do.

Steffy covers much of the same ground as Krusch but if he is pandering to anyone, it would appear to be the “every” man or woman who is likely to resent “Apache’s legal bullying.” Should management of a $33 billion company prevail against its own shareowner just because they can hire “high-dollar attorneys,” which they have asked the judge to make Chevedden pay for if they win or is this just a case of bullying by managers who want to remain unaccountable to owners? Steffy reveals where he thinks justice lies.

Given the reasonable nature of Chevedden’s proposal — a measure that’s been supported at other companies by far larger investors, including CalPERS, the country’s biggest pension fund — I asked Harrison (Apache’s attorney) why Apache didn’t simply adopt a majority vote on its own.

“Apache believes that its current voting rules are in the best interest of its long-term shareholders and should not be changed,” he said.

In other words, it believes its owners are better served by having less input, and it would prefer they simply shut up and fork over their money.

Then again, based on its legal arguments, Apache doesn’t even seem to believe it has owners.

That’s the real irony here. Apache CEO Steven Farris believes shareowners shouldn’t be able to file nonbinding resolutions… they shouldn’t be able to make formal requests of management. If they do file, only those who hold registered shares will be recognized. Registered shares are usually held by very small investors in DRIP accounts or by employees in 401(k) plans. Of course, the other registered shareowner, Cede & Co. isn’t going to take any action as an owner because their job is simply to hold the immobilized stock.

Given the complicated legal chains involved in “street name” registration and laws that were often written based on a misunderstanding of who really owns corporations, Steven Farris thinks he holds all the cards. Will justice prevail or do court decisions simply depend on who can hire the best attorneys?

This just in: The United State Proxy Exchange (USPX) will be filing a motion for leave to file an Amicus Curiae memorandum with the court later this week. Stay tuned. Also just in, Broc Romanek followed up previous posts at TheCorporateCounsel.net: “As noted by Allen Nelson in the reactions to this case, Chevedden could have easily obtained the evidence showing his record ownership if he had his “tackle” together and made a simple request to DTC. Here is a sample of how he could have proved his ownership and avoided this mess.” The link is to a broker-like letter from Cede & Co., with information concerning the beneficial owner and company redacted.”  The letter includes an attached “Proposal to Declassify the Board of Directors of the Company.” The final paragraph in the letter from Cherl Lambert of Cede & Co. reads as follows:

While Cede & Co., is furnishing this demand as the stockholder of record of the shares, it does so at the request of Participant and only as a nominal party for the true party in interest, the Customers, Cede & Co. has no interest in this matter other than to take those steps which are necessar to ensure that the Customers are not denied their rights as beneficial owner of the Shares, and Cede & Co. assumes no further responsibility in this matter.

Searching the internet, similar letters can be found involving China Yuchai International Limited (NYSE: CYD) here and here.  Another similar letter involving Cryptologic, whose registered office in Guernsey, can be found here.  One common theme is the involvement of companies domiciled outside the United States.

Getting a demand letter from Cede & Co. to inspect the books in order to obtain a list of shareowners of record may be common practice in a bona fide proxy contest. However, it is certainly not common practice when shareowners file resolutions. Nor should it be. How many banks or brokers have been caught lying, by writing a letter evidencing ownership by a customer who is not a beneficial owner?  Even if a rare instance of such behavior can be found, the same could occur if there were a requirement to get broker letters from Cede & Co. Cede doesn’t have a list of beneficial owners. They would have to depend on the word of the bank or broker, just as 99.99% of companies do in accepting a broker letter. Let’s not put up more procedural barriers to the exercise of our rights.

By shifting from street name registration to a system of direct registration, we could all avoid the issues faced by Chevedden. Who owns what would be clear. (see Co-Filers Wanted on Petition to Eliminate Street Name Registration) Neither would we have the problem of blank votes going to management (Support Petition to Keep Blank Votes Blank) or the identity of proxy resolutions being obfuscated on voter information forms (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration). Additionally, direct registration would put a stop to most of the abuses around firms going dark (Firms Gone Dark: Another Reason to Abolish Street Name). I hope readers will consider joining with us in our efforts to stop these abuses.

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Intel Virtual Mtg Out for 2010 But Exploring Future with USPX

Bowing to shareowner concerns, Intel Corp. scrapped plans to hold an exclusively on-line virtual annual meeting in 2010 and is likely to participate in a Fall conference to establish safeguards for the conduct of virtual meetings in the future, the United States Proxy Exchange (USPX) announced today.


Last Fall, Intel Corp. announced plans to scrap its annual shareowner meeting for 2010 and host an on-line forum in its place. In 2000, Delaware enacted legislation allowing corporations to do exactly this. Sadly, that state’s legislators granted shareowners no say in the matter, leaving the decision solely to the discretion of corporate boards.

Broadridge Financial Services has developed software for the conduct of virtual meetings. A handful of smaller corporations have already adopted that software and switched to entirely virtual meetings. For a number of years, Intel has held hybrid shareholder meetings, allowing people to attend both in person or via the Internet. Their plan had been to go to an all virtual meeting in 2010.

There is every reason to believe that, with strong safeguards, virtual shareowner meetings could enhance shareholder participation in meetings while protecting—even restoring— shareowner rights that have atrophied over the decades. However, no such safeguards are in place. Here are just a few scenarios illustrating how virtual meetings will deprive shareowners:

  1. A well known shareowner activist plans to ask some pointed questions at the shareholder meeting, but his connection to the meeting somehow fails. He is left wondering if he was targeted or if there truly was an honest technical problem.
  2. A shareowner wants to challenge the chair’s conduct of the meeting with a point of order. She is within her rights to do so and may interrupt the chair for this purpose, but she finds that the electronic forum software won’t allow her to do so ….. one more shareholder right lost.
  3. A shareowner wants to make a floor amendment, but the software doesn’t allow that either.
  4. The meeting software provides no means of group communication, such as applause of booing, so shareowners come away from meetings with no sense of how other shareholders felt.
  5. Corporate executives decide to pre-record their comments for a virtual shareowner meeting, including answers to pre-selected “shareowner questions.” The executives then don’t bother logging in during the actual “meeting.”

Most annual meetings are heavily scripted. The chance for real interaction often comes in informal encounters before and after the formal meeting. Those opportunities would also be gone with virtual meetings.

Formation of the Coalition to Preserve Shareowner Meetings

Following the announcement by Intel, shareowners discussed what might be an appropriate response to virtual shareholder meetings. Intel was the first major corporation to announce plans to switch to a virtual meeting, and more corporations were likely to follow suit. Without safeguards in place to protect shareholder rights, the situation was critical. There were few attractive options.

The SEC would be unlikely to intervene to preempt a Delaware law. We could launch a withhold vote campaign against the directors of Intel and other corporations that host electronic-only meetings, but that would entail participating in—and thereby accepting as legitimate—the virtual meetings.

In November, the USPX announced it was exploring a two-pronged strategy to address the issue of virtual shareowner meetings:

  1. Host a conference in the Fall of 2010 to develop safeguards that would allow virtual meetings to be held in a manner that protects shareowner rights, and
  2. Organize a withhold proxy campaign against corporations holding virtual meetings without safeguards.

Since that announcement, USPX has made considerable progress on both aspects of the initiative. A formal announcement of the formation of a Coalition to Preserve Shareholder Meetings is expected shortly. That announcement will include details on the Fall conference.


“The United States Proxy Exchange applauds Intel’s decision to postpone implementing of virtual shareholder meetings until after the Fall conference. We welcome all parties— investors, shareowner advocates and service providers—to join the Coalition to Preserve Shareholder Meetings and participate in the Fall conference, said Glyn Holton.

Interested parties should contact USPX Executive Director Glyn A. Holton at 617.945.2484 or [email protected]. See also, Intel Yields on Virtual Meeting, 1/20/10. I hope to be at this conference myself and urge others to join us.

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Apache Files Slapp Suit: More Support for DRS

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

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

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

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

Here’s what others had to say:

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

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

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

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

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

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

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

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

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

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

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

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Co-Filers Wanted on Petition to Eliminate Street Name Registration

As I indicated in my last post (Can We Change Voting Behavior?), I’m working with the United States Proxy Exchange (USPX) on a petition to the SEC to end “street name registration.”  That largely ad hoc system took root under emergency conditions stemming from a paperwork crisis during the 1960s, before networked computers were ubiquitous in trading markets. Street name registration, and a system that immobilized stock, were supposed to be temporary measures but they have grown to undermine our ownership culture. Just as poker chips allow us to play under rules that often favor the house, those holding “security entitlements” do not acquire the rights of real shareowners.

Street name registration is the primary reason proxy solicitations cost hundreds of thousands of dollars—and that exorbitant cost is why entrenched boards routinely run unopposed. Eliminating street name registration, in favor of a direct registration system, could bring the cost of proxy solicitation down to a few thousand dollars, which would have a bigger impact on shareowner rights than the SEC’s proposed proxy access initiative. It would also eliminate the use of voter information forms and other vehicles that circumvent the legal rights of shareowners with official proxies.

We welcome interested parties to co-sign the petition with us. The January 12, 2010 draft petition may go though minor revisions, based on your recommendations, but the substantive points will remain. We intend to submit the petition by the end of January to help ensure it is considered by staff preparing recommendations to the Commission concerning how to resolve various “proxy mechanics” issues.  If you are interested in signing on to the petition, please e-mail Glyn Holton, Executive Director, United States Proxy Exchange, indicating you want to co-sign, and provide the following:

  • Your signature block with your organization affiliation, if any
  • Please note the affiliation is for “identification purposes only” if you are not signing on behalf of the organization
  • Please include a small pdf of your signature that can be used in the filing
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Top Ten for 2010

Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas of Weil, Gotshal & Manges LLP offer up Ten Thoughts for Ordering Governance Relationships in 2010, including recommendations for boards, shareowners and regulators.

This Week in the Boardroom: 12/24/09 TK Kerstetter and Scott Cutler also addresses their Top 10 Board Issues for 2010. Response to one item from Kerstetter — no, we haven’t gone too far in requiring independent directors. Independent directors can certainly have expertise and can contribute the same value with less potential conflicts of interest.

Neither the top ten lists offer up anything earth shattering; both are well worth attention. See also, How Socially Responsible Investors View Companies in 2010 from the GreenBiz Staff.

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MoxyVote.com launched on November 20, 2009 in Beta and has already attracted considerable attention. Philly.com jumped right in with West Chester’s Moxy Vote boosts rebel shareholders on opening day. Cari Tuna did something a little more substantial with her Proxy-Voting Advocates Pool Resources on the Web (WSJ/11/23/09).

Of the systems utilizing the internet to increase retail investor participation in proxy voting by providing guidance on proxy issues from institutional investors, advocates or analysts, MoxyVote.com is the only one attempting to do so as a profit-making business, except perhaps FundVotes and CorpGov.net. The others – Investor Suffrage Movement, ProxyDemocracy.org, Shareowners.org, TransparentDemocracy.org, and VoterMedia.org – are all using some sort of non-profit form.

MoxyVote’s most direct competition at this point is ProxyDemocracy.org and TransparentDemocracy.org. All three systems provide users with information on how others are voting or advocate voting. ProxyDemocracy.org appears to be far ahead at this point with regard to actually being able to look up an individual company and finding recommendations, since they are collecting votes from some very huge funds like CalSTRS and Florida SBA, which own shares in thousands and thousands of companies.

Those reporting or advocating on MoxyVote and TransparentDemocracy.org tend to be smaller, like Calvert Investors or Investors Against Genocide. However, MoxyVote has the distinct advantage of being able to be tied in with your brokerage accounts and by allowing you to vote your shares right through the site. It is the only site that allows users to receive their proxies, obtain guidance from multiple sources and submit their votes all at one place.

Since proxy season isn’t in full swing, I don’t have any proxies to vote right now, so couldn’t test that function yet. However, when we do, another feature I like is that we will be able to see how many voters used MoxyVote to vote how many shares. That’s going to be a powerful tool in building involvement. Yes, you may only be voting 40 shares with the recommendations of Calvert or Change to Win but if you see on the site that 100, 1000, or 10000 others did the same, you begin to see that small votes do add up.

MoxyVote also employs a form of client directed voting (CDV) that allows users to set it and forget it. The CDV system advocated by the Business Roundtable has five choices: always vote for management, always vote against management, abstain, vote in proportion to shareowner vote within my broker, let my broker decide. These feel relatively meaningless to me. MoxyVote allows you to set your voting default to your list of advocates (your trusted “brands“). Right now, I’ve got mine ranked as follows:

  1. Investor Environmental Health Network
  2. Center for Political Accountability
  3. Change to Win
  4. Calvert Investments
  5. Boston Common Asset Management

Therefore, I could set up my account so that four days before the meeting, my stock is voted as recommended by IEHN. If IEHN has no recommendation by then, it is voted per the recommendation of CPA. If CPA has nothing, then it looks to CtW and on down the line until one of my advocates has a position. If none do, I can set the default position to vote with management, against them or abstain. If I elect to abstain, MoxyVote withholds my votes from director nominees.

For individual shareowners, MoxyVote provides access to various information sources, the convenience if automated voting and the ability to align your votes with those supporting like-minded organizations. For shareowner advocates, it appears to be a cost-effective way to get out their message and recruit new members with similar values. Once the site begins to attract a large following, corporate management may also see value in getting involved. They could use the site to communicate with owners and potential owners, as a listening post to get a sense of where their retail investors stand on various issues, and in helping them meet quorum requirements.

I encourage readers to try all three of these sites: MoxyVote’s, ProxyDemocracy.org and TransparentDemocracy.org. Please let me know what you think of each.

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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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