Tag Archives | shareowners

July 2009 News Archives

Mutual Funds: Pass Through Voting?

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

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

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

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

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

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

Say on Pay Clears House

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

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

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

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

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

Satyam, Did it Wake Up Indian Boards?

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

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

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

Better Governance Narrows Spreads

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

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

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

ProxyDemocracy Keeps Growing

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

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

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

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

Trouble in Proxy Access Land

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

SSMII Opportunity at CalSTRS

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

The Future of Corporate Reform

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

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

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

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

SEC Floods In-box

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

Drill, Baby, Drill

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

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

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

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

PRI Enforcement Coming

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

Caution Urged: War is Good

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

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

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

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

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

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

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

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

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

Comparing CalPERS Board Candidates

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

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

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

SEC Investor Advisory Committee

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

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

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

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

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

And a site with a broader focus:

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

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

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

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

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

Board Pay

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

Should Proxy Voting at Mutual Funds be Reformed?

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

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

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

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

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

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

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

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

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

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

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

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

CorpGov Bites

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

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

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

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

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

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

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

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

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

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

Kapoor goes on to discuss several recent scandals.

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

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

SEC Proposes to Curtail “Pay to Play”

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

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

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

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

Governance Exchange

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

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

Walmart and Sustainability

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

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

China & India

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

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

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

Twitter-Based Petitions

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

Say on Auditors

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

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

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

Suit Anticipation Accurate

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

Green Century: First With Carbon Footprint Disclosure

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

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

Other key findings of the carbon audit include:

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

Let’s hope that others soon follow their lead.

Pre-paid Variable Forward Contracts

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

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

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

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

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

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

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

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

Here’s my own draft wish list:

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

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

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

Words Create Worlds

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

Demand for More ESG Disclosure

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

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

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

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

Shareowner Forums

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

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

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

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

Broadening Fiduciary Duty

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

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

ShareOwners.org (updated 7/20/09)

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

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

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

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

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

Proxy Access

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Goldstein concludes:

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

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

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

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

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

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

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

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

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

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

Dell (Updated 7/17)

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

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

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

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

Institutional Investor Complicity with Bad PE Governance Practices for IPOs?

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

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

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

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

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

Being a Director Should be Considered a Real Job

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

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

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

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

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

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

Barriers Remain

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

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

Preventing Failed Director Elections

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

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

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

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

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

Corpgov Bites

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Auditing Governance

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

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

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

Internet Evolution and TCL’s 2009 Public Funds Forum

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

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

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

Shareowners.org at 250

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

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

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

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

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

UK Advice of Note

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

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


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

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

Boardroom Insider

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

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

BRT Seeks Delay for Proxy Access

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

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

Governance Standards Slipping

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

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

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

A Primer for Boards

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

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

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

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

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

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

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

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

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

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

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

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

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

Best Boards

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

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

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

SEC Posts Colorful Comment

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

Expanding Fiduciary Duty

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

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

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

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

Beta Sites Facilitate Voter Branding

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

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

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

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

Get Your Union Involved

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

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

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

Stocks Down, Advisor Pay Up

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

Golden Peacock Award Nominations Due

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

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

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

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

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

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

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

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

Results of SEC July 1 Meeting

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

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

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

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

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

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

Chamber Sponsored Study Agrees with Chamber

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

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

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

I analyzed last Navigant study back in July 2008 under the heading Chamber Attacks Resolution Process. bs I said then, businesses should ask their local and state chambers, which may be members of the US Chamber of Commerce, to seek new leadership at the federal level. Sure, shareowner resolutions and annual meetings are a bit of a pain, but they keep us in touch with what is coming. For example, ICCR filed resolutions on subprime loans for years. Too bad banks didn’t listen.

The resolution process is an early warning system that allows us to gauge the popularity of a given issue. Often we can avoid regulations by working out less burdensome voluntary measures. Even when businesses fully adopt resolutions, the costs can be substantially less than complying with mandatory rules.

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

Support Petition to Keep Blank Votes Blank

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Yale Governance Forum June 2009: Restoring Trust

Rising StarsPrior to the Forum, I attended a reception honoring the Rising Stars of Corporate Governance for 2009. Those included in the photo are (left to right, top to bottom):

  • Evelynne Change, Coordinator for Corporate Governance, African Peer Review Mechanism (APRM) Secretariat, New Partnership for Africa’s Development (NEPAD)
  • George Anderson, Partner, Tapestry Networks
  • Elizabeth Ising, Associate Attorney, Gibson, Dunn & Crutcher LLP
  • Stephen Brown, Director & Associate General Counsel, Corporate Governance, TIAA-CREF
  • Deborah Gilshan, Corporate Governance Counsel, Railpen Investments (a subsidiary of rpmi)
  • Rachel Lee, Senior Corporate Counsel, EMC Corporation
  • Nada Abusamra, Attorney at Law, Partner, Raphaël & Associés Law Firm
  • Julieta Rodríguez Molina, Associate Attorney, Galindo, Arias & López

David Hess, Assistant Professor of Business Law & Business Ethics, Stephen M. Ross School of Business, University of Michigan and Alexis B. Krajeski, Associate Director, Governance and Sustainable Investment, F&C Investment were also named rising stars but were unable to attend the reception.

I also caught this quick shot of several members of the Millstein Center for Corporate Governance and Performance staff who were involved in making the Forum a huge success. Included here from left to rightMillstein Center staff are:

Note regarding the limitations of this report: Often at the Forum several sessions met concurrently; I could only be in one place at once. Additionally, in order to encourage the free exchange of information and opinion, I agreed, generally, not to report for attribution. Therefore, the following notes provide only a brief sketch of what I focused on and how my limited observation mixed with my own opinions. Of course, sessions were designed to elicit debate among experts with often well known conflicting opinions, so consensus was relatively rare but insights were not. I’ve provided some links that may give readers a better understanding of the positions of individual participants.

Plenary 1: What is the proper balance between regulation and private sector initiatives to restore trust in the market system?

Moderator: Ira Millstein, Senior Associate Dean for Corporate Governance, Yale SOM; Senior Partner, Weil, plenary1Gotshal & Manges LLP. Discussants: William Donaldson, Chairman, Donaldson Enterprises; Fmr. Chairman, SEC; Founding Dean, Yale SOM; William Goetzmann, Edwin J. Beinecke Professor of Finance and Management Studies and Director, International Center for Finance, Yale SOM; Mats Isaksson, Head, Corporate Affairs Division, Organisation for Economic Co-Operation and Development (photo: right to left)

I think there was general recognition by panelists that we have been through a recent period of very little regulation, when far too many ignored risk. There was frustration that mutual funds and other intermediaries frequently don’t acknowledge or behave as if they work for us. Instead, too many are more concerned with lining their own pockets.

Reference was made to the glorious revolution of 1688. I’m not sure I got the context but I imagine it was a call for shareowner democracy, in much the same way as the Bill of Rights in 1689 ended absolute dominance by the king. While we seem to be near ushering in an era of democratic rights for shareowners, there were also concerns with the likelihood of over regulation, especially enactment of regulations that aren’t enforced, either because of practicalities, lack of will, or follow through.

One danger of over regulation is that it often leads to an assumption that someone is taking care of “it.” Regulations work best when they empower markets and those dependent on the regulated to make the markets work or to enforce the rules.

The focus on “say on pay” for CEOs is overblown, according to at least one panelist. There’s very little evidence that it will bring down pay. In fact, the movement risks taking attention away from the real problem of incentive structures for dealers and traders who were walking away with huge bonuses for short-term deals. Hedge fund and private equity groups were seen as possible problems. Yet one panelist cited an OECD Steering Group conclusion that “activist” hedge funds and private equity firms could help strengthen corporate governance practices by increasing the number of investors that have the incentive to make active and informed use of their shareholder rights.

Regulators frequently respond like generals that just lost a war. They plan how to win the last war, not the next. We need to understand tomorrow’s markets, yet we are the product of our experience. Throwing out Glass Steagall created something of a free for all, although there doesn’t appear to be much political will for turning back.

It all starts with the education. Principles start at home but have been diminished in our educational system, especially in business programs. We lost our bearing with the appointment of SEC commissioners who didn’t believe in rules or regulations.

We need regulations, like we need traffic lights. Too few have asked what makes for a great company. Get at key factors like employee morale and quality, not just making money. Others argued the DNA of selfishness brought us prosperity. Don’t blame everything on markets and don’t expect everything from them. The market won’t fix things that must be fixed by politics, like the disparity of wealth.

Students come into university with a competitive history of community service. Yet, once here, most spend their summers working for hedge funds or commercial banks. Their next level of winning is a salary beyond imagination. We need to change educational structures to broaden the entrepreneurial to include giving back to society.

A fundamental question involves our approach. Do we try to solve with our problems with prescriptive regulations or by empowering shareowner engagement? Clearly, most believe the later. Owners need structures to support their ability to hold management accountable. Proxy access, say on pay (primarily as a vehicle for communication), supercharging dialogue with boards…. those are the directions.

What about rights that follow a share of stock? Should you be rewarded for holding for the longer term? It gets complicated. Most seemed to recognize the importance of large activist shareowners. Some felt that since pension funds feed the private equity funds, they need to take a larger part in keeping these funds in line and their costs down. Others focused on conflicts of interests among intermediaries, such as credit rating agencies that are paid by issuers and given monopoly status by the government. One answer might be rating the raters, either by SEC or others. A member of the audience from Egan Jones pointed to his firm as not being paid by the entities being rated, so there is a clear alignment of interest between investors and the firm.

There were lots of good ideas but little unanimity on solutions. Like mutual funds that make more money by starting more funds than by earning money for their clients, intermediaries seem likely to continue to lead most investors astray. AndrewMetrick

Plenary 2: Has the public corporation model been under challenge from the current crisis? Are there lessons from private equity?

Moderator: Andrew Metrick (left), Theodore Nierenberg Professor of CorpRichFerlautoorate Governance, Yale School of Management.

Discussants: Rich Ferlauto (right), Director, Corporate Governance aSuzanne Hopgoodnd Pension Investment,

Suzanne Hopgood (left), Director, Board Advisory Services, NACD; Ronald W. Masulis

Ronald W. Masulis (right), Frank K. Houston Professor of Finance, Owen Graduate School of Management, Vanderbilt University; Thomas Werlen

Thomas Werlen (left), Group General Counsel, Novartis International AG

Andrew Metrick started the group off with a reference to Michael Jensen’s Eclipse of the Public
. Jensen thought the public model was broken.
The KKRs of the world were going to take over, loading corporations up with debt. They would take a direct role in corporate governance. Private equity does seem to be taking a larger role. The public model is costly, based on information intermediaries analyzing markets. Private equity structures better align investor

interests, at least those of the managing partners, with those of the company but investors are not getting a lot of detail with that model either. So, we have two different models to solve asymmetric information issues. Two competing models. Have public markets failed?

Panelists also raised other issues. Are they engaged with beneficial owners and other stakeholders? Do they demonstrate independence of thought or are they trapped in group think? We want diverse directors who are reflective and engaged in self evaluation. Do shareowners have the resources to intervene? They have a collective voice problem, often a lack of expertise but have a fiduciary responsibilities to beneficial owners. What we’ve experienced is regulatory arbitrage, a race to the bottom, seeking the weakest regulator.

At least one panelist felt strongly suspect of the private equity model. Within the top quartile, these funds that can take advantage of cheap money. It wasn’t the model that worked but circumstances. In fact, they were over leveraged, depending on loopholes in tax system. Often they skimmed low hanging fruit and took short-term exit strategies.

Other approaches might include investor representation on boards where, through collective action, they can effectively engage on behalf of beneficial owners. Stakeholder engagement councils could be convened as method of risk management. Certainly, we need more in the way of director disclosure and evaluation concerning their expertise and philosophy. The current information disclosures for director nominees is nearly worthless. Use of new technologies can help get us over collective action problems. Regarding risk management, we need to move to independent chairs but also need inside directors on risk committees with deep knowledge of companies. In a theme often repeated, investment companies must resolve conflicts between their fiduciary obligation to the company and their duty to investors. Resolution must find solely in the interest of investors.

Board composition is critical. Transparency in public companies instills discipline, even if you must issue a statement that investors can no longer rely on financial statements. Turnaround boards must be focused and committed. They should develop their strategic plan, determine skill sets needed, match those with the skill sets of board and ask what value each director brings to board. Disclose it in proxy. Shareholders will love it.

Public corporations in the US are generally characterized by strong management and atomistic shareholders. We suffer from information asymmetry to the degree that it is almost impossible for shareowners to monitor. Unfortunately, independent board members also lack knowledge of the business and management. Frequently, they don’t devote as much time to job as they should. Private corporations generally have fewer board members, more diversity, hands on involvement, and are incentivized to spend more time and effort. Public companies should take a lesson from such private boards. Strengthening boards is more important than shareowner involvement, since most shareowners will never have access to needed information or enough incentive to monitor.

Academic research shows that improving corporate governance is a primary driver of wealth creation. Concentrated ownership gives major owners control. Expertise, financial incentives, guarding against empire building, more efficient reporting systems, high leveraging, managers with invested liquid assets, bonuses in stock rather than cash… Why don’t public boards model such characteristics?

Financial reporting doesn’t track risk taking activity. Quarterly reports lag on risk. Our current system rewards high risk taking for short-term earnings. Inside directors have been dismissed but they are critical with regard to knowing what questions to ask (even better if they are also serve on more than one board).

Leveraged buyouts more frequently have the financial incentives, diversity, and critical skills. Regarding directors in general, foreign directors in the US are not helpful, since they tend to miss meetings. The recent IRRC report, What Is the Impact of Private Equity Buyout Fund Ownership on IPO Companies’ Corporate Governance?, was raised. “Whatever benefits there may be to the private equity model, they seem to disappear once a private equity backed company goes public. The findings are contrary to conventional wisdom and significant for investors,” said Jon Lukomnik, program director of the IRRC Institute. When they go public, such firms were more likely than others to have classified boards, poison pills, and restrictions on director removal by shareholders. Additionally, the report indicates that lucrative consulting agreements for former executives, generous employment agreements, and special bonuses are significantly more common at private equity buyout backed companies. Finally, the analysis indicates that once taken public, executive compensation at private equity backed companies tended to be higher, less performance-related, and less at-risk than at comparable companies that did not have private equity sponsorship.

One panelist asserted the value of discipline around directors with audit experience. Companies perform better with outside discipline and an organized agenda. Outside directors are key. Committee chairs must bring the discipline. Another said good governance isn’t just a matter of process. The key is balancing strategic vision and monitoring functions. Constructive challenge comes most frequently from the chair or lead director. Executive session useful in getting “snits” managed. It forces and focuses discussion. Telephone meetings are useful specific issue. CEOs who speak last will ensure generation of genuine discussion. Private companies are better for rapid change, while public companies are better for high growth mode/cycle. Public companies generally have a lower cost of capital, whereas private companies are easier to restructure. Both have their place.

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panel 2

Focus Panel 2 (photo right): What effect did the financial crisis have on this year’s proxy season, if any? What is the long-term impact of the crisis on shareholder governance responsibilities?

Moderator: Meredith Miller, Assistant Treasurer for Policy, State of CT.

Discussants: Kenneth Bertsch (right), Executive Director, Corporate Governance, Morgan Stanley Invest. KennethBertsch

Abe Friedman (left), Managing Director, Global Head of Corporate Governance & Proxy Voting, Barclays

Abe FriedmanMark Preisinger (Note product placement. That got a laugh.), Director of Corporate Governance, Coca-Cola CompanyPreisingerYerger and Ann Yerger, Executive Director, Council of Institutional Investors.

Miller led off with general statements about the proxy season. There was an increase in no action requests but a reduction in the number granted. There also appears to be an increase in withholds, more requests to split the chair/CEO, more contests. Demands for bonus pools and majority vote were also being pressed.

Other panelists noted the level of engagement is going up. Funds are more frequently being contacted by CEOs CFOs, general counsel, and even board members. Abe Friedman described how he must prioritize, screen and log calls. With the largest fund, I can imagine that gets tough during proxy season. He and others said they pay attention to these calls and often learned something, especially if there is a proxy contest or vote no campaign.

One panelist pointed out there are many issues on the table that still haven’t been resolved. It is time to get serious about majority voting, which may be a done deal at many of the largest companies but has still not been adopted by most small companies. Declassifying boards, poison pills (voting on it), and proxy access… If there ever was a time to focus on the few important things, now is the time.

Again, there was dispute among some panelists and participants on the say on pay issue. All agree that pay is really important because of how it incentivizes. But some think say on pay is not the right answer. It can even be harmful. Say on pay is seen by them as the executive’s safety net. We’re not going to know all the details related to pay, since disclosing strategy would harm competitiveness. And, of course, the execution of strategy should be a prime component in pay for performance. When shareowners vote overwhelmingly for pay that is structured badly, this simply provides legitimacy for poor practices. Say on pay will prove to be a shield, not a sword. Investors should focus on voting out those who approve unjustified pay. Focus on majority vote, so that directors who are not doing their job can be voted out. The ultimate say on pay is voting out directors.

Others who were initially skeptical have come around because the pay issue is the single most significant marker with the public. The cost of poorly structured pay is significant. Owners are already voting on bonuses, stock options. It provides another “pulse check.” Capability needs to be developed. It is an evolutionary process.

Another panelist was pushing hard for 10% thresholds to call a special meeting. This is something Bob Monks also emphasized when I spoke to him about the next point of shareowner leverage. Most shareowners seem to be willing to withdraw resolutions if companies make substantial movement towards a lower threshold. That makes me think shareowners may be settling for 25%, which will be harder to lower in the future. Compromise may not be such a good thing if it draws a line that is more difficult to move in the future.

At least one panelist and several in the audience seemed to be pushing for advance disclosure of proxy votes. Anne Sheehan spoke up from the audience about their experience at CalSTRS of announcing their votes through platforms at Broadridge and ProxyDemocracy. She was glad they started at end of season because it gives them some time to “test drive” the sysLaura Berrytem before going through a full proxy season. Yes, it has been something of an adjustment to plan a little further in advance. Several discussed possible downsides, primarily logistics, increased contact from benefical owners, and being afraid of announcing a vote and then and having to change. I know that ProxyDemocracy is out beating the bushes. I’d love to see more involvement and disclosure by international and mutual funds, as well as endowments and other mission-based funds.

Laura Berry (left), of the Interfaith Center on Corporate Responsibility, spoke from the audience, noting ICCR’s many years of attempting to raise issues regarding subprime loans and asked if panelists would be looking at social proposals more seriously because of their ability to predict problems. Yes. Everyone seems in agreement on that AnneSimpsonone. As a side note, IRRC celebrates its 40th anniversary through a year-long series of monthly audio podcasts entitled The Arc of Change. You can join ICCR’s Facebook group to keep up on their activities.

Focus Panel 5: The role of institutional investors in restoring trust

PeterButlerModerator: Anne Simpson (right), Senior Portfolio Manager for Corporate Governance, CalPERS

Discussants: Peter Butler (left), CEO, Governance for Owners LLP

Anne SheehanCatherine JacksonCatherine Jackson (right), Manager, Corporate Governance & Proxy Voting
Ontario Teacher’s Pension Plan Kieth Johnson

Keith Johnson (left), Head of Institutional Investor Legal Services, Reinhart Boerner Van Deuren

Anne Sheehan (far right), Director of Corporate Governance, California State Teachers’ Retirement System (CalSTRS)

There was discussion about the need to be as transparent as we are asking our companies to be. We need to be working closely with regulatory agewncies and to be prepared for changes. Otherwise, we are going to be like the dog that chased the car and caught it. We need to be active participants in the market, engaging with the SEC and Congress and speaking with one voice.

Keith Johnson said the UK’s University Superannuation Scheme developed a questionnaire for candidates and nominating committees. It asks candidates about their skills, how they relate to those of the board and its needs, as well as why they they will make effective directors. The Canadian Institute of Corporate Directors has posted a list of Key Competencies for Director Effectiveness that ties in well with board evaluations.

Cathrine Jackson said OTPP has been disclosing proxy votes in advance on their website in advance for years. In her opinion, too many funds outsource voting and engagement. Transparency and accountability; OTPP seems to be leading the pack.

One panelist said shareowners need to combine forces. Over diversification has become a problem. We need to “think globally and act locally.” (As an aside, the original phrase “Think Global, Act Local” first appeared in the book Cities in Evolution (1915) by town planner and social activist Patrick Geddes.)

Questions were raised about the skill set fund managers have, how we solve the free-rider issue, who should pay for necessary research, who should actually engage with companies. If companies paid, every shareowner would pay for research. It was suggested that half the money required come from companies, the other half from a levy on every investment scheme that gets tax relief. The issue of shareowner representatives for corporate nomination committees was also raised. Apparently, this is something like the approach used in some Scandinavian countries. (see Swedish director-election rules could cross Atlantic, MarketWatch.com, 4/17/09)

Another issue raised was stock lending with warnings that some have sold their franchise. Most appeared in agreement that funds should always recall their stock for voting. The difficulty arises primarily when special meetings are called. OTPP doesn’t lend their stock anymore. One suggested that long-term shareowners should be given loyalty payments. (Sleight Corporation (link to PowerPoint) in France considered paying extra dividend payments after two years but, as I recall, they rejected the idea.)

What would get shareowners to act responsibly? Suffering huge losses should be motivation enough. Ideas were thrown out such as asking DOL to establish by regulation that pensions must be engaged, enforcing current rules, sharing resources between funds, pooling resources. OTPP is opening up to accept other funds from other entities. California funds have made some attempt to share resources. Engagement must be based on bottom line results. It was a good dialogue with many creative ideas.Jonathan Koppell

Plenary 3: Government as shareholder of or lender to public corporations: What is the government’s role?

Moderator: Jonathan Koppell (right), Faculty Director, Millstein Center for Corporate Steve OdlandGovernance and Performance, Yale SOM

Discussant: Steve Odland (left), Chairman & CEO Office Depot (As far as I know, Odland was the only CEO to attend or at least to present at the Forum. That’s certainly to his credit but where were the others? More are needed at forums like this to ensure adequate dialogue.)

There was an interesting discussion here by Odland who recounted his experience with investors and a proxy contest. There were multiple shareholders with different timeframes and strategies. The gist of it was that investors aren’t of one voice and even if they are, the voice can change dramatically and sometimes is not accompanied by memory. Whatever strategy management uses, some shareowners aren’t going to like it. He had many good points. Not every activist is a good activist. Odland would like long-term interests to be aligned. Three years seems like forever to many hedge funds and other shareowners. We’ve got to find common ground.

They talked about who is the best owner across boundaries. Is government similar to other investors? How do you deal with generic issues of self-dealing with the government as owner, since the sovereign is both above the law and the regulator. Power corrupts and absolute power corrupts absolutely. Put the finest most capable people on boards to exercise their best independent judgment. CEOs would love to have large shareholders long-term. There was discussion of how to avoid unintended consequences and some commitments from people in the audience to try to work and find common ground with the Business Roundtable.

Plenary 4: Will the crisis help or hinder the integration of the global financial markets?Jeff Sonnenfeld

Moderator: Jeff Sonnenfeld, Lester Crown Professor in the Practice of Management & Senior Associate Dean, Executive Programs, Yale SOM (right)

Discussants: (left to right) Leonardo Peklar, Chairman, Socius Consulting, Inc.; Marcos Pinto, Commissioner, Securities and Exchange Commission of
Brazil; John Sullivan, Executive Director, Center for International Private
Enterprise (CIPE) James Shinn, Lecturer, Princeton University.

Leonardo PeklarMarcos PintoJohn SullivanJames Shinn

Sonnenfeld showed a Saturday Night Live parody of the stress tests. I hadn’t seen it… funny.

The main basis for optimism appears to be the hope that institutional investor will pay a premium for good corporate governance and that corporations will lobby governments to get standards raised. However, there were assertions that there may actually be a slight negative correlation between price and the quality of corporate governance by most indicators. Additionally, there is little evidence of corporations lobbying to improve governance. Witness continued opposition to proxy access from the US Chamber of Commerce and the Business Roundtable.

Don’t give up though. There is a strong correlation between the amount of money managed by pension funds and the quality of governance, especially when they have the political support of the citizens. (Hmm… what about when defined benefit plans are under all out attack?)

Brazil’s Novo Mercado, with its higher governance standards, seems to be working in a “race to the top.” However, apparently a similar attempt in Romania didn’t.

Brazil has had rebirth. Stocks have appreciated 40% since the beginning of year. Flows are positive since January, with about 37% coming from outside Brazil. Most derivatives are also regulated and there is disclosure of related third-party transactions.

In most markets, shareowners have been trading liquidity for control. The financial crisis revealed severe shortcomings in corporate governance. When most needed, standards often failed to provide the checks and balances that companies need in order to cultivate sound business practices. The OECD’s Corporate Governance Lessons from the Financial Crisis provides an overview of these shortcomings and resulting challenges.

There were discussions around block holding, both by families and governments, and how the role of director differs in a country like China where they may represent both shareowners and the government. The wisdom of Millstein’s advice to the OECD was acknowledged to be outcome oriented. How we get there may differ.

Comments from others:

On Thursday, Ira Millstein announced that leaders from the Millstein Center had joined three former SEC Commissioners, a former World Bank President and a former US Treasury Deputy Secretary in calling for enactment of long-championed financial market accountability and transparency reforms that include access to the proxy, say on pay, independent board chairs and creation of a permanent commission to develop and oversee updating of a US code of corporate best practice principles. That was a bold, but important, step for an academic center. To me, it demonstrated why the Forum consistently attracts so many insightful corporate governance leaders from around the globe. – Keith L. Johnson, Chair, Reinhart Institutional Investor Services

More photos from the Forum:

Andrew Shapirogroup 1Meredith Millergroup2>Mary Ellen Andersen
Ira MillsteinStephen Davis

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Mutual Fund Voting

Rank Fund Family Score
1 (tie) Templeton 7
1 (tie) Oppenheimer 7
3 (tie) T. Rowe Price 7.67
3 (tie) AIM 7.67
5 (tie) Schwab 8
5 (tie) JP Morgan 8
7 Janus 9
8 American Century 10.67
9 Legg Mason 11
10 Federated 11.33
11 Franklin 11.67
12 Morgan Stanley 13
13 Van Kampen 13.33
14 (tie) TIAA-CREF 13.67
14 (tie) BlackRock 13.67
16 (tie) Putnam 15
16 (tie) Scudder 15
16 (tie) American Funds 15
19 Vanguard 15.33
20 (tie) Fidelity 16
20 (tie) Lord Abbett 16
22 Columbia 17.33
23 Ameriprise 18.33
24 Barclays 20
25 MFS 21.67
26 AllianceBernstein 23.33

FT says mutual funds are expected to spend more time evaluating proposals, especially compensation-related resolutions. (Pay proposals to dominate proxy season, 4/5/09) They also note that “mutual funds have contributed to corporate America’s excessive pay by voting in favour of companies’ compensation plans, research by corporate governance experts will reveal on Monday. (Mutual fund votes helped to boost pay, 4/5/09) Better to start giving a damn in 2009 than never.

The Corporate Library, Shareowners Education Network and AFSCME analyzed 2008 votes in Compensation Accomplices: Mutual Funds and the Overpaid American CEO and found “AllianceBernstein, Barclays Global Investors, Ameriprise and Bank of America’s Columbia Management were the most consistent backers of management proposals to increase executive pay.” In 2008, the 26 mutual fund groups studied voted in favor of management compensation proposals 84%, 82% in 2007 and 76% of the time in 2006. “T Rowe Price, Templeton (part of Franklin Resources) and Charles Schwab were at the top of the rankings of those voting to constrain pay, the study found.”See table to right.

My analysis: It looks like funds got a little bit of fiduciary responsibility religion when the SEC required mutual funds to start disclosing their votes in 2004 but grew complacent… probably since few people use voting behavior as a factor when considering where to invest. Now, since almost all funds are losing a ton of money for their customers, they are probably worried blame may spread to them… as it should. Voting rights are assets and must be treated as such. Always voting with management and simply saying that is “in the best interests of its shareholders” won’t cut it anymore.

What should an investor do? The report came out with four recommendations (my additions):

  1. Mutual fund families that have been consistently
    categorized as “Pay Enablers” should revise their
    proxy voting policies to ensure that they promote
    responsible compensation programs that encourage
    the creation of long-term shareholder values and do
    not promote excessive risk-taking. (Contact funds in your portfolio and let them know of your concerns.)
  2. Mutual fund companies should have a uniform
    mechanism in their corporate governance and proxy
    voting policies for establishing and communicating
    their view of pay to boards, especially compensation. (If you can’t identify this in your funds policy, contact them and ask them what it is.)
  3. Retail investors in mutual funds, whom the
    Shareowner Education Network calls “citizen
    investors,” have a responsibility to critically evaluate
    how their mutual funds vote on pay issues and hold
    those funds accountable for votes that enable pay
    abuses. (Of course, you’ll want to view performance as well. However, if they are relatively the same and your “enabler” funds refuses to budge, dump them.)
  4. The Securities and Exchange Commission (SEC)
    should require funds to distribute a Plain English report
    on proxy voting to their investors and should revise
    and improve the N-PX data disclosure. (The SEC should also urge funds to announce their votes in advance of annual meetings. If votes are an asset and they put a lot of effort into voting, shouldn’t they want retail shareowners to copy their voting behavior?)

Another good source of information (although the funds reviewed are limited) is ProxyDemocracy.org. Here’s their highest rated ten funds on executive compensation issues and their activism scores.

  1. Green Century Equity Fund 79.7
  2. AFSCME Employees Pension Plan 74.0
  3. Florida SBA 70.8
  4. Sentinel Sustainable Core Opportunities Fund (formerly Citizens Core Growth) 65.5
  5. Trillium Asset Management 61.4
  6. Domini Social Equity Fund 60.6
  7. CBIS 56.4
  8. Calvert Social Index Fund 51.4
  9. Calvert Social Investment Fund 48.6
  10. Parnassus Fund 48.5

The ten least activist funds and their scores are as follows:

  1. Dodge & Cox Stock Fund 0.0
  2. Dodge & Cox Balanced Fund 0.0
  3. Barclays Global Investors S&P 500 4.6
  4. AllianceBernstein Large Cap Growth Fund 5.3
  5. AllianceBernstein Value Fund 5.5
  6. Vanguard Wellington 7.6
  7. Vanguard Windsor II 8.2
  8. Growth Fund of America 9.4
  9. Northern Institutional Balanced Fund 9.4
  10. Northern Institutional Mid Cap Growth Fund 9.5

Look up yours here. ProxyDemocracy also rates funds for their activism on corporate director elections, corporate governance and corporate impact (social and environmental issues). Other more comprehensive analysis can be found at Fund Votes and The Corporate Library. In a related article, Amgen’s proxy directed shareholders to a 10-question online survey written by pension-fund manager TIAA-CREF to help it evaluate pay plans of companies in which it invests. (Companies Seek Shareholder Input on Pay Practices, WSJ, 4/6/09) And, of course, there’s plenty of blame to go around. (Executives Took, but the Directors Gave and Who Moved My Bonus? Executive Pay Makes a U-Turn, NYTimes, 4/4/09)

Two good observations from Dave Lynn: “The study does note a contrary trend that I think everyone has probably noticed in the past couple of years – mutual funds seem to be increasingly willing to withhold support or vote against directors serving on compensation committees of companies where pay practices are perceived as subpar. One limiting aspect of the study is that the data only goes through June 2008, so the full impact of the recent “torches and pitchforks” attitude toward compensation is not fully reflected.” (The SEC’s Corporate Governance Agenda Comes into Focus, TheCorporateCounsel.net Blog, 4/7/09)

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Rights of Public Shareholders

Lawrence E. Mitchell just published a very thoughtful paper, The Legitimate Rights of Public Shareholders. He argues that shareholders don’t contribute capital to finance industrial production but are, instead, net consumers. Since their investment incentives "significantly distort the behavior of corporate managers," leading CEOs to value stock price at the expense of long-term business health, shareowner rights should be eliminated, instead of expanded or enhanced.

The article reminds me a of Marjorie Kelly’s The Divine Right of Capital, which argued that instead of maximizing the return to shareholders, corporations should maximize total return …a concept I have been advocating at CorpGov.Net since 1995. Total return implies the long term efficient use of all resources, both natural and human.

I agree with both Mitchell and Kelly that, generally, stockowners aren’t providing capital to a company. We are buying shares from another stockowner, gambling the price will rise. We aren’t really investing, in the traditional sense. We’re buying the right to extract wealth in the future. I liked Kelly’s argument that efficiency is best served when gains go to those who create wealth. That puts an emphasis on brain power and knowledge workers.

Of course, the revelation that shareholders don’t contribute much isn’t new. Back in the 1960s Louis Kelso asserted that 99.5% of corporate capital came through internal earnings and debt. This insight led him to advocate employee stock ownership plans (ESOPs). Norm Kurland took up the cause with a call for a Capital Homestead Act. Kelly endorsed a similar idea and a renewed look at charters and other stakeholder reforms. Making every citizen a shareowner, especially in a broad-based basket of stocks, has appeal. Everyone would benefit from the wealth corporations develop. Yet, if ownership were universal, there would be little incentive for owners to externalize costs onto society.

Mitchell is less imaginative in this paper. He’s not sure if the problems can be solved by electing directors for five-year terms, letting creditors also vote, or by eliminating shareowner votes on all but except directors. This contribution is worthy, not in recommendations, which he says are beyond its scope, but rather in documenting a dramatic increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and, more generally, the shift from "achieving gains from production to using the corporate machinery to manipulate stock price."

Yes, the shift from dividends to capital gains has distorted incentives in a way that "encourages managers to harm the long-term health of their corporations’ businesses in order to satisfy current shareholder demands." Yes, many forces have moved investors to think of themselves as simple gamblers based on speculative future value, rather simply extracting dividends from actual earnings. Yes, interested parties pushed more churning because it meant more commissions and fees.

However, I don’t think it follows that we should now begin to rely more heavily on the market for corporate control, especially one where shareowners are given less power. As an article in the FT points out, in the US overall debt reached an all-time peak of just under 350% of GDP, 85% of it private, up from 160% in 1980. (Seeds of its own destruction, 3/9/09) Like global climate change, we need to develop more sustainable models, both for corporations and for a salubrious environment.

Doing away with shareowner proposals under Rule 14a-8 won’t make companies more responsible. Shareowners raising issues through such resolutions serve as a better proxy for the public than reinforced insulation of CEOs and boards. After all, if the market had listened to ICCR’s warnings over many years and 120 resolutions on subprime lending and securitization, we probably wouldn’t be in the current financial mess. The fact that only 5% of retail shareowners are now voting under e-proxy is a sign that proxy voting must be made more meaningful, not less meaningful.

We should be looking at how to address short-termism and conflicts of interest that lead to gaming of numbers and the entire system. Perhaps long-term shareowners should have more voting rights. Maybe if more employees were shareowners we’d have a few employees on boards who are more likely to take a longer term perspective than day trading investors. Additional fiduciary duties on boards for the welfare of employees, the economy in general or for a salubrious environment might add a bit of stability and long-term thinking.

Why not look at the increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and other shifts to manipulate stock price and address them directly? Mitchell had a better idea in The Speculation Economy: How Finance Triumphed Over Industry. There, he proposed the terms of capital gains taxes be tied to industry. For the auto industry that might be a tax on 90% of gains if sold in the first month, tapering to tax-free after seven years. "Perhaps the right time period is two years in the software industry, or four years in computer hardware." At least that solution actually attempted to address fundamental problems. Disenfranchising shareowners does not.

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Corporate Rescue Law

With the growing number of bankruptcies in industries ranging from financial, manufacturing, to retail, what could be more timely than Corporate Rescue Law – an Anglo-American Perspective? Gerard McCormak’s review of practices in the two countries concludes there is more convergence than is generally recognized. the us moving is in a UK direction with regard to disposal of profitable components, rather than carrying on through the bankrupt corporate entity.

Both shareowners and creditors generally come out ahead when debt is restructured privately, rather than through Chapter 11. Such private restructuring is more likely to succeed when commercial banks or other sophisticated investors are involved and is facilitated when debt is concentrated, as through trading by vulture funds who are advantaged by private settlement, rather than going to court, which tends to be a more costly and time-consuming process.

McCormak provides an overview of recent law and legal thought, explaining the fundamental features in both the US and UK, entry routes to changes in corporate control, moratoriums on creditor enforcement actions, mechanisms to address financing difficulties, the role of employees, and restructuring plans themselves.

The US debtor has more rights to formulate a reorganization plan, has more prescriptive rights with regard to dividing creditors into classes, has cram down capability in exceptional circumstances to force acceptance by creditors, and has traditionally focused on getting the corporate vehicle in working order.

However, McCormak finds that a growing number of bankruptcies, at least among larger companies, have been essentially pre-packaged deals involving going-concern sales of company components blessed by the court to ensure conduct that brings the highest price. in contrast, the UK approach largely leaves matters to creditors, respecting the values of “simplicity and economic self-determination.”

Economics Of Corporate Governance and Mergers

This is a wide-ranging reader, with theory and empirical studies, domestic and international well represented. For example, one paper casts doubt on the frequent assertion that common law countries have better shareowner protection than civil law countries. Another examines the role of directors and the question of emphasis (monitoring vs. participants in management). Central to corporate governance are issues of mergers and acquisitions. If internal governance mechanisms are ineffective, which I have argued for decades, hostile takeovers can act as the avenue of last resort to discipline managers, although this all too often comes at the expense of acquiring shareowners.

Stephen Martin looks at five waves of mergers and finds irrational exuberance often plays a crucial role, concluding that although reasons for such waves may vary, results do not generally benefit shareowners. Another paper by Mike Scherer provides evidence that mergers do not generally increase productivity, despite glowing predictions by management. As the editors note, the findings of accounting data contrast sharply with those of the finance literature, short-term stock market event studies. Rises in merger activity are likely attributable to empire building by managers.

Examining Japanese mergers, Hiroyuki Odagiri finds mergers generally hurt relative profitability. A UK study finds that acquisitions, after implementation of the Cadbury Code, experience better long-run returns but the driver remains CEO ownership. Gerhard Clemenz creates a theoretical model to study the impact of vertical mergers between producers and retailers, finding that integrated firms should be better able to monopolize markets and drive up retail prices. A study of 13 indicators on competition for 29 countries finds economic performance best predicted by the degree of competition.

Not all the authors take a shareholder maximization of value view of the firm. Branston, Cowling and Sugden, for example, explore redesign of company laws based on wider membership and creation of more democratic forms. In “Corporate Governance and the Public Interest,” they call for greater participation by the public in strategic decision-making, especially mergers in the financial, IT, and communication sectors. Here, I found convincing arguments that an educated and participatory democracy can only be obtained with a communication revolution, since advertizing revenue now allocates coverage and interest.

The editors conclude that “corporate governance systems that better align shareholders’ and managers’ interests lead to better corporate performance” and “there is an important relationship between corporate governance structures and the quality of firm decision making,” especially with regard to mergers and acquisitions. Since most are suboptimal for both shareowners and society, “the suspicion remains that corporate governance systems and mechanisms are not yet optimal.” Masters of understatement but the volume includes a good collection of important reading and commentary.

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India Funds Investor Activism

India’s Securities and Exchange Board of India (Sebi) will offer financial help, as “investor education and related activities,” to select investor rights groups fighting court battles against listed companies and market intermediaries such as brokerages. “Funding will be considered on a case-to-case basis,” said a senior Sebi official, who did not want to be identified. Sebi will pick up to 75% of legal fees in these cases.

Legal cases fought by investor associations will qualify for Sebi funding only if there are a thousand or more investors affected, or likely to be affected, by issues such as mis-statement in offer document, non-payment of dividend, fraudulent and unfair trade practices or market manipulation. Legal aid will not be provided if the Sebi board is a party in the court case or where it has initiated enforcement action.

IIM-A’s Varma, who is also a former Sebi board member, said a more effective step would be if India introduces class action law suits. “It is easy for a large firm to buy out a small association of retail investors.” (Sebi to finance, nurture activist investor clubs, LiveMint.com, 2/20/09)

Yes, we have class action lawsuits in the US, as well as several activist institutional investors, such as Florida SBA, CalPERS and CalSTRS. However, most of the associations focused on retail investors seem to be geared toward brokers and other providers of service and stock picking but nothing on responsible ownership and proxy analysis. The closest we see to have are the Investor Suffrage Movement and Proxy Democracy. I’d love to see SEC funding for organizations like them and for promoting corporate governance activism. Under e-proxy, 95% of retail shareowners aren’t voting. Obviously, something is wrong. Maybe the Sebi is onto something.

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January 2009 Special News Supplement: Directors Forum 2009

The conference opened with a great dinner and a fascinating keynote speech by Jim Chanos, founder and managing partner of Kynikos Associates, the world’s biggest short-seller. In introducing him, conference co-host Larry Stambaugh proudly held up a copy of the Financial Times from two days earlier that had Chanos’ picture not only above the fold but above the headlines. (View from the Top, 1/26/09) In the FT interview Chanos said of the banks, "there is still a lot of damage on these balance sheets that has not come out." Asked if America’s financial shift is Chanosmoving from New York to Washington, he said, "power is beginning to shift… anyone who doesn’t see that is kidding themselves." He thinks the next target for regulation is likely to be private equity funds.

Short positions represent only a small portion of hedge fund activity, according to Chanos. Take out 3-6% being arbitraged and that leaves only about 0.5-1% of pure shorts. Although short-sellers are often viewed as "skunks at the garden party," "we’re not your enemy." In fact, short sellers are needed for efficient markets. He told of the case of three Irish banks that lost 40% of their value and had to be nationalized when short-sellers were required to disclosure their positions.

Short sellers are "real-time financial accountants," whereas the SEC reviews are more like "archeology." He advised that when short-sellers attack, directors should ask their CEO or CFO why. If they don’t know, they’d better find out, because they are usually doing so based on real evidence of problems. He questioned why the SEC has so few staff with real world experience, suggesting that at least one commissioner should be someone with trading desk experience. He thought it was a good time to short the rating agencies and questioned how senior executives of Wall Street banks could be so clueless. Perhaps they weren’t, because many were shorting their peers.

Chanos sees that any company still distributing analog products is likely to be in trouble, given the marginal costs of distribution over the Internet. Expect a shakeout of firms as the giants go digital. On a more global scale, he seems to be shorting Mexico, seeing a crisis coming. He covered an enormous amount of ground and took lots of questions. No, he’s never been called by a director to find out why he is shorting a company. Ask your CEO or CFO. He’s usually found some accounting issues that show bad judgment.

Everyone I talked to learned a lot from Chanos. He wasn’t a "skunk at the party" at all, at least not at Directors Forum 2009. Those of you who were unable to attend might glean the much of essential message from Short Sellers Keep the Market Honest. (WSJ, 9/22/09) Of course, you’ll have missed a great deal of wit and charm. See also, IIROC releases two studies on marketplace trends related to short sales.

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Cynthia Richson moderated the first panel of the Forum’s program on the topic "Shareholseatingder Hot Topics." Richson co-founded the Directors Forum and has been a dynamic figure in corporate governance well before creating the Directors’s Summit for the State of Wisconsin Investment Board, which the Forum used as something of a model. Panelists were among the most distinguished in the field: Richard Ferlauto, Peggy Foran, Mike McCauley and Pat McGurn. The auditorium was modern and comfortable. (right) Here, I’m not going to report individual comments either here or as I discuss other panels, since that could stifle frank debate at future Forums.

Needless to say, there was a lot of speculation concerning the role the Federal government will take at financial companies coming under the TARP. Shareowners will be taking a laser light to executive compensation, especially repricing. There are expectations that holding periods will extend beyond tenure. Investors expect stronger succession planning. Compensation should be built around developing and meeting strategic plans and leadership expectations.

Shareowners will be more proactive. Corporations should talk to their major investors before taking controversial actions. Companies expect investors to talk with them before submitting resolutions. Panelists expressed concern over both short-term shareowners and CEOs. They briefly discussed recommendations of the Group of Thirty, the Aspen Institute’s Principles, the shift to independent chairs, and many other issues. One colorful bit of advice that I think all would agree with came from Pat McGurn. "Engagement is critical. Don’t get in a defensive fetal position."

John Wilcox, Chairman of Sodali, previously with TIAA-CREF and Georgenson, moderated the panel, "Do You Know Who Your Shareholders Are? The Changing Face of Activism." Distinguished panelists included William Ackman, Brian Breheny, John Olson and Frank Partnoy. Short-selling was again discussed, including the issues of disclosure, share lending, voting by short-sellers, etc. Readers might want to review ICGN’s best practices from 2007.

Another topic discussed was the fact that so many investors are short-term holders, rather than long-term owners. Panelists appeared to agree that companies shouldn’t take action to placate shareowners by generating short-term gains that would impair long-term value. However, they couldn’t agree on requiring something like a one year holding period before being eligible to vote.

Again, it was another far-ranging discussion about disclosures, the need to create forward looking risk models, the problem of real property prohibitions against foreign ownership above 5%, the desire of shareowners to be able to talk with their elected representatives (directors), the use of Reg FD as an improper excuse not to engage (see interpretive release), and much more.

The final Monday morning session was on "The Future of Corporate Governance: the Next Five Years?" Henry James HaleduPont Ridgely, Steven A. Rosenblum, Richard Ferlauto, and Sara Teslik were moderated by James Hale. (picture on right) Again, lots of disagreement among this group. However, they all appeared to agree that technology is leveling the playing field. Just as it helped Obama win office, it is changing the way corporate governance is pursued.

Another development that could have lasting impact is the Delaware Supreme Court’s agreement to accept questions certified to it by the SEC. The first questions involved AFSCME’s proposal to CA, Inc. The Court knocked that decision out in twenty days. There was general agreement that dialogue is needed but disagreement as to how big of a stick shareowners need to get into the conversation. Majority vote provisions for director elections have been tremendously effective. Future actions may focus more on directors, rather than symptomatic issues that are often addressed in shareowner resolutions. When shareowners can speak with one voice, that facilitates agreements.

Directors need to focus on process with regard to risk. Bad outcomes don’t equal bad faith but bad documentation can certainly lead to trouble. There was a good discussion around split chair/CEO movement, including mention of Millstein’s recent attention to the topic. Yet, when the chair wants to actually be the CEO, the split might not work as well.

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Almost on cue, the keynote speaker for lunch, Rex D. Adams, discussed their transition to separating out the role of chairman. At that time Invesco was a UK company and the idea was pushed by investor groups, such as the Association of British Insurers. Invesco kept the structure when the moved to a New York Stock Exchange listing but is now reexamining their position. He acknowledged good arguments that a single position strengthens the focus of accountability on one person and ensures against distraction. However, he thinks the split provides greater transparency with respect to roles and puts the board in a better position to evaluate the CEO and management team. As chairman, he sets the board agenda and governs allocation of the board’s time but does so in close collaboration with the CEO. There were several questions from the audience and Adams did a good job of detailing his experience with split roles.

Charles ElsonThe afternoon broke into concurrent sessions. I missed "IFRS: Sound Principles — Or More Room for Manipulation?" Here’s a recent update from Business Finance – Regulatory Strategy 2009: What to Watch Right Now. Instead, I opted for the more popular, "Compensation: Pay Practices Under Fire, with panelists Karin Eastham, Charles Elson (left), JoAnn Lublin, Robert McCormick, and Anne Sheehan, moderated by David Swinford. Much of the discussion centered around repricing options, most of which are currently underwater. Movement now is to rethink the base vs bonus with more emphasis on restricted shares.

Directors were warned to tread carefully. Investors have a sense of betrayal and compensation packages may be the best place to regain trust… or lose it altogether. A good explanation goes a long way. I heard it in the panel and elsewhere that more investors are focusing on pay equity within the enterprise. Does the comp committee even look at it? Too often, CEO pay is driven totally by comparisons with other companies with no look within the organization. Employees won’t be motivated if CEO pay gets too far out of alignment. Few boards appear to be cutting back on board pay… maybe because directors are putting in so much more time and effort.

Of course, CEO pay remains the hot button issue and Forum panelists are in the news commenting. "This is different. The arguments against curbs don’t make sense any longer. My friends will bring up the issue even before I do. Opinion has been galvanized," said Robert McCormick. (CEO pay cuts: Not just for banks, CNNMoney.com, 2/4/09)

I then missed "Risk Assessment: Questions Directors SHOULD be Asking." Here are materials on that subject from Deloitte. Instead, I attended a session on "Corporate Governance "Lite" for Smaller Companies." The panel consisted of Janet Dolan, Gregory P. Hanson, William McGinis and Deborah Rieman, moderated by Scott Stanton. Panelist discussed some issues common to small companies, like too often trying to rely on board members as adjunct staff experts. Again, there was discussion of split chair/CEO positions and at what stage that transition might take place. They discussed SOX, the fact that small companies have thin or no coverage from analysts and their stock price is more vulnerable to attack on shareholder bulletin boards. The most fascinating discussion for me was of founders who don’t want to let go of the reins. What made it even more so, was discussion from audience members in that position.

That evening at dinner, we heard from New York Times columnist Joe Nocera. His speech was short and highly entertaining. He took a lot of questions from the audience on wide-ranging topics from the "great unwinding" that would have happened if Bush had been successful in privatizing Social Security, to the likelihood of credit card debt forming the next crater. One thing he was definitely sure of, each generation discovers its own cycle of "fear and greed." The cycles seem to be accelerating.

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Former SEC Chairman Christopher Cox (right) made a plea for an "exit strategy" from government ownership and Christopher Coxinvolvement. The speech was very similar to one he delivered to a joint meeting of the Exchequer Club and Women in Housing and Finance last December. He spent some time on how we got into the mess, explained the economy goes through cycles and although he did not discount the need for intervention, his main message was that we shouldn’t conflate the role of market regulator with market actor. He said Congress does two things well, "nothing and overreacting."

Interestingly, he made no mention of reinstating the leverage limits the SEC removed on 2004 under William Donaldson. For years, financial institutions could lend 12 for every 1 dollar they held in reserve. "Using computerized models, the SEC, under its new Consolidated Supervised Entities program, allowed the broker dealers to increase their debt-to-net-capital ratios, sometimes, as in the case of Merrill Lynch, to as high as 40-to-1." (Ex-SEC Official Blames Agency for Blow-Up of Broker-Dealers, New York Sun, 9/18/08)

The 2004 decision gave the SEC authority to review the banks’ increasingly risky investments in mortgage-related securities but the program was a low priority for Cox. Seven staff, without a director, were assigned to examine the companies, with assets more than $4 trillion. As of September 2008, "the office had not completed a single inspection since it was reshuffled by Cox more than a year and a half ago." "The commission’s decision to effectively outsource its oversight to the companies themselves fit squarely in the broader Washington culture of the past eight years under President George W. Bush" according to U.S. regulator’s 2004 rule let banks pile up new debt, International Herald Tribune, 10/3/08.

Bill George was next up. He’s the type of inspirational leader conferences often put at the beginning to fire up those in atBill Georgetendance, but it works just as well to end on a high note. The themes of his advice to directors have broad appeal:

  • Board independence is critical. Executive sessions were the most important thing to come out of SOX.
  • Board composition should reflect their customer base — a diversity of life experiences and thought. Strongly favors self-evaluations and a mechanism to ensure directors rotate off.
  • The form of board leadership isn’t so important — it doesn’t guarantee results.
  • Time and commitment are important. He also favors totaling the location of board meetings for context/access.
  • Board chemistry is important and is often improved by offsites or other informal occasions that result in honest conversations and straight talk about values and strategy.
  • Increase interactions with management, not just the CEO. The company’s future may depend on it.
  • On executive compensation, look internally as well for equity issues. How is pay for performance viewed from the inside?
  • Ensure the corporation’s reputation through transparency. Employees should hear it from the company first, not the newspaper.
  • Maximizing short-term shareholder value will destroy the company — focus on the next 10 years. Don’t forecast earnings — let the analysts do that.
  • Remember that government charters companies to do something of value. Ensure you a fulfilling society’s mission and instill values in those coming up. People are not just motivated by money. Search for meaning and significance, being part of something special.

Continuing the theme of ending with a bang, the last panel of the Forum was "Selecting & Training Directors — the Role of the Governance/Nominating Committee." The moderator was Richard Koppes. Panelists were Bonnie Hill, James Melican and Kristina Veaco. Whereas some might argue that Christopher Cox spoke too long and left too little time for questions, that certainly wasn’t the case here. The audience had every opportunity to ask for advice on issues that concerned them. Hill spoke on lawsuits, risk issues and culture… much around how Home Depot had learned its lessons the hard way with shareowners. Melican talked about working with clients, such as CalPERS, about the needs of a particular board. With proxy access coming, proxy advisors may be placed in such a role on a more routine basis. Veaco got right into the grit of reference binders, policies, contracts, charters, etc., emphasizing the Bonnie Hillneed for new director orientation and the benefits of being assigned a mentor. Plan ahead and get items on an annual calendar… two to three years ahead. Now that’s planning!

They talked about the importance of resources, like The Corporate Library, the Society of Corporate Secretaries and Governance Professionals, and Stanford Directors College. Hill (pictured at right) spoke of the importance of getting to know the directors before you join a board and the need for boards to think ahead, keeping a reserve of potential directors in the pipeline. She stressed the importance of peer evaluations… and the need to shred the written component. Melican suggested evaluations should be conducted by a third party rather than in-house staff. Veaco preferred evaluations have a written component as well as an oral interview and that the most sensitive questions/answers would occur orally, but that in any event the questionnaires would not be kept and only summaries of the results would be provided.

Hill advised shareowners they don’t have to submit a proposal before getting a hearing. Have the conversation prior to submitting proposals. Veaco seconded that, saying discussions should go on all year, not just during proxy season. Corporate secretaries should be reaching out to top shareowners.

Hill spoke of the increased time commitment directors are making and the use of conference calls and tools like BoardVantage. Again, split chair and CEO came up as a topic as it did so often at this year’s Forum. Hill described their use of a lead director at Home Depot. Pay was also touched on again. Home Depot has moved away from a per meeting charge, using a flat retainer. Veaco said in her experience directors are paid meeting fees, even when they are called on to attend a large number of meetings, and the amount is the same for telephonic as for in-person meetings, but companies can handle this differently. Melican stressed the need to look beyond compensation to what shareowners might view as perks. This is not the time for junkets in Paris or to line up the limousines. Look at your charitable contribution match. Think of eliminating meeting fees and address the issues before they hit the press. (see also Nominating/Governance Committee Roundtable)

Of course, much of the essence of the Forum were the encounters that happened outside the formal confesettingrence. The beautiful setting, wonderful food, small number of participants to speakers, the high quality of both, and the importance and timeliness of the topics all contributed to a very successful program. I’m sure Linda Sweeney has already begun planning Directors Forum 2010.

This year’s steering committee did a great job. Three cheers to each of the following:

Comments From Attendees

Putting Jim Chanos on the agenda on the first evening was absolutely brilliant. The theme of the meeting was the focus on shareholders. Many of us, including me, had never heard a talk by a short seller! Bill George was very inspirational and a wonderful way to top off the meeting. — Julia Brown, Targacept, Inc.

It’s always useful to understand what the latest issues are from a shareholder’s (or shareholder activists’) point of view. That helps us as management to be mindful of those as we make decisions and communicate with the shareholders. And, the exchange of ideas with other attendees was invaluable in helping improve our own companies’ performance on an ongoing basis. — Bruce Crair, Local.com

The planning and organization of the event left nothing to chance making it an outstanding experience. The Forum brought together people with diverse thinking and backgrounds but all dedicated to improving corporate governance throughout the United States. I was proud to attend and be part of the conference. — Richard A. Collato, YMCA of San Diego County; Director Sempra Energy, WD40, Pepperball Technologies and Project Design Consultants

The highlight for me was Bill George’s presentation – concise, insightful and practical. — John F Coyne, Western Digital Corporation

It was the best one yet – I really enjoyed listening to all the speakers — Lynn Turner, former SEC chief accountant

The conversational format, close to the audience, was much better than the usual sitting up high on a stage all lined up on a panel — Kristina Veaco, Veaco Group

My second Director’s Forum – again this year, very worthwhile. — Lou Peoples, Northwestern Corp.

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Pre-Conference Bonus Session

Even before Directors Forum 2009 began, there was a very worthwhile "Pre-Conference Bonus Session," entitled The Latest Research in Corporate Governance, presented by the Corporate Governance Institute at San Diego State University. There were two concurrent sessions. I attended Management and Law reviews. Therefore, I missed Finance and Accounting. All bibliographies and presentations are available on the CGI’s Post Conference Materials page.

Lori Ryan did a great job of touching on some of the highlights of studies published in 2008 on "management" topics. Following are a few of the many findings that struck me.

Professor Paul Graf‘s bibliography highlighted some important recent court decisions and articles but his presentation honed in more on common threads and direction, which I find difficult to summarize. Much of his talk centered around the concept of "good faith," which can’t be indemnified. The duty to act in good faith is "intertwined" with the duty of care, but it is different. It is "shrouded in the fog of hazy jurisprudence, grounded in the duty of loyalty, but it does not involve self dealing." "It is more culpable than a breach of the duty of care—gross negligence."

Sounds a bit like a Zen koan. In Disney, failure to act in good faith is 1) where the fiduciary intentionally acts with a purpose other than that of advancing the best interests of the corporation, 2) where the fiduciary acts with the intent to violate applicable positive law, or 3) where the fiduciary intentionally fails to act in the face of a known duty to act, demonstrating a conscious disregard for his duties. The last was emphasized by Graf, who went on to quote several other attempts to surround the concept of good faith, including Nowicki’s notion that courts are focusing on bad faith, instead of defining good faith. I liked his distillation of Hill and McDonnell. "On the continuum of liability from duty of care to duty of loyalty, good faith occupies the vast middle ground." Apparently, ill defined ground.

From what I gathered, the duty of care is morphing into the duty of good faith in recent cases such as Stone v. Ritter and Ryan v. Lyondell. Plaintiff alleged the directors knew that they had a known duty to act to ensure an offer was the highest available but they chose not to act. Therefore, good faith was implicated for purposes of the motion to dismiss. What was crystal clear was the need to document "actions" taken, even if they would otherwise be viewed as non actions, since if the board "acts," its actions are reviewed under the more favorable business judgment rule.

In sessions I did not attend, David DeBoskey provided a review of 2008 in Accountancy and Nikhil Varaiya reviewed Finance. You can find their bibliographies and presentations on CGI’s Post Conference Materials page.

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Best Book of 2004

Pay Without Performance

Pay Without Performance: The Unfulfilled Promise of Executive Compensation was the best book published in 2004 in the field of corporate governance. Lucian Bebchuk and Jesse Fried focus on one aspect of corporate governance, executive pay, and clearly demonstrate that many features of executive pay are better explained as a result of shear managerial power, rather than arm’s-length bargaining by boards of directors.

After thoughtful analysis, they find “systematic use of compensation practices that obscure the amount and performance insensitivity of pay, and the showering of gratuitous benefits on departing executives.” The cost of current corporate governance systems is weak incentives to reduce managerial slack or increase shareholder value and “perverse incentives” for managers to “misreport results, suppress bad news, and choose projects and strategies that are less transparent.”

Their recommendations on improving executive compensation are clearly aimed at eliminating or reducing some of the most egregious of the practices of those they document. Interestingly, the recommendations are written to shareholders, apparently because there is little likelihood such reforms will be raised by even “independent” directors without further corporate governance reforms. A few examples are as follows:

  • To reduce windfalls in equity-based plans, shareholder should encourage that at least some of the gains in stock price due to general market or industry movements be filtered out. “At a minimum, option exercise prices should be adjusted so that managers are rewarded for stock price gains only to the extent that they exceed those gains (if any) enjoyed by the most poorly performing firms.”
  • Executives should be prohibited from hedging or derivative transactions to reduce their exposure to fluctuations in the company’s stock and should be required to disclose proposed sale of shares in advance to reduce perverse incentives to benefit from short-term gains that don’t reflect long-term prospects.
  • Do not provide large payments to executives who depart because of poor performance.
  • The compensation table should include and should place a dollar value on all forms of “stealth” compensation, such as pensions, deferred compensation, postretirement perks and consulting requirements.
  • Allow shareholders to propose and vote on binding rules for executive compensation arrangements.

Although many directors now own shares, their related financial incentives are still too weak to induce them to take on the unpleasant task of firmly negotiating with their CEOs. Recent reforms requiring a majority of independent directors, and their exclusive use on compensation and nominating committees, may be beneficial but “cannot be relied on” to produce the kind of arm’s length relationship between directors and executives needed. CEOs retain influence over director compensation and rewards, as well as social and psychological rewards. “The key to reelection is remaining on the company’s slate.” Remaining on good terms with the CEO and their director allies continues to be the best strategy for renominatation.

Executive compensation “requires case-specific knowledge and thus is best designed by informed decision makers.” They conclude, “While we should lessen directors’ dependence on executives, we should also seek to increase directors’ dependence on shareholders.” After discussing the now failed “open access” SEC proposal to grant shareholders the right to place a token number of candidates on the ballot after specified “triggering events,” the authors propose the following significant corporate governance reforms:

  • Access to the ballot should be granted to any group of shareholders that satisfies certain ownership thresholds. Their example is 5%, held for at least a year.
  • Such slates should be able to replace all or most incumbent directors in any given year.
  • Companies should be required to distribute the proxy statements of shareholder nominated candidates and should be required to reimburse reasonable costs if they garner “sufficient support.”
  • Legal reforms should require or encourage firms to have all directors stand for election together.
  • Shareholders should be given the power to initiate and approved proposals to reincorporate and/or adopt charter amendments.

In their conclusion, the authors recognize the “political obstacles to the necessary legal reforms are substantial” and that “corporate management has long been a powerful interest group.” The demand for reforms must be greater than management’s power to block them. “This can happen only if investors and policy makers recognize the substantial costs that current arrangement impose.” Pay without Performance will certainly contribute to such recognition. It should be required reading for every fund fiduciary, SEC board and staff, as well as all members of Congress. Shareholders should read while sitting down.

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Corporate Governance: Law, Theory, And Policy

Joo-CGCorporate Governance: Law, Theory and Policy, edited by Thomas W. Joo (Carolina Academic Press 2004), this excellent reader on corporate governance presents a cross section of mostly academic perspectives on important current issues, including: the role of the corporation, balancing interests, state and federal law, shareholder litigation, criminal and regulatory law, shareholder voice, board composition, director duties in corporate takeovers, executive compensation, and corporate lawyers as gatekeepers.

Many of the articles are modern classics by authors well know to readers of CorpGov.Net, such as Margaret Blair and Lynn Stout, Marleen O’Connor, Stephen Bainbridge, Edward Rock, Roberta Romano, John Coffee, Mark Roe, Continue Reading →

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The Recurrent Crisis in Corporate Governance

The Recurrent Crisis in Corporate Governance The Recurrent Crisis in Corporate Governance pushes the edge of mainstream thought in this growing discipline. Authors Paul W. MacAvoy and Ira M. Millstein, giants in the field, have well deserved reputations as practitioners and scholars. This thin volume will quickly guide the course for progressive board members concerned with building solid companies, rather than future Enrons.

Although MacAvoy and Millstein stop short of urging direct nomination of directors by shareholders, the author’s do recognize the real benefit of boards being truly independent from the CEO. “The independent and professional board is the ‘grain in the balance’ of survival in the long run.” Continue Reading →

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Review: Fair Shares: The Future of Shareholder Power and Responsibility

Much has been written about the role of directors and boards but far too little on the how shareholders can add value. Carolyn Kay Brancato did so in her excellent book, Institutional Investors and Corporate Governance: Best Practices for Increasing Corporate Value. However, Brancato was primarily writing from the perspective of managers. Although there was general recognition that shareholders can add value, the thrust of the book was on what managers need to know about shareholders and how to attract shareholders who will support them. Charkham and Simpson take a larger societal viewpoint. At bottom, they are concerned not with what is best for managers but what system will best provide the goods and services that society needs. Continue Reading →

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