Tag Archives | The Corporate Library

3D Advisory Panel Named

CalPERS and CalSTRS are working with an Advisory Panel of leading corporate governance experts to develop a new digital resource devoted to finding untapped diverse talent to serve on corporate boards.

The Diverse Director DataSource, known as “3D,” will offer shareowners, companies and other organizations a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a director’s seat.

“The Diverse Director DataSource is an important tool for finding untapped, experienced Continue Reading →

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Airgas: More Reasons for Proxy Access

The Airgas situation demonstrates that continued investor engagement is needed in order to assert shareholder power in the hostile takeover setting. Popular perception holds that classified boards and poison pills are both in sharp decline, and there is some truth to this notion at large-cap US firms. However, nearly 90% of US firms have charter provisions that allow their boards to adopt a pill at any time, without shareholder approval. Classified boards, moreover, are far more common at smaller companies and recent IPOs than at established large-cap firms. For more on the implications of the Airgas/Air Products battle for US governance reform, see my report, available as a free download from the GovernanceMetrics online store.

via Lessons from the Airgas Battle – The Corporate Library Blog.

The report concludes:

Shareholders, especially those with holdings outside the S&P 500, are left with one option if they wish to retain power in the hostile takeover setting: use the tools available, including proxy voting, shareholder proposals and “vote no” campaigns against directors, to work toward the elimination of the classified board.

Similar sentiments earlier this year at theRacetotheBottom [Delaware Validates “Just Say Never:” Air Products v. Airgas (The Need for Shareholder Access) (Part 3)]

Airgas in conjunction with Selectica and Yucaipa have as a practical matter mostly eliminated the market for corporate control. Without the market for corporate control, management becomes even more entrenched. These decisions, therefore, make it even more important that shareholders have a mechanism to remove directors who do not respond to shareholder interests. Cases like Airgas all but prove the need for shareholder access.

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Proxy Season Foresight #3

The two big items on the governance proposals front this year, according to The Corporate Library are, management proposals:

  • the advisory vote on executive compensation (SOP), and
  • the advisory vote on the frequency of the advisory vote (SWOP)

So far, only two companies have received majority votes against approval of executive pay, those at Jacobs Engineering and Beazer Homes…

One of the earliest votes was Monsanto, with 35.08% of shareholders disapproving of executive pay. “We won, ‘soy ’ there,” said Monsanto. But to describe this as a “victory”, once you’ve “rounded up” (sorry, you can’t not, can you?) the nay sayers, it’s a bit of a Pyrric victory…

However, there have been four other annual meetings more recently with votes against Say on Pay in the region of 47% to 49%…via Proxy Season Foresight #3 (From remarks for a BSR webinar 16 March) – The Corporate Library Blog.

Tomorrow, I’ll post my vote at Schlumberger. Frankly, I just can’t bring myself to vote in favor of $15 million in pay for anyone. There has to be a limit to this craziness. We’ve got to stop the bracket creep.

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2010 CEO Pay Survey

Corporate Governance Research Reports. A new report from The Corporate Library found that the value of CEO perquisites at S&P 500 firms declined by a median of 18% in 2009. Most notable was a clear drop in the number of CEOs who received tax gross-ups. The report titled, “The Corporate Library’s 2010 CEO Pay Survey,” is available for $125 from The Corporate Library’s online store and also examines the pay packages of the top ten highest-paid CEOs of 2009.

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Corporate Accountability, Web 2.0 & CorpGov Functions at Public Funds

Bill Baue and Marcy Murninghan have authored a recent working paper that deserves wide circulation and thoughtful consideration. The Accountability Web: Weaving Corporate Accountability and Interactive Technology can be downloaded from the website of the Corporate Social Responsibility Initiative at the Harvard Kennedy School of Government. Since I’m trying to get you to read the paper, I’ll provide just a small taste. Then I’ll show how it might be applied to the corporate governance functions at public pension funds, as an example.  Let’s start with a very abbreviated version of the introduction in the Executive Summary:

Corporate accountability and Web 2.0 share a common thread: both are rooted in interaction and thrive on engagement. This overlap creates opportunities for corporate accountability and Web 2.0 to join forces to create mutual benefits for firms and their stakeholders. However… current business use of Web 2.0 tools focused more on improving performance and increasing efficiencies inside the firm, and on brand management, customer relations, or crisis management outside it.

At a time when our economy is navigating a crisis, and public trust of business activity is in short supply, the intersection of concerns about corporate sustainability, accountability, transparency, and ethics with the proliferation of Web 2.0 communication tools offers an opportunity for new forms of collaborative leadership and participation… an evolution in the concept of who is “inside” and who is “outside” the organization.

Accountability 1.0 is marked by one-way proclamations, campaigns, and PR communications. Accountability 2.0 rests on the assumption of two-way communication, cooperation, and mutual engagement.

Almost anyone will find the tale they weave informative, even entertaining. For example, from a section titled “The Progression of Corporate Accountability,” they start with what may be the first case of stakeholder activism, soon after the Dutch East India Company launched their initial public offering.

Dutch religious pacifists, appalled by the reliance of the company’s business model on the “generous application of warfare, blockade, piracy, assassination, imprisonment, plunder, terror, slavery, [and] bribery,” campaigned by lamplight house-to-house to gather signatures for a notarized public petition, to boycott investment, and to make a show of selling shares in protest (Baue 2008; Davis et al. 2006:175-6).

Let’s take a quick look at the paper’s recommendations, greatly abbreviated here:

  1. Adapt, Don’t Just Adopt. Don’t just extend your existing model, use Web 2.0 for engagement/dialogue to enhance accountability.
  2. Cultivate Participation. Build community and technology in parallel; don’t assume if you build it, they will come.
  3. Develop Clear Terms of Engagement. Electronic media is susceptible to misunderstanding. Set guidelines for critiquing practices and policies, not people. Use assessment and feedback mechanisms to identify keys to success and flag problems.
  4. Foster Mutual Accountability. Model self-accountability, when asking other parties to hold themselves accountable, to create a culture of mutual accountability.
  5. Use Blended Engagement. Augment Web-based communication with face-to-face meetings, choosing the medium based on which is most likely to serve the objectives.
  6. Broaden the Media Palette. Social networking, augmented reality (AR) and wikis tools may be pushing the envelope too quickly, try them internally first to unfreeze thinking.
  7. Build Communities of Inquiry and Practice.  Utilize experts with experience in building communities of inquiry and practice to convene, facilitate, moderate, and/or curate online engagement.

Like corporations navigating the financial crisis, public trust of public pension funds is also in short supply. Many have suffered scandals around placement agents, face huge deficits because of falling portfolio values, are resented by taxpayers who have lost their own defined benefit plans, and are always vulnerable to funded attack by money managers who want the profits that would incur if public employees were converted to defined contribution plans.  The most powerful adversaries of public pension fund might be organizations, like the Business Roundtable and the US Chamber of Commerce, that represent top corporate managers. The more coordinated and powerful shareowners are, the likely directors will represent their interests in corporate boards rather than acceding to every whim of management. The percentage of the profits taken by top management has gone from about 5% to 10%. It isn’t hard to imagine they want to keep it and public pension funds have taken a leadership role in weakening the power of the imperial CEO… for example, by advocating the roles of CEO and board chair be split.

Public employees want to keep their defined benefit plans. They know their pension funds are under attack but they often have little understanding of how corporate governance plays a role in the earnings of their plans or the dynamics of initiatives, legislation and other attacks that may be orchestrated by forces not easily identified, especially after the Supreme Court’s decision in Citizens United. Web 2.0 and Accountability 2.0 could offer public funds a way to integrate their corporate governance concerns about sustainability, accountability, transparency, and ethics with their own internal governance.  These tools offer an opportunity for new forms of collaborative leadership and participation with their own stakeholders… an evolution in the concept of who is “inside” and who is “outside” the organization. By utilizing such tools, funds may not only increase the understanding of stakeholders (which might expand beyond unions and direct members to taxpayers and others) but they may also benefit from what Baue and Murninghan call “cultivating communities of inquiry and practice.”

Now let’s try to apply these recommendations to the corporate governance functions of public pension funds. At some funds, these functions may be largely contracted out or carried out by one individual. Other funds may have dozens of contractors as well as dozens of in-house staff. Therefore, I’ll divide them into basic and expanded activism practices. Most of these practices will be Web and Accountability 1.0 but some will move into 2.0 and be informed by the paper. I’m drawing heavily for large portions of the list from Council of Institutional Investor (CII) publications.

Basic Activism Practices

  1. Obtain useful information necessary to make activism decisions;
  2. Commit staff time to implementing an activism strategy;
  3. Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework (see those of  CII and CalPERS, for an example);
  4. Make the proxy voting guidelines available for public comment prior to adoption… using a 2.0 strategy, provide for and cultivate interactive comment and discussion, reaching out to unions and other interested parties who are also connected with members and taxpayers;
  5. Make sure fund proxies are voted by fund staff or by a specialized proxy voting service in accordance with the fund’s proxy voting guidelines;
  6. Adopt a process to handle “No” votes on directors;
  7. Provide for an override mechanism so the fund can vote individual proxies on a case-by-case basis, even if voting is otherwise delegated;
  8. Factor into share lending practices a mechanism to retain voting rights on a targeted basis;
  9. Obtain and post on the web an annual report on the fund’s proxy votes… using more of a 2.0 strategy, facilitate comment and discussion again after the fact, since there are often unanticipated proposals each year and we often learn a lot during proxy season;
  10. Disclose the fund’s proxy voting guidelines on the web site, or alternatively on CII or other web site;
  11. Go public with issues or views on proxy votes through press releases, Twitter, a blog or other mechanisms that move toward 2.o;
  12. Withhold votes from directors of specific companies and/or committees;
  13. .

    Expanded Activism Practices

  14. Develop a methodology and strategy for communicating and engaging with portfolio company directors or executives… making use of pre-season webinars and other 2.0 mechanisms as forms of blended engagement to reach out to more companies efficiently;
  15. Coordinate action with, or support the actions of other shareowners through international networks like ICGN, national networks like CII, as well as state and local networks like the Los Angeles Area Pension Trustees Network;
  16. Weigh in with Congress, the SEC and others to improve investors’ legislative and regulatory environment… use or work with constituent groups to use web-based tools for electronic messaging and other advocacy efforts;
  17. Monitor the discretionary voting by investment managers of shares held for other clients to ensure alignment;
  18. File binding and/or precatory shareowner proposals… foster mutual accountability by modeling self-accountability before introducing proposals that are also applicable to fund governance;
  19. Solicit support (not proxies) for shareowner proposals or opposition to management proposals;
  20. Disclose shareholder initiatives to stakeholders and the public… solicit feedback and dialogue from stakeholders though surveys, webinars and other methods before filing to ensure support or at least acquiescence;
  21. Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles;
  22. Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy;
  23. Use the legal system, such as filing class-action suits under the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995 (see On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance by Stephen J. Choi & Jill E. Fisch);
  24. Work with CII members and others to develop a backbench of potential director candidates with a wide variety of skill sets;
  25. Disclose proxy votes in advance of AGMs on web site, through RSS feeds, ProxyDemocracy.org, MoxyVote.com, and other such sites as the develop;
  26. Develop your reputation as a voting “brand” (see Proxy Voting Brand Competition at http://votermedia.org/publications). One way to enhance your brand is to provide a brief reason for your vote. As sites compiling votes become more popular, canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following;
  27. Develop education tools and games to help members with investments to supplement their pensions making use of mutual fund activism comparisons like those available at ProxyDemocracy.org;
  28. Use Twitter and/or a blog to broadcast votes and invite discussion, especially from stakeholders;
  29. Build communities around fund activism that will provide feedback, identifying success and flagging problems;
  30. Run a short slate of directors;
  31. Campaign to deny management a quorum in especially circumstances where the rules or procedures are inherently unfair (see Guest Commentary From Glyn Holton: Emergency at Intel and Intel Virtual Mtg Out for 2010 But Exploring Future with USPX
  32. Utilize corporate governance measures as part of an overall investment strategy. For example, GMI and The Corporate Library have both done studies showing that an index of funds weighted by certain corporate governance measures (mostly measuring risk) should lead to outperformance over traditional indexing;
  33. Work with the SEC to encourage the development of proxy advisory firms (PAFs) by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples from Mark Latham that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented. For more recent language, click here (Consider that RiskMetrics probably spends an average of less than $4,000 researching each proxy and think about how much more company specific recommendations can be made if $50,000 is allocated to PAFs by shareowners, partially from corporate funds.);
  34. Model self-accountability to your own stakeholders in ways similar to how you think corporations should be responsible to shareowners by transitioning from one-way communication to two-way or multi-directional interactivity.
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Sustainability Reporting

The Corporate Library has a new free report well worth downloading, Ten Myths About Sustainability Reporting. Kimberly Gladman explains how the UN’s GRI has become mainstream.

  • According to SIRAN, almost all S&P 100 companies disclose some sustainability informaon either in reports or on their websites.
  • UNI’s principle to “seek appropriate disclosure on ESG issues by the entities in which we invest” has have been endorsed by more than 700 investors represenng approximately $20 trillion in capital.
  • Growing evidence suggests a posive relaonship between strong ESG performance and equity returns.
  • Increasingly, external auditors verify company reports.
  • Comparisons among companies are facilitate by GRI, Corporate Register, Ceres, and Carbon Disclosure Project.

Want to get your company involved? Gladman’s report offers suggestions on your next steps and who to contact.

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Ramblings on Votes, the Power of CorpGov.net, TCL and Jim Crow for Retail Shareowners

I see from Alcoa’s 8-K filing, that William Steiner’s proposal to end supermajority requirements won 68%. Last year, a similar proposal won 73% but this year management put their own proposals on the proxy, so some just voted for their proposals to end supermajority requirements in three areas. Management’s highest proposal won 736,143,769 votes, with 20,319,646 opposed and 4, 344, 531 abstentions. I understand that’s 74% of stock outstanding, so the measures still failed to meet the 80% supermajority threshold required for change.

With 74% favoring, and 2% opposing, it is yet another frustrating exercise in futility by shareowners. Since management placed proposals on the proxy, they look like they’re being cooperative. However, how much was real and how much was just for show? Did they make any real effort to solicit proxies to overturn supermajority requirements? My guess is that it was minimal, if any.

I see from the 8-K filing by Kellogg that my proposal to end supermajority requirements won about 46% of the vote, despite opposition from the Kellogg Foundation, which owns about 23% of shares. At least with the new filing requirements, we’re getting results a lot quicker.

At Bank of America, shareholders passed a resolution by John Chevedden that would give shareholders the right to call a special meeting as long as owners of at least 10% of shares vote in favor of it, down from the current 20-25% requirement (unclear in Fortune article). (Bank shareholders fight back — and win, Fortune, 4/29/10)

I reviewed Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance by Martin B. Robins on April 22 in Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule. I may be going out on a limb but I think that publicity was all that was needed to push the paper onto the list of SSRN top downloads. Now, if we can only influence proxy voters as much as we influence SSRN readers, we’ll have a huge impact on corporate governance.

Ric Marshall and Cheri Gaudet, of The Corporate Library, put on a great webinar yesterday, “Director Elections 2010: A Shareowner’s Guide.” Ric was able to demonstrate their tools using some well know examples of outrageous disclosures. If you missed it, you may be able to catch the recorded version on-demand, assuming it is available to those who didn’t register.  It was especially interesting to see how TCL flags directors for various issues such as overboarding, lack of full independence, involvement in corporate failures, compensation and for several other reasons. Want to know which directors have lucrative compensation contracts with management? TCL has the tools to get you their in seconds. Check out Director Flags – Highlighting Shareholder Concerns. You can also request a free trial to Board Analyst to try out the Director Highlights feature.

John Chevedden brought to my attention what appears to be draconian bylaw provisions that call for a whole bunch of hoops to be jumped through for raising issues at shareowner meetings.  Some companies appear to be trying to discourage shareowner proposals by telling proponents that in order to file a rule 14a-8 proposal they have to jump through the same hoops as hedge funds. See item 4 in this example from H&R Block but note the language near the end  that says rights of Rule 14(a)-8 aren’t impacted. Comments on what this is all about?

And speaking of John Chevedden, he e-mailed me with yet another way retail shareowners get the shaft when voting through a voter information form (VIF) from Broadridge. I’ve written extensively on the “blank vote” issue and even filed a rulemaking petition with the SEC. Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. However, VIFs typically include a practically microscopic footnote. Chevedden point out that after you cast your preliminary vote, it is easier to see how your blanks will be voted; and he provided this example from Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared. Gotcha! I revised my post, Jim Crow “Protections” for Retail Shareowners, to include this additional information.

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The Corporate Library's Governance Ratings and Equity Returns

Research on the relationship of governance ratings systems to investment performance has shown mixed results, and the significance of particular governance features to equity returns is widely debated. A recent study by The Corporate Library suggests their ratings system, focused on the identification of agency problems rather than supposed best practices, can contribute significantly to generating excess returns.

TCL backtested a model portfolio benchmarked to the Russell 1000 that excluded companies they rated “high” or “very high” risk in board, compensation and/or overall governance. Unlike “best of class” studies, TCL didn’t hesitate to underweight entire industries where poor governance is widespread and risk is higher.

In comparison to the benchmark Russell 1000, the model TCL portfolio with the strictest standards had a smaller weighted average market-cap ($42 billion, vs $79 billion) and a slight growth tilt (P/E ratio of 20.3 vs 18). It was persistently underweight in financials and energy, while overweight in technology stocks. Annualized performance was 6.91%, compared with 4.16% for the benchmark for the 2003-2010 period.

Download the study for free from TCL.

I consider studies such as this one extremely important. We can shout from the rooftops about the need for corporate governance reforms until we’re blue in the face, but once a few funds have been initiated that make excess returns using corporate governance indices to overweight or underweight issuers, the walls of resistance will really come down. Please let me know of additional studies and especially of any funds using corporate governance strategies.

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Free Webinar: Director Elections 2010 – A Shareowner's Guide

Join The Corporate Library on April 28 for a free webinar with Chief Analyst and co-founder, Ric Marshall. New SEC proxy disclosure rules and changing director election standards have greatly expanded the ability of shareholders to influence election outcomes for individual corporate directors, but for many investors they have also increased the complexity and uncertainty of the voting process.

Current subscribers of The Corporate Library’s Board Analyst database will benefit by learning more about the individual director screens employed by our top analysts in evaluating individual director and board effectiveness, while non-subscribers will have an opportunity to better inform their own analysis and decision-making by learning more from these same insights. Time: 1:00 – 2:00 PM EDT. Register; I certainly did.

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Annual Meeting Reports

I don’t get out to attend many annual meetings but I would like to encourage anyone who does to report on what happened. Matthew Rafat, who writes for Seeking Alpha, is the only one I know of who routinely writes up his impressions of these events.

On April 14, Rafat wrote Notes From the 2010 Brocade Shareholder Meeting. I see management had two governance proposals on the proxy. One to declassify the board. The other to end supermajority requirements. Since these both came from management, I suspect they got the votes required for adoption. However, I would be interested to know if there was any discussion at the meeting of these proposals and their importance. Rafat’s discussion of Brocade’s strategy is good. I wish he would discuss governance concerns more frequently but at least he is out there giving us some idea of what happens.

John Chevedden reports that a shareowner proposal by Patricia Shaw of Scarborough, Maine, submitted by Ram Trust Services of Portland Maine won 55% support at Weyerhaeuser this morning in spite of management opposition. The proposal was item 6 and advocated for a right for 10% of shareholders to call a special meeting. I see that, as reported by ProxyDemocracy.org, Green Century, CalSTRS, CBIS, Florida SBA, and AFSCME all voted in support. In addition, Chevedden tells me that probably as a result of a shareowner proposal last year to end supermajority requirements that won 85% support and a 2005 proposal from CalPERS that won 73% to declassify the board, management put forward a proposal this year to not only  end supermajority requirements but also to declassify the board, allowing annual election of all directors. That important measure passed as well.

According to an e-mail alert from The Economist, “Nearly 40% of shareholders at UBS opposed a plan on executive pay in a consultative vote. The Swiss bank earlier forecast a pre-tax profit for the first quarter, but investors are furious at the huge losses it has previously incurred. Kaspar Villiger, the chairman, said he understood the anger, but that UBS had ‘cut back too much last year, causing us to lose entire teams, their clients and the corresponding revenue.'” (4/15/2010)

Fair Pensions reports, their resolution on BP’s controversial plans in the Canadian tar sands (also known as oil sands) won support or abstention from 15% of shareowners, despite a strong company recommendation to oppose. Many, even some of those voting with management, agreed that BP had not provided sufficient assurance that tar sands plans are financially robust, and that the greater level of transparency called for in the resolution is still required.

Those attending the meeting raised questioned the companies’ use of demand projections that assume no change in governments’ climate change policies & imply catastrophic climate change. They also questioned, how adequate control of outsourced projects can be asserted and expressed concern over health impacts on local communities and the overall impact on BP’s finances. Catherine Howarth, CEO of FairPensions said:

Shareholder resolutions are primarily a means to draw attention to an issue of concern to investors. The vote today is only one outcome of a wider process, which has catapulted tar sands risks to the top of BP’s agenda, and has become a major topic of debate in the City. The task for investors now is to make the most of the disclosures made to date, and continue to robustly engage with BP into the future. This will be matched by an unprecedented level of scrutiny from campaigners, politicians and members of the public.

The resolution was filed by over 140 individual and institutional investors from around the world including The Co-operative Asset Management, Boston Common Asset Management, the Ecumenical Council for Corporate Responsibility (ECCR), the UNISON Staff Pension Scheme, Rathbone Greenbank, and other fund managers, foundations and faith groups. The resolution asks the company to commission and review reports setting out the assumptions made by both companies in deciding to proceed with tar sands projects regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods. The resolution asks that the findings of the report and review should be reported to investors in 2011.

Votes cast at the AGM have yet to be counted, but figures for votes cast in advance and announced on the day indicate that 15% of shareholders either voted for the resolution (5.6%) or abstained (9.2%). Total advance votes are as follows:

For: 622,272,418
Against: 9.497,638,714
Withheld / abstained: 1,020,301,075
Total Shares: 11,140,212,207

On a somewhat related note, a new proxy voting guide from The Corporate Library has just been released by The Corporate Library and is available for free download. Proxy Voting on Labor Standards: A Case-by-Case Guide.

The second principle of the UN PRI commits signatories to active ownership with regard to environmental, social and governance (ESG) issues. “Proxy voting is an important means of exercising active ownership but can also be challenging to execute,” said Director of Research and Risk Analytics Kimberly Gladman, author of the voting guide. “Investors must not only understand the topic of the resolution, but also determine whether it deserves support at a particular company.” Although this guide focuses on labor standards, guidance on all ESG issues is similar.

Investors who conclude that a resolution is germane to the company’s business and that the company’s board and management are not yet adequately addressing the business risks and opportunities it poses are likely to support the resolution. Those who conclude that the issue is not significant for the company, or that it is significant but the company is already taking adequate steps to address it, may oppose the resolution. Some investors in the later group, however, may also choose to abstain on the resolution, in order to signal support for investor abstention to the issue in general, even if it does not seem pressing at this particular company at this time. Some investors also oppose or abstain on resolutions they believe are overly prescriptive or poorly constructed, even if they agree that the issue is important.

Abstentions, in the case of BP, may indicate the many investors want BP to do more, but aren’t necessarily ready to back this specific proposal. How many investors have the time to sit down and properly read and analyze the proposal? That where, in future, “branded” voting advice becomes ever critical. Who do you trust? Mark Latham’s Proxy Voting Brand Competition remains a critical read.

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Medium CEO Pay Declines

Median total annual compensation for North American CEOs declined for the second straight year, according to a preliminary CEO pay survey from The Corporate Library.

The study analyzed CEO compensation data for fiscal 2009 drawn from 823 proxy statements filed in the United States between July 1, 2009, and March 25, 2010.

The report titled The Corporate Library’s Preliminary 2010 CEO Pay Survey, is available for $45 from The Corporate Library’s online store. According to Paul Hodgson,

The decrease marks the first time since The Corporate Library began publishing its annual CEO pay survey in 2002 that the median change in compensation has declined for two consecutive years.

Median total annual compensation for all CEOs in the study declined by 2.78 percent from 2008 to 2009.

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Goodyear Vote and the Timeliness of Analysis

The Corporate Library Blog today carries a great post, Inflated CEO pay at Goodyear Tire. Good puns and even better information on CEO Robert J. Keegan’s “maximum payout for a net loss.”

Mr. Keegan received four separate stock option grants. The largest of the four market-priced grants, almost 500,000 of them, was at $4.81. Less than six months later he’d made $6.23 million worth of notional profit on that. This is just irresponsible, and it’s taking advantage of a super-low stock price to grant any stock options at all in such circumstances. It’s virtually impossible NOT to make money in such a situation.

This is Paul Hodgson writing in excellent form, including his conclusion that “it might even be time to vote against Denise Morrison, Rodney O’Neal, Craig Sullivan and Thomas Weidemeyer,” members of Goodyear’s compensation committee.

I’ve only got one complaint. The meeting is tomorrow; for many, voting has already ended. Hopefully, those who subscribe to “Board Analyst,” or other services at The Corporate Library, got this analysis earlier. However, I see, as reported by ProxyDemocracy.org, CalSTRS voted in favor of compensation committee members, so I’m left wondering if timeliness is a frequent issue during the busy proxy season.

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Dodd Bill: Majority Vote Provisions

Senator Dodd  finally introduced his bill. I’m sure it will get a massive coverage and comment. I will have little to add. Find a quick overview at The Corporate Library (Dodd’s Bill, 3/15/10). The Dodd Bill: Weighing In at a Portly Six Pounds, by Broc Romanek at TheCorporateCounsel.net/Blog provides the best guide I’ve seen.

However, I would also draw your attention to Restoring American Financial Stability Act of 2010: Reforming the Independent Director Standard and Federalizing Executive Compensation and other posts by J. Robert Brown at theRacetotheBottom.org, 3/16/10. Brown brings to our attention a couple of good “sleeper” provisions that may help override provisions now controlled by exchanges and Delaware. However, he also points with disappointment to a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure.

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn’t remove them.  The provisions are, therefore, a myth.

I hope CII and others will take up this issue. Brown writes, “Real reform would provide that directors who do not receive a majority lose and cannot take office.” I’m willing to concede there may be circumstances where that could create a problem. However, if a board doesn’t accept a resignation, they should be required to immediately find a replacement and do so within six months.

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0.3% of Directorships Voted Down in 2009: Will 2010 Be Different?

The Corporate Library announced a new enhancement to its Board Analyst® product:  the ability to visually flag specific areas of potential concern for individual directors. (‘Director Flags’ Zero In On Potential Areas of Concern for Individual Board Members, The Corporate Library Blog, 3/8/10)

With the end of “broker voting” for directors and the adoption by many firms of majority vote requirements, shareowners finally have an opportunity to make a difference. However, doing so is difficult because board activities still go on inside what amounts to a black box. In 2009, only 95 directors out of 30,000 positions covered by Board Analyst® failed to get a majority vote. Reviewing area of possible concern, they found the following:

  • 2,712 individuals who are over 70; 283 who are over age 80; and 10 who are over age 90.
  • 4,588 directorships whose tenure is greater than 15 years and 1,187 whose tenure is greater than 25 years.
  • 1,257 directorships where the individual director is over 70 AND his or her tenure is greater than 15 years.
  • 3,468 directorships where a director with more than one year of tenure holds no shares in the company, including 1,108 where a director with more than five years of tenure holds no shares.
  • 93 directors who sit on more than four corporate boards, and thus may be over-boarded.
  • 187 CEOs who sit on more than two corporate boards, and thus may be over-boarded.
  • 3,461 directorships categorized as “Outside Related”, indicating a possible conflict of interest.
  • 272 directorships where the individual has previously failed to meet minimum attendance standards.
  • 95 directors who did not receive support from a majority of shareholders at 2009 elections.
  • 1,070 directors who sit on two or more boards assigned a D or F rating by The Corporate Library.
  • 702 directors who have been flagged by The Corporate Library as having been involved in a previous corporate bankruptcy or other failure, including 21 who have been involved in more than one such failure.

No one is saying all these directors should be turned out of office but surely there must be more than 95 out of 30,000 director positions that don’t deserve an A or B and who wants mediocre directors representing shareowners? What excuse can any director have for not holding any shares in their company after five years on the board? Will 2010 be a turning point? The Corporate Library is offering tools that help, if only institutional shareowners would use them. Better yet, they should vote and announce their votes, and the reasons for their votes, two weeks before the annual meeting, so that retail shareowners can copy their brand.

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CorpGov Bites

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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CDV vs FAVE: More Proxy Voting Options (updated)

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

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

As Latham puts it:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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PRI Is Not Just PR

A new white paper, “Why the PRI Is Not Just PR,” is available as a free download from The Corporate Library’s website.

The United Nations’ Principles for Responsible Investment (PRI), launched in 2006, have been endorsed by more than 670 asset owners, money managers, and investment service providers who have pledged to incorporate environmental, social, and corporate governance (ESG) issues into their investment analysis and ownership policy. At first glance, the Principles can seem vague: what exactly does it mean, one might ask, to “incorporate ESG issues into investment decision-making” or “seek appropriate disclosure on ESG”? The Principles are explicitly “voluntary and aspirational,” and signing on to them might seem like a mere marketing gesture. However, the sixth of the Principles is a promise to report on an entity’s progress toward implementing all of them, and in August 2009 five organizations were removed from the signatory list for failing to make such a report.

The report goes on to describe each of the Principles, provides guidance on what each is about and on how to comply.

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CorpGov News Bites

Goldman Sachs Group Inc., trying to show it is responsive to public pressure over its pay, said Chairman and Chief Executive Lloyd Blankfein would get a $9 million bonus for 2009, a fraction of the $68.5 million payout he got in 2007. (Goldman Bows on CEO Pay, WSJ, 2/6/10) My heart bleeds for him but I still haven’t earned a dime from my 2007 investment in Goldman, a company where management certainly dominates over shareowners. We did win big last year on my “simple majority vote,” with 75% of shares voted thanks to efforts by John Chevedden,  Claire Davis of the Edward G Hazen Foundation, and Timothy Smith of Walden Asset Management. If we can democratize Goldman, we can democratize anything.

Ceres is seeking a director of investor programs to lead in their work with institutional investors and asset managers on climate change and other sustainability issues. More information about the position and how to apply. This is a great opportunity to influence and work with more than 80 institutional investors with over $8 trillion in assets.

John Chevedden’s proposal for a majority voting standard for directors won 51% at Oshkosh (OSK) on Feb. 4th, even after OSK said it was not needed because they had already adopted majority vote requirements (in a lesser form).

Most of the companies which excel in the employee satisfaction measures used by Fortune to determine their “100 Best Companies to Work For” are privately held. Among those that are public,company founders or families have a disproportionate ownership stake. Maybe one key is that these firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective. (Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10)

Download a free Environmental, Social and Governance (ESG) Research Starter Kit for Investment Risk Management from The Corporate Library. The Financial Crisis is moving such assessments from the vanguard few to a part of normal fiduciary duty. Don’t get left behind.

SEC gets governance reforms as part of BofA settlement. As Broc Romanek notes, “governance by gunpoint” settlements have typically been driven by judges over the past decade, where institutional investor are plaintiffs. Will this be a new trend for the SEC? (The SEC Enforcement Division’s Use of Governance Reforms: Something New?, theCorporateCounsel.net, 2/5/10)

From the member area of theCorporateCounsel.net, “Can you get attorney’s fees for causing a company to add disclosures to its proxy materials? In this case – Pipefitters Local DB v. Oakley – the California Court of Appeal said ‘no.'” However, plaintiff’s counsel (Coughlin Stoia et al.) appears to have done a sloppy job. “The amended complaint copied identically worded paragraphs from previous complaints and even included the name of one of the defendants in the those other suits.” More importantly, the implication is that you might get attorney’s fees, if done right. (Suing for Attorney Fees: Causing Company to Add Proxy Disclosure, 2/4/10)

Investment Officer II opening at CalSTRS. One of the benefits; parking is only $28/mo. Great place to work.

As the debate about the rights of shareholders to appoint their own nominees to US boards continues, the PROXY Governance (PGI) Hybrid Boards study, sponsored by the IRRC Institute, is appearing with increasing frequency in shareholder comment letters and other governance analyses regarding the SEC’s proposed proxy access rules. The study found that total shareholder returns at ongoing companies with hybrid boards were 19.1% – 16.6 percentage points better than peers. (Proxy access – hybrid boards perform for shareholders, Manifest, 2/5/10)

The Altman Group’s 2/5/10 newsletter contains informative interviews with Charles Elson, which includes a discussion of the adoption of a reimbursement bylaw, and
a guest commentary from Robert Lamm, which provides a roundup of information for the 2010 and recommended action by boards.

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Disclosure Enhancements May Drive Resolutions

The Corporate Library’s free new report entitled “What To Expect During Proxy Season 2010,” states, “The SEC’s new ‘Proxy Disclosure Enhancements’ will likely dominate the coming season.”

The report also anticipates increased scrutiny of executive compensation practices, and new disclosure requirements for compensation consultants. Finally, the report expects that publication of proxy voting outcomes will be “dramatically accelerated.” (SEC Ruling on Proxy Disclosure Is Likely to Lead to Increased Shareowner Activism, SocialFund, 2/1/10)

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Corporate Library's Free ESG Webinar

Ignites and FundFire are jointly hosting “Social Investing Opportunities And Challenges” a special 45-minute webinar on January 26th, 11:00 AM EDT, helping money managers, financial advisors and investment consultants address the increased interest in investments focused on environmental, social and governance (ESG) issues.

Sponsored by The Corporate Library, an independent corporate governance research firm, this event will explain:

* Which of the areas of ESG promise the most opportunity?
* How do firms identify likely investors?
* What changes to your trading infrastructure does ESG require?
* How will adding ESG impact your distribution strategies?

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Directors From Failing Boards: A More Nuanced Approach

Gretchen Morgenson’s What Iceberg? Just Glide to the Next Boardroom (12/26/09) tells of directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae and how many have moved on to other boardrooms. Morgenson’s article implied that shareowners should vote them out at their new companies. In I Read Morgenson; Now What?, I tried to tell readers how to do just that. Paul Hodgson – Senior Research Associate with The Corporate Library offers up another approach. (Directors and Blame. Where does the fault lie?, 12/30/09)

Paul’s is much more nuanced, pointing out that being a member of a failed board shouldn’t necessarily brand one for life. “Fair enough, the two PACCAR directors who served on the Washington Mutual board (for 38 years) and the Countrywide board (for four years) are two among a total of 12 directors, but they must still be having some kind of effect. Is it a good one and was the 38 years at WaMu just a bad dream? Or is their service on a failed company board irrelevant. Or is it an advantage?”

His blog post seems to lead on that such experience could be an advantage if they learned from it, or a disadvantage if they were incriminated in the failure. He notes Peter Cohan’s recommendation from Why American Corporate Governance is a Bust as adding a requirement or best practice that directors be required to “buy significant stakeholdings.” If their wealth is tied to the company, they will be vigilant in protecting shareowners. Paul then asks, “Might they not be driven by the kind of impetus that drives executives with millions of stock options to book revenue that hasn’t been earned yet, to manipulate earnings, to artificially boost stock prices?”

He recognizes there is no single solution that will always apply but then concludes that at least an apology may be due. “It goes a long way when you are asking for forgiveness, and re-election is a form of forgiveness.” In general, I agree with Peter Cohan and would like to see more directors with their wealth ties into the firm. Yes, that can lead to accounting gimmicks, but that why we should require that substantial holdings be long-term, extending even for some time after they have left the board.

I like Paul’s call for apologies but even that is not so straightforward. What if these directors did everything they could to avoid trouble at Washington Mutual and Countrywide? Would they need to apologize for not convincing the rest of the board or for remaining on the board, instead of making a noisy exit?

One of the fundamental problems that shareowners have in monitoring boards is that boards are such a black box. We don’t know who is responsible for what, other than by what committees they sit on.

Instead of an apology, or perhaps accompanied by one, directors should offer up an explanation of what went wrong, their role in it, and what lessons they learned.

The SEC’s new disclosure requirements will mandate proxies include an evaluation of each nominee’s “competence and character,” including the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company. Such notice is also required to include a list of other directorships held by each director or nominee at any public company during the previous five years, rather than only current directorships. I would love to read, among these disclosures, explanations from candidates about their roles as directors and why we should elect them despite the taint that may come from such service. Will apologies and explanations be forthcoming?

While Weil, Gotshall & Manges put out an excellent briefing today, SEC Disclosure and Corporate Governance (December 30, 2009), that goes over the disclosures and many other new requirements, I don’t see any recommendations for apologies. “As a starting point, the nominating committee chair and company counsel should consider requesting updated CVs from each of the directors (some companies may choose to include additional questions in the D&O questionnaire). Companies should begin drafting this section of the proxy statement early since each director will likely take a keen interest and may have comments.”

Keen interest indeed, as Paul Hodgson notes, “PACCAR coyly omits the WaMu and Countrywide service in its directors’ bios.” Next year they can’t. Will they include apologies or explanations? Maybe Michelle Leder will be the first to let us know at footnoted.org.

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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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