Tag Archives | TIAA-CREF

Morningstar Direct Uncovers ESG Hypocrites

Morningstar Direct is planning to offer its clients important voting data. The firm recently published a preview of what I impolitely term ESG hypocrites – funds that advertise themselves as allowing us to invest in our values but then vote proxies against our values.

For example, last week, students around the world participated in a massive #ClimateStrike. Some have called it a tipping point. With BlackRock, Fidelity, TIAA-CREF and Vanguard all offering ESG funds to invest in our values, we must be heading for a low-carbon economy, right? That assessment may be premature. Not all ESG funds are alike.

New Morningstar research – published for Morningstar Direct users – uses Morningstar’s Fund Votes database to examine how ESG funds voted during the 2018 proxy season on climate-related shareholder resolutions. The research reveals a striking difference in voting patterns from funds sponsors by ESG-specialists vs. ESG funds from more traditional, non-ESG fund companies.

Morningstar Direct Findings

A huge positive is that more funds are starting to “get” the importance of ESG, not only as a screening tool for investing but also in casting proxy votes. Morningstar research found votes cast by the largest asset managers across all funds shows a year-on-year increase in support for all climate resolutions voted since 2016. That is certainly good news. Morningstar surveyed 14 resolutions with a positive vote of 40% or higher. Notice the two largest funds, BlackRock and Vanguard, with combined assets under management of $11.5 trillion, are laggards. Changing how they vote would make a significant difference.

Moningstar Fund Votes ESG Trends

ESG funds from BlackRock, Vanguard, Fidelity Investments, and TIAA- CREF, among others, cast a number of votes that appear to conflict with an ESG mandate, especially for funds specifically aimed at the environment.

ESG votes by Mainstream funds

By way of contrast, among nine fund companies with a long-term ESG focus, not a single vote was cast against climate-change resolutions that garnered more than 40% of the shareholder vote. Asset managers with an ESG orientation unanimously voted for the 14 climate-related resolutions that garnered more than 40% of the shareholder vote across all funds managed.

Votes by SRI asset managers

Underlying Assets

It also might be useful to look at underlying assets. For example, compare holdings of the Trillium P21 Global Equity Fund with BlackRock’s Impact US Equity Fund. BlackRock’s Impact fund contains investments in coal, oil and gas, fossil-fired utilities, etc. They constitute only a small portion of the portfolio but that is enough to get them 0 out of 5 “badges” from Fossil Free Funds. In contrast, Trillium P21 Global Equity Fund wins 5 out of 5 badges.

Research based on Morningstar’s Fund Votes database will help Morningstar Direct clients differentiate ESG hype from ESG reality. The service is likely to increase demand for mainstream fund families to be more consistent in voting and investing within a transparent ESG framework. Traditional SRI funds have been investing and voting ESG concerns for decades. Some, like Calvert, Domini, Pax World, Praxis, and Trillium even announce their votes to the public before annual meetings. Do not expect that from mainstream ESG funds any time soon.


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Boardroom Issues of the Future

Boardroom Issues of the Future

Boardroom Issues of the Future

Boardroom Issues of the Future is Part 2 of my coverage of Directors Forum 2017 in San Diego, which was billed as Directors, Management, & Shareholders in Dialogue. I was also hoping to learn more about President Donald J. Trump and how his administration might impact corporate governance. See Part I. As usual, the Directors Forum was under Chatham House Rule, so I’m mostly just posting a few observations that were interesting to me. Sorry for the poor photo quality. I find it difficult to get good color in front of a lighted screen. Photos from the professional photographer at Directors Forum 2017 Photo Slide Show. Continue Reading →

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Looking for Best SRI Funds? Start Here

Best SRI Funds

Best SRI Funds

After making the decision to apply the principles of SRI investing, many clients embark on the initial step of selecting a core stock fund. Traditional investors have literally hundreds of highly efficient core investment solutions. However, SRI investors aren’t so blessed—which is why I put together this core list of Best SRI Funds.

Best SRI funds need to start out by being financially sustainable. Some fund companies seem to believe that they can rake in higher fees on the backs of well meaning investors. The primary objective of a core fund is to match the market with as little cost drag as possible. Continue Reading →

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Replay the Glass Lewis Conference Call on Proxy Access

Glass LewisOn Thursday March 5th proxy advisor Glass Lewis held a conference call to discuss proxy access, i.e. the right for shareholders to place their director nominees on company proxies, instead of having to pay for a separate proxy and solicitation.

The New York City Comptroller, Scott Stringer has taken the lead on proxy access this year with his Boardroom Accountability Project and the introduction of 75 proxy access proposals. Continue Reading →

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Bess Joffe Takes Corporate Governance Post at TIAA-CREF

Bess Joffe photo

Bess Joffe



TIAA-CREF, the $569 billion financial services provider, appointed Bess Joffe as managing director of corporate governance, effective August 4. She will report to Jonathan Feigelson, senior managing director, general counsel and head of corporate governance, and will be based in London. Joffe will help lead TIAA-Cref’s corporate governance program and policies, including active ownership, public advocacy, thought leadership and proxy voting. Continue Reading →

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Corporate Governance: Stepping Back in Time From October 2013

MrPeabodysWayBackMachinePublisher’s Note: Yes, you’ll find many broken links in the material referenced below. After 5, 10 and 15 years, the internet moves on. Many of the organization’s linked have since gone under. We’re just glad to still be here, offering our readers a sense of the history we have shared. More about the WABAC machine.

Five Years Ago in Corporate Governance

  • The Treasury is injecting $125 billion into nine big banks and making a like amount available for other banks that apply. Those financial giants owed their executives more than $40 billion for past years’ pay and pensions as of the end of 2007, a Wall Street Journal analysis shows. (Banks Owe Billions to Executives, 10/31/08) How much of our $250 billion bailout will go to pay for special executive pensions and deferred compensation, including bonuses? Will our disgust with those who brought us the financial melt-down lead to an upsurge in mutual banks and credit unions?
  • Jackie Cook, the founder of Fund Votes, told SocialFunds.com, “Executive compensation is at the heart of a growing problem Continue Reading →
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Video Friday: Peter Reali of TIAA-CREF Discusses Proxy Voting

Peter Reali, Lead Corporate Governance Analyst, TIAA-CREF, discusses his process for voting over 100,000 discrete ballot items each season with the Darla Stuckey of the Society of Corporate Secretaries and Governance Professionals. Mr. Reali talks about the use of proxy advisory service data, engagement with issuers, timing, the interaction between governance experts and asset Continue Reading →

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Corporate Directors Forum 2012 – Part 1: Shareholder Hot Topics

These are some relatively quick notes that I’m sharing from the Corporate Directors Forum 2012, held on the beautiful campus of the University of San Diego, January 22-24, 2012. Since I am busy with no-action requests this proxy season (especially proxy access proposals), this post may be a cryptic… not complete sentences bt hopefully mor intelligible thN txt msgN. Continue Reading →

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TIAA-CREF Annual Meeting

TIAA-CREF, the nation’s largest pension system and a leader in corporate social responsibility, has come under fire from a coalition of academics and activists who are questioning TIAA-CREF’s commitment on a range of social responsibility issues.

“TIAA-CREF’s tagline is ‘financial services for the greater good,’ but it seems like the only good they are concerned about is the bottom line,” said James Keady, Director of Educating for Justice and long-time active member of the coalition.

Coalition reps will be at the upcoming CREF annual meeting on Tuesday, July 20, 9:30 AM, at TIAA-CREF’s  NYC headquarters and plan to pressure TIAA-CREF to stop outsourcing  jobs overseas, firing whistle-blowers, investing in sweatshops, and paying its CEO 10 million dollars a year.

“After years of member lobbying, TIAA-CREF finally agreed to talk to some of the companies we have focused on,” said Keady.  “Unfortunately, TIAA-CREF’s method of ‘quiet diplomacy’ over the past five years has not led to any substantive changes.”

The coalition believes that TIAA-CREF can and should do more. Its Policy Statement on Corporate Governance reads, “While quiet diplomacy remains our core strategy…the TIAA-CREF engagement program involves many different activities and initiatives, including engaging in public dialogue and commentary…  engaging in collective action with other investors…  seeking regulatory or legislative relief…  commencing or supporting litigation.”  It is time for TIAA-CREF to get aggressive with these companies.

If you are a member of TIAA-CREF willing to attend the meeting, the coalition asks you to contact Neil Wollman. If you are not in the system, you can still send a personal message to CEO Roger W. Ferguson, cc  [email protected]. You also call 800-842-2733 or 212-490-9000 and ask for CEO Roger Ferguson and leave a recorded message.

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Directors Forum 2010

First, a precautionary note about this post. These are strictly my impressions. There is no intention here to present juicy findings with regard to any corporation, fund, individual etc. My purpose is simply to help facilitate dialogue and understanding.  Keep this in mind as you read my notes, as well as the following. One of the panelists from a government agency began with the standard disclaimers about how what he said was his opinion alone and did not necessarily reflect the views of his agency. Ted Mirvis, a partner with Wachtell, Lipton, Rosen & Katz interrupted, as I recall, saying something to the effect that he not only disavows the applicability of any of his statements to his firm, he also disavows their applicability to himself. That got a laugh, but says it all. The conference was the perfect venue for throwing out ideas and seeing what sticks… what resonates with those attending. We can learn a lot from that.  Of course, there were also plenty of hard facts.

Your comments and especially your corrections are welcome. To comment directly on the blog, you’ll need to register first. Just press the “No comments” button and it wil step you through registration, if you aren’t already registered. (This process cuts down on spam.) If you don’t want to bother registering, you can always e-mail your comments directly to [email protected]. Your feedback on my coverage, the topics and the conference itself are important to me.

Prior to the dinner, there was a networking reception held outside the Joan B. Kroc Institute for Peace & Justice… a wonderful facility in a beautiful setting overlooking the northern part of San Diego. My little point and shoot camera can’t do the place justice. I’m sure the Forum will have much better photos on their site, perhaps on the Conference Materials page where you will find a wealth of studies, books and other resources.

Keynote: The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery.

At the dinner to kick off Directors Forum 2010, Strine’s main point seemed to be that we can’t expect corporations to act in the long-term interest of shareowners if most investors are rewarding short-term performance. He looks at corporations as republics, rather than direct democracies. Regarding proxy access, he appears to favor the opt-in option to encourage innovation without imposing a government mandate. Shareowners who propose changes should have long-term holdings, whereas most activists hold only a short time. They should have a substantial positive interest and disclosure should be required so we know they aren’t shorting.

Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. Hedge funds are turning over their shares three times a year. Active mutual funds are holding only for a year on average. At the NYSE turnover was 130% in 2008 and 250% in 2009. Owning Intel 14 times in 10 years isn’t being a long-term owner by Strine’s measure. Institutional investors have been too little concerned with risk management and utilizing leverage. Too many are focused on getting rid of takeover defenses, stock buy-backs and replacing CEOs who don’t yield the highest short-term returns. We’ve been driven to the point that 280 out of the S&P 500 spent more on stock buy-backs than on investments.

Strine ended by quickly throwing out some reform ideas to consider. I didn’t get them all down but here are a few:

  • Pricing and tax to discourage short-termism.
  • Build fundamental risk analysis into corporate governance measures.
  • Compensation of investment managers based on the horizons of beneficiaries and beneficial owners.
  • 401(k) and college plans consistent with those time horizons.
  • Indexes should act and vote consistent with long-term
  • Limitations on leveraging and disclosure by hedge funds
  • Fixing the definition of “sophisticated investors.” Many trustees are sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital.
  • We need to know more about hedge funds – your positions, your voting policies, etc.
  • Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.

See also Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, The Aspen Institute.Linda Sweeney Also of note is Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10. Most of the companies which excel in the employee satisfaction are privately held. Among those that are public, company founders or families have a disproportionate ownership stake. These firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective.

Welcome & Introductions from Linda Sweeney, executive director, Corporate Directors Forum; Larry Stambaugh, conference program chairman, Corporate Directors Forum. I must say, Linda, Larry, Cyndi Richson and Jim Hale have built this conference into a premier event.

Plenary Session: Shareholder Hot Topics
Moderator Cynthia L. Richson, president, Richson Consulting Group; former member, PCAOB Standing Advisory Group, former head of corporate governance, OPERS & SWIB. Panelists – Patrick S. McGurn, special counsel, RiskMetrics Group , ISS Governance Services; Jennifer Salopek, chairman, Charlotte Russe Holding, Inc. principal, ARC Business Advisors LLC; Andrew E. Shapiro, president, Lawndale Capital Management, LLC; John Wilson, director, Corporate Governance, TIAA-CREF.

Cynthia RichsonAgain, there was some focus by panel members of long-term vs. short. Are compliance driven measures and the use of compensation consultants driving oversized compensation? Some seem concerned that directors are more focused on compliance and in developing a plan that can be explained than they are in coming up with the best package. Also of concern, last year’s rally may lead to out-sized awards implemented last March or April.

As several others at the conference also pointed out, options are a vestige of the tax system… better to see restricted stock granted as performance targets are met. The feeling expressed by many is that the tax system shouldn’t be driving the form of C-Suite pay. There is also a tendency by a shareowner elite to focus on exit that leads many companies to underinvest in strategy, R&D,  and management systems.

Shapiro sees a wave of management led buyouts on the horizon as well as activism by creditors to address over leveraged balance sheets and liquidity problems. He is buying up debt that can be converted to equity… reamortizing balance sheets. He expects this to continue for several years because of limited economic growth. Management is likely to see the light at the end of the tunnel first and will use that advanced knowledge to look for private buyout opportunities. He sees too many no-shop clauses, rights of first refusal and other deal protectors that give a control premium to management. In these situations, independent directors should seek real competition through an auction.

John Wilson was asked about how proxy access would be impacting TIAA-CREF. He responded that ideally they will have access rights and never use them. Just having that power should lead to more dialogue between shareowners and companies. They will look at each situation individually and may side with as access filer or management.

Pat McGurn said these types of contests will be management’s to lose, not to win. RiskMetrics will need to be convinced of the need for change. It will be something of a last resort, like just vote no campaigns. Many are likely to settle out before proxies are finalized, either through trade-offs or board enlargement. He also noted that out of 12,000 board candidates up for election last year, fewer than 100 didn’t get elected. Many such contests are coming at companies that don’t have majority vote requirements.

Shapiro and others pointed out the real impact of proxy access may be overblown, since not much will be saved by having a universal proxy card. Challengers will still need to campaign and that costs money. Additionally, many hedge funds won’t use it because of the change-in-control exclusion.

Asked about liquidity, Wilson said at TIAA-CREF it is driven more by economic conditions than any growing net-flow of baby boomers out of the workplace. Companies should see long-term shareowners as their allies, not those who acquire rights just before the proxy vote. Again, emphasized the need for constant communication.

Salopek said one of the advantages she has found in having a split chair is increased dialogue with shareowners. Shareowners find it more difficult to talk about concerns, such as about CEO pay, when the CEO is also the chair.

Shapiro emphasized the need for communication, citing its lack as the biggest reason for escalation by funds like his. He also sees that interaction as part of director responsibilities around “duty of care.”

Another panelist cited a university of Santa Cruz study that showed even one woman director on a corporate board led to greater board independence and better financial reports. (sorry, I did a quick search but didn’t find the study) That led to discussion around diversity and the need to apply thinking more broadly. I know that CalPERS and CalSTRS are working to build a pool of potential candidates for proxy access nominations. Diversity will play a large part in developing the list.

Shapiro gave some advice concerning annual meetings, pointing to Warrn Buffett’s practice of calling on individual committee chairs to report their respective parts of the annual report. Also some discussion around virtual meetings with Intel pulling back on their virtual-only meeting, but that web broadcast would allow many more to participate and would make them a real event that could generate a lot of publicity and positive dialogue. (see my posts on this from 1/20/10 and earlier same day)

Wilson’s final advice included papering in a day or two of engagement for directors with shareowners before the meeting. Shapiro similarly recommended calling your top 10 shareowners to hear their concerns… actually check in with several types. Keyword for the panel — communication. Further reading: Activist Shareholder Dialogue, Andrew Shapiro.

Plenary Session: Shareholder Rights AND Responsibilities

Moderator    The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery. Panelists – Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz; Brandon J. Rees, deputy director, office of investment, AFL-CIO; Lynn A. Stout, professor, Corporate and Securities Law, University of California, Los Angeles School of Law; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.

We were reminded that individuals still own about a third of all shares, mutual funds and ETFs are the next largest holders with pensions coming in third with about 20%. Turnover by all seems to be going through the roof. While it was about 150% in the early 2000s, it accelerated to 200% and last year 300%.

Among the most pressing issues this season for labor are “say on pay” and proxy access.  Compensation plans aligned with long-term interests and holding. Restricted stock awards should be held for five years and preferably beyond retirement. When chasing return and trying to beat the market, active managers are likely to be little concerned with corporate governance or proxy issues. Yet, ideally these should factor into investment decisions. Labor would like to see reforms in the tax code and a very small transaction tax to discourage turnover.

Turner was largely in agreement with Rees up until that transaction tax. He sees the need for taxreforms, greater transparency and much more dialogue, as well as a heightened fiduciary duty that would include better disclosure of conflicts of interest. All funds should have to disclose votes and policies. He also sees too many funds voting for poorly performing corporate directors. As I heard this last point, I couldn’t help thinking, “Yes, but how do we know which are the poorly performing directors?” Maybe the new disclosures required by the SEC will begin to give clues.

Ted Mervis noted a 2003 Conference Board report that investment fundsshouldn’t compensate on a quarterly basis. Yet, that isn’t likely, because funds with the highest returns this year attract the most capital next year… even if there is no correlation in the performance for both years. Perhaps sharowner democracy amounts to “faith-based” corporate governance, since there is so little evidence that shareoweners are really in it for the long-term.

There was some mention that corporations are more likely to talk to activist funds than indexed funds, even though they are less permanent shareowners. I presume this is because activist funds are more likely to spend time and money analyzing the issues, whereas indexed funds, wanting to minimize expenses, may do less.

Stout said there is decades of evidence that trading eats up about 1.5% of return each year. The greater the sharowner power, the higher the issuers turnover.

Rees said he supported indexing, long-term investing, defined benefit plans, disclosure of proxy voting and a reassessment of securities lending practices and rules.

Mervis thinks too many directors may be knowing each other “by name tags” because of increased turnover and less collegiality.

Strine seemed to put forth the idea that shareowner rights aren’t inherently good. In fact, maybe we should embrace shareowner ignorance. Increasing leverage to chase returns can lead to ruin. He agreed with Stout, we need higher fiduciary standards for investors.

Stout seemed disposed to a small transaction tax and thought ERISA standards are needed to limit what funds can invest in. It is also time that companies looked at adopting bylaws limiting those who can file bylaw proposals to those without certain conflicts and derivative positions… maybe shareowners should have to hold for two years. That got a lot of attention from directors in the audience who virtually swarmed Stout at the panel’s conclusion.

For further reading see The Mythical Benefits of Shareholder Control (Stout, 2007) Fiduciary Duties for Activist Shareholders (Iman Anabtawi & Lynn Stout, 10 April 2009) Find more reading from several of the panelists on the Conference Materials page. Personally, Lynn Stout is one of my favorites. I don’t always agree with her conclusions, but she is certainly a creative and stimulating thinker.

Plenary Session: The Fast Changing Regulatory Landscape: Judicial, Congressional and Executive Developments

Moderator    Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz. Panelists    Rhonda L. Brauer, senior managing director, corporate governance, Georgeson; Byron S. Georgiou, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, Financial Crisis Inquiry Commission member; Robert Jackson, Jr., deputy special master for executive compensation, Department of the Treasury (aka deputy “pay czar”); Frank Partnoy, George E. Barrett Professor of Law and Finance; director, University of San Diego Center for Corporate and Securities Law.

Mervis went over the pending proxy access proposal and discussed legislative push for separating board chair and CEO, push against staggered boards, mandatory risk management committees and enhanced disclosures. Some boards are getting ahead of the ball by passing their own measures granting shareowners a say on pay but limiting it to every three years.

Brauer advised boards to be ready with their own proxy access proposals.What alternative does your board want if given and opt out option. Be ready for that possibility and check with your shareowners first.

Jackson advised to look at how your compensation policies might be incentivising risk. Have a discussion before the fact with your shareowners and disclose the process you use to think about risk. Too many financial intermediaries are making decisions that extend over years but are paying bonuses based on only yearly returns.

Partnoy thinks reviewing a “worst case” scenario might be a useful exerciseFrankk Partnoy for most companies in developing a risk profile. Partnoy expressed his desire to see financial institutions treated differently.

Georgiou noted the Financial Crisis Inquiry Commission got an enormous volume of google searches during its first hearing. Regulators can’t keep up with innovation and need market mechanisms to enforce behavior.

One key reform might be a requirement to have underwriters hold a portion of the securities they create. They should be required to eat their own cooking, maybe also institute clawback provisions for their earnings. Capitalized gains and socialized losses doesn’t work. The issuer paid model is faulty. Even CEOs recently asserted no one should be too big to fail. Discussion around a resolution authority to take down such companies without risk to the larger economy. Problems at seven or eight firms shouldn’t be allowed to infect the whole system.

Further reading, see Frank Partnoy’s posts on the Huffington Post and the Conference Materials page.

Lunch Panel: Bad Loans, Gatekeepers and Regulators – Is change on the Horizon or just a Mirage?
Moderator Lynn Turner, managing director, LECG, former chief accountant, SEC; trustee, AARP, Colorado PERA. Panelists – Charles Bowsher, former Comptroller General of the United States & Head of the GAO, director, the Financial Industry Regulatory Authority (FINRA); Kristen Jaconi, former senior policy advisor, for Domestic Finance, US Department of Treasury, former senior counsel to Michael Oxley, US House of Representatives; Barbara Roper, director, investor protection, Consumer Federation of America, member, PCAOB Standing Advisory Group.

Bowsher sees at least part of the problem stemming from traders getting essential control of several banks, like at Enron. Safe and sound banking is important to reestablish. Favors a risk regulator with real stature but is worried that legislation that is 1700 pages long fails to focus.

Roper sees the idea of an individual systemic risk regulator as a reform in name only, since they wouldn’t have the tools to do the job. They need to have the staff, tools and the authority,  otherwise reform will be a mirage. See her testimony to Congress here. What we need, if anything is to be accomplished, is a fundamental shift in how we see regulation.

Jaconi says we aren’t thinking big enough. The center of arbitrage is London, not New York. We need to be thinking on the scale of the IMF. Another point she emphasized was the importance of inspections and examinations. Training inspection staff will be critical but there is little notion of that in current proposals.

The consensus of the group seemed to lean in the direction of mostly mirage with some substantive reform. The public has embraced say on pay but watered down derivative regulations appear likely to mostly miss the mark.

Plenary Session: Risk Management: Monitoring for Known and Unknown Risks Moderator   James Hale, former EVP, general counsel & corporate secretary, Target Corp.; director, The Tennant Company. Panelists    Heidi M. Hoard Wilson, VP, general counsel & corporate secretary, The Tennant Company; Stephen A. Karnas, director, Mars, Incorporated; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.

Wilson discussed their extensive process at Tennant, from weekly meetings, board involvement, measuring probability and potential costs, disaster recovery plans, their ranking process, supply chains, etc. She discussed the need to pay special attention to sole source suppliers. You need to know who to turn to if they go bankrupt.

Karnas described his experience at Mars and their use of a chief risk officer primarily functioning as facilitator. Their process is top down as well as bottom up, a little different than that of their recent acquisition, Wrigley, which views risk primarily from a centralized perspective. He discussed how each work and how they are likely to be integrated. Interestingly, the Mars board gets very involved, apparently traveling on a bus, during quarterly Board weeks, to their factories so they can view the production process and operations and become very familiar with risk at the core business level.

Turner discussed his approach as one of finding out keeps them up at night. Ask your external auditor what are the top five risk areas at your company and at the competition. Ask the executives the same and note differences. What are the key trends in marketing, spending rates… key dashboard issues. How do you get to know risks that don’t get communicated? He stressed the need for a bottom up process, as well as top down.

The consensus of the group was that risk is an issue that should be addressed by the full board, not shuffled off to an individual committee… although it may be important for the board to get input from multiple committees.

Further reading: see Risk Management and the Board of Directors, Wachtell, Lipton, Rosen & Katz, 2009;  Managing Corporate Risk, BoardMember.com; and Risk roundup 2010, McKinseyQuarterly.com.

Plenary Session: A Compensation Committee in Action (A Socratic Dialogue)
Moderator    Larry Stambaugh, chairman & CEO, Cryoport, Inc., principal, Apercu Consulting. Panelists – James Hale, former EVP, general counsel & corporate secretary, Target Corp., director, The Tennant Company; Garry Ridge, president & CEO, WD-40 Company; Anne Sheehan, Director of Corporate Governance at CalSTRS; Matthew T. Stinner, senior managing director, Pearl Meyer & Partners.

Gary Ridge

This was an interesting play-like exercise that was so much fun, I failed to take notes. However, I do recall the pretend CEO using that famous line, “It depends on what the meaning of the word ‘is’ is,” in response to a question from the compensation committee. It was a good discussion of the factors of what goes into pay for performance and the importance of what gets left out that isn’t recognized until after the fact.

Key points: Most companies don’t factor in consideration of performance relative to peers or even the market… and they probably should. Plans should be simple and easily understood but driving compensation based on a single metric, like net income, probably results in too narrow of a focus. Payouts should be held for 3-5 years to emphasize longer term thinking. Further reading: Compensation Committee topics on BoardMember.com and Compensation Season 2010 (Wachtell, Lipton, Rosen and Katz)(PDF).

Dinner and Keynote Speaker; John J. Castellani, president, Business Roundtable

Castellani asserted there is a cultural divide between public thinking reflected by Congress and that of business leaders that is not unlike the divide between C.P. Snow’s scientists and nonscientists. The public wants many thing from business: high quality, employment, good stewardship, earnings, shared sacrifice. They see little difference between finance and other sectors… lumping all large businesses together. Board attention is generally more concentrated on good earnings and stock performance.

Congress suffers from ignorance regarding how businesses work. They think boards are constituent based. They think boards operate like Congress does. The prevailing view is that directors are rubber stamps of CEOs. Yet, the truth is that CEOs are practically an endangered species (my term, not his)… going from a tenure of 8 1/2 years in 2006 to 4.1.  He sees most of the reforms like “say on pay” and separating CEO and chair positions as a “relief valve” for American frustration with bigness and fears there will be unintended consequences.

We need to help politicians understand how businesses work.  He noted that the costs and performance of the U.S. health care system have put America’s companies and workers at a significant competitive disadvantage in the global marketplace. (see Business Roundtable Health Care Value Comparability Study) People hate insurance companies and banks. They are looking for shared sacrifice.  For further reading: John J. Castellani’s blog entries on the Huffington Post.

Plenary Session: Insider’s View of Surviving a Proxy Contest
Moderator  Karin Eastham, director, Amylin Pharmaceuticals, Inc., Illumina, Inc., Genoptix, Inc., Geron Corporation. Panelists – Daniel M. Bradbury, president & CEO, Amylin Pharmaceuticals; Daniel H. Burch, chairman, CEO & co-founder, Mackenzie Partners, Inc.; Suzanne M. Hopgood, director of board advisory services, National Association of Corporate Directors director, Acadia Trust Realty, Point Blank Solutions Inc.; James P. Melican, senior advisor, Ridgeway Partners, former chairman, PROXY Governance, Inc.; Alison S. Ressler, partner, Sullivan & Cromwell LLP

One discussion during the session was the problem that during a proxy fight, particularly in a three card proxy fight, shareowners can split their vote between cards, picking the best directors from each advocate. However, that opinion was not universal. The opposing viewpoint was that slates are good because they are more likely to result in an integrated board and directors with Suzanne Hopgoodcomplimentary vetted skills.

It was a very informative session focused mostly around Amylin Pharmaceuticals, in addition to several experiences of Ms. Hopgood. Aside from three proxy cards at Amylin, the company also had three previous CEOs on their board, one as chairman. Takeaway points for me were as follows:

  • Things generally go worse when the company refuses to talk.  Earlier is better.
  • RiskMetrics doesn’t seek to review a strategic plan from dissident slates Dan Burchunless they are seeking a change of control.
  • Most dissident groups are giving more thought to their director candidates these days… no longer mostly relatives.
  • Hire a good proxy solicitor.
  • Review corporate governance practices and consider eliminating those that are unpopular with media, like shareholder rights plans (poison pills). If you are going to make changes, do it before the contest.
  • Identify possible conflicts of interest all around.
  • Don’t retain CEOs on the board after they leave.
  • Pay close attention to board skill sets and succession planning.
  • Learn what shareowners are thinking.
  • Dissidents shouldn’t assume they’ll get the votes if the stock price tumbles.

Plenary Session: What is the Director’s Job Today, and How Does He or She Prepare for It?
Moderator    Kenneth Daly, president & CEO, National Association of Corporate Directors. Panelists – John T. Dillon, director, Caterpillar, Inc., Kellogg, Company, DuPont; Matthew M. Orsagh, director, Capital Markets Policy, CFA Institute Centre for Financial Market Integrity; Margaret M. Foran, VP, chief governance officer & secretary, Prudential; Richard H. Koppes, director, Valeant Pharmaceuticals International, former general counsel, CalPERS.

Ken Daly explained that NACD had worked with CII, ICGN, AFL-CIO, BRT and others to develop 10 principles, which they have posted on their website and on the Conference Materials page. He urged all directors to download the principles, review them and provide NACD with feedback. The idea is to empower boards to lead the way in restoring public and investor confidence. “If we don’t act, lawmakers will do so with prescriptive rules and regulation.”

One interesting finding from a recent survey was that board members are less happy with agendas than CEO/Chairmen. Strategy is top priority for boards in the coming year. Interestingly, the conference made use of their ability to rapidly survey those in attendance regarding various topics. We simply pressed numbers on a little remote control type gadget and in seconds they displayed the results. This worked smoothly until this panel where there was one glitch. Asked if information received from management engages the board’s expertise in planning and Matthew Orsaghexecuting strategy, the graph makes board members seem a little more satisfied than they really are, since there isn’t much difference between 51% and 49%.

Aside from the fun with numbers, I noted the following takeaway points:

  • Boards want to discuss strategy before it is fully baked; strategy is job #1.
  • Directors shouldn’t play the role of gotcha. Trust and respect are essential to board functioning. Dissent should be accepted.
  • IT expertise and succession planning deficient on many boards.
  • Balancing long and short-term strategies is key… see Aspen Principles.
  • Put something in your proxy regarding succession planning.

Further reading: The New and Emerging Fiduciary Duties of Corporate Directors by Elizabeth B. Burnett and Elizabeth Gomperz.

Keynote Speaker: William A. Ackman, founder and managing partner, Pershing Square Capital Management LP. Apparently, Ackman was on a recent edition of Charlie Rose, so Frank Partnoy couldn’t resist beginning the interview as if he were Charlie Rose.

With all the talk about the need for long-term holders, that was one of the first questions. Pershing Square typically holds for about 2.5 – 3 years. Ackman described his process, which mostly involves picking stocks that are undervalued (spread between price and value) and then he works on a strategy to get the market to recognize that value.

He described his efforts at Wendys, which owned Tim Hortons. The chains weren’t really a great fit because of differences in how they operate and management styles, so he worked to get Hortons spun off… yielding a hefty profit. Ackman believes competition for board seats will give us better candidates and will cause boards to do more self-examination. Choice will force board to adopt term limits to keep fresh.

He says boards should invite their largest holders and short-sellers to discuss any issues or concerns they may have. Try your best to understand your harshest critics. You’ll probably learn something. Asked how he’d do that, he suggested issuing a press release inviting the company’s biggest critics to call in and schedule a confidential meeting.

Another case he discussed extensively was Borders, which he believes had been consistently mismanaged and is now finally facing a possible turnaround, even though the CEO that helped them regrow the company had just resigned the night before for a better offer… with no warning.

One factor that appears to keep him invested for a longer term is reputation. If he bails out too quickly with a loss, his reputation suffers more than if he keeps a company for longer but ends up making something.

Where’s the next crisis? Akman thinks it is likely to be failed municipalities.

Pre-Conference Bonus Sessions – “Legal Issues in the Year Ahead: What Directors and General Counsel Need to Know”

Session 1: “What to Expect in Regulation,” presented by Frank Partnoy, director of USD’s Center for Corporate and Securities Law.

The sun was shining outside our beautiful auditorium at the University of San Diego but Professor Partnoy’s prognostications inside the hall were gloomy with his comparisons of the current financial crisis and the Great Depression. “This is 1931,” he said, noting that markets recovered from the 1929 crash but then turned down again. Because of the recovery (like the little bear market in 1930), he doesn’t see strong demand for reform. Like then, banks say they will reform themselves. Like their Pecora Commission, our Financial Crisis Inquiry Commission is mostly political theater. Pecora didn’t even arrive at the commission remembered for him until 1933. Our efforts could be similar. If history is a guide, it will take a couple of years.

Partnoy doesn’t see real reform on the horizon until more revelations of wrongdoing. He predicts the Volker rule will be watered down and sees an absence of commonsense in the process.

Proxy access is coming but there are still some vestiges of a federal versus state law battle. Delaware incorporated companies may already adopt bylaws and many may do so to preempt the proposed federal default rules. (Elsewhere at the conference the advice was more to be ready, once we know what the rules will be.) Partnoy described the basic outline of the proposed default, with its thresholds ranging from 1, 3 and 5%, depending on size – the 25% limit on board members so nominated and the one year holding period.

Broker nonvotes won’t count this year and that has hedge fund activists excited. They don’t care much about proxy access because the new rule can’t be used for a change in control, and that’s what hedge funds seek. Derivative and credit rating reforms may be the most important reforms on the horizon for 2010. However, strong action appears unlikely. Yes, they’ll probably pass something but there won’t be a central clearing platform for the derivatives that really matter.  Banks don’t like the idea of open source disclosure of all contracts, even on a lag basis.

Partnoy thinks the Fed will have to raise rates at some point and when they do, we may see derivative contracts implode.  Institutional investors who actually depend on rating agencies to grade risk are being naïve or irresponsible. He cited several commonly know examples where the rating agents gave companies high marks… even as companies tumbled into bankruptcy. Perhaps on of the more important provisions will be to expose credit rating agencies to legal liability.  See additional discussion at Proposed Credit Rating Reforms May Empower an Embattled Moody’s (HuffingtonPost, 1/4/2010) and Why Rating Requirements Don’t Make Sense (WSJ, 1/18/2010)

Session 2: What to Expect in Litigation, facilitated by Fran Partnoy. Panelists included Leo E. Strine, Jr., Vice  Chancellor of the Delaware Court of Chancery; Darren J. Robbins, Coughlin Stoia Geller Rudman & Robins LLP; and Koji Fukumura, Cooley Godward Kronish LLP.

Initial discussion focused around the issue of individual director liability and the fact that many funds are pushing for that. They want individual directors to feel the pain, not just be covered by D&O insurance. So far, it appears that most of the money that has come out of director pockets has come from CEOs who also chair their boards. Cases were down in 2009 because the market is up. Companies have spent up to $80 million to defend two directors. Strine offered up a bit of speculative advice. Separate director’s insurance from officer’s insurance.  Officers get most of the focus, often depleting the coverage available. Options backdating and earnings smoothing created a culture of corruption that led to the move by public funds to go after individual directors. See discussion at Insurance for A-Side D&O Exposures after Enron—A Riskier Proposition?, IRMI.com and Recent Developments in D&O Insurance, HLS CG&FR Bog.

There was also discussion around the fact that many disclosure only cases filed in state courts are abusive. They are filed as soon as any action happens, like an agreement to sell. Several cases discussed. Strine also cautioned to watch shortcuts regarding tax avoidance and don’t sign consents of action after the fact… like documents where management fills in the blanks later. Gimmicks are gimmicks and should be avoided. Also some discussion around a case where the company tried to sue its own internal auditors for malpractice but couldn’t.

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Proxy Access: The Letters Are In

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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February 2009 Special News Supplement: Corporate Governance Roundup 2009

Yippee-i-o-ki-ay! From the conference flyer, I half expected Will Pryor, Director of the IAFF Local 10Ehnes14 and conference “go-to” guy, to show up in chaps, especially with his e-mail encouraging attendees to dress casually. Well, maybe next year. Suits and jackets prevailed in the fashion arena but there was little in the way of pretense as funds from all over California and beyond shared mostly proxy strategies. The conference was also well attended by consultants, service providers and investment advisors. Jack Ehnes (right) was the emcee and set the tone for moderators by keeping everyone on track and additing insights, without dominating the conversation.

Session One

The fist panel was composed of Bill McGrew of CalPERS, Ann Sheehan of CalSTRS (left), and John Wilson of TIAA-CREF, ASheehanmoderated by Ralph Whitworth of Relational Investors. I was a little surprised to learn that TIAA-CREF, with more than twice the assets of CalPERS, has about half as many staff working on corporate governance issues. (6 vs 11) Maybe the bigger you are, the less you need to spend to influence outcomes. Each discussed their fund’s proxy policies and initiatives. Since I live near Sacramento and am more familiar with CalPERS and CalSTRS, I paid more attention to Wilson discussing TIAA-CREF’s collaborative approach.

They don’t look at themselves as “activists” but as moderates, engaging in private dialogue, using a non-prescriptive approach but having influence behind the scenes. With holdings in about 7,000 companies, they view themselves as universal owners and all that entails, focusing more on driving changes in the market vs at individual companies. Their efforts can largely be broken into three areas: proxy voting, corporate engagement, and thought leadership. Wilson made one of the stronger arguments at the conference that divestment simply allows companies to profit from genocide in Sudan, for example, by selling shares to investors who don’t care. TIAA-CREF emphasizes reputational risk to companies in situations where they aren’t open to other arguments. (Although in the case of the Sudan, it is now mostly Asian companies that continue operating there.)

All three giant funds emphasized their relationship with CII, ICGN, global reporting initiative and other national and international organizations. All are concerned with executive pay and agreed the problem is more the rationale of the pay package, not so much the size. Pay needs to be structured in a way that it can’t be gamed. It should encourage sustainable development of the company. All support proxy access, as did just about everyone at the event.

Session Two

This was a short session with two panelists: Ann Yeger of CII (below, right) and Allen MacDougal of PIRC, HKimmoderated by Hank Kim of NCPERS (left). Is your public pension fund under attack? See Lies, Lies and More Attacks on Pension Plans, as well as other publications from NCPERS.

Yerger discussed CII’s efforts and involvement in economic reforms. For example, the Investors’ Working Group (IWG), led by William Donaldson, and Arthur Levitt Jr., both former SEC chairs. The non-partisan panel of experts is co-sponsored by CII and
the CFA Institute Centre for Financial Market Integrity. An initial report and
recommendations are expected by late spring. In April, CII expects to release a white paper commissioned by their credit rating
agencies subcommittee. I liked this phrase from a handout: “The ability to attract capital and investors, not just listings, is what makes markets competitive… investor interests should always come first.” Top concerns for CII were identified as:Yerger

  • majority voting for directors
  • proxy access
  • broker voting eliminated
  • independent board chairs
  • independent compensation consultants
  • say on pay
  • clawback provisions for unearned bonuses
  • no pay for failure – termination for poor performance

MacDougal (below left), from PIRC went on to discuss “a way out of the crisis.” He brought up the need for asset managers to be subordinate to fund trustees and the need for trustees to get involved in market reform. He also mentioned the United Kingdom Shareholders Association (known as “UKSA”), formed in 1992 to support and to represent the views of private (ie. non institutional) shareholders. UKSA provides investment education and conveys the views of investors to the boards of British companies, to the MacDougallGovernment, to the Stock Exchange, to the media and to other bodies. Wouldn’t it be grand to have something like this in the US?

He also brought up an organization that arose to help get qualified independent directors on boards. ProNed was established in 1981 by the Bank of England, following a series of banking crises in the 1970s. Yes, somewhat similar to what we now face in 2009. With proxy access likely to be granted soon, it would be great to see a clearinghouse like this in the US. Shareowner groups seem much more likely to take action if they can easily coalesce around director candidates already vetted by shareowners. There’s a ProNed in Australia. I’m not sure how involved shareowners are in it, or even how involved they were in the original.

A few of MacDougal’s other ideas involved independence of compensation and audit consultants, collective funding by investors of the effects of incentives on behavior (with regards pay), employee representatives on boards would provide another avenue of oversight (as in European countries), additional investor representation is needed in government commissions and regulatory bodies, and he favors mandatory voting disclosure for all fund managers. “We need to be radical AND practical,” he said. I say, we need to get more speakers, like MacDougal, from outside the US with a fresh perspective. I’m glad he made the long trip for the event.

Session Three

Ralph Whitworth, of Relational Investors, Denis Johnson, of Shamrock Capital, Scott Zdrazil of Amalgamated Bank and Mike Ibarra of Landon Butler presented their investment opportunities, proxy strategies and practices. Dan Pedrotty of the AFL-CIO moderated. Relational Investors and Shamrock take stakes in just a few companies. Relational focuses on:

  • business strategy (long-term value, mitigating risk),
  • capital allocation to maximize return,
  • capital structure (optimal use of debt/equity),
  • governance (transparent, responsive, accountable),
  • board composition (diverse, independent, engaged),
  • compensation (LT alignment, reinforce strategy and risk mgt.),
  • communication (timely, accurate, consistent, realistic)

During thDenis Johnsone Q&A, Whitworth said he doesn’t favor more rights for long-term investors. I haven’t heard anyone from these types of funds who does. I suppose when a fund makes a commitment of time and effort, they want to be heard right away, not ignored for the first few years.

Shamrock’s strategy was similar, although Johnson (left) placed more emphasis on removing anti-takeover provisions and providing shareowners the ability to call a special meeting. Shareowners need to accept more responsibility for removing ineffective directors. Withhold votes should have been greater in the past. Shamrock will help ensure such votes will be higher in the future. Proxy voting policies should place a greater emphasis on poor relative stock performance, he says.

Scott Zdrazil, of Amalgamated Bank, emphasized their resolutions for 2009. They’ve been using resolutions to try to “move the market” since 1992. This year they have over thirty. Zdrazil highlighted the following:

  • majority vote standard for director elections
  • annual election of all directors
  • separation of CEO and chair
  • oversight and disclosure of political contributions
  • curtailing “golden coffins”
  • clawbacks for unearned compensation
  • say on pay
  • double trigger change in control provisions – to kick in, must be change of control and termination of CEO
  • ban gross-up – let CEOs pay their own taxes
  • golden parachutes
  • healthcare reforms – adopt universal principles for national healthcare reform
  • adopt ILO labor standards

Mike Ibarra, of Landon Butler, emphasized the history of their Multi-Employer Property Trust (MEPT) funded mostly by building trade unions and pensions. He described their Responsible Property Investing as comprehensive in terms of environmental, social and governance, to preserve and enhance economic returns. The MEPT claims to have created 52 million jobs through 2006 and has played a key role in revitalization and historic preservation. They’re beating the comparable indexes, so you can do well by doing good.

Session Four

After a nice lunch, we heard from the AFL-CIO, CTW/SEIU, AFSCME and LIUNA, moderated by Carolyn Widener, of CalSTRS. Dan Pedrotty, of the AFL-CIO said they will shortly issue a rating for registered investment advisors, discussed the need to reregulate capital markets, focus more on risk management, and push for greater disclosure. He then talked about some of their new proposals:

  • golden coffins
  • hold past retirement – retain 75% of comp shares until two years after termination
  • healthcare initiative – universal, continuous, affordable, high quality

Rich Clayton then discussed the focus of Change to Win and SEIU. The focus was broader than most, with initial emphasis on the Investor and Employee Free Choice Act, which is critical to ensuring that higher productivity leads to improved paychecks. He had plenty of graphs to demonstrate our new gilded age and how the increasing disparity on income and benefits has helped fuel our problems and the financial crisis. The proportion of workers wanting to join a union has risen substantially during the last 10 years but intimidation has kept them from doing so. Clayton also touched on the 2009 resolutions being introduced by SEIU’s Capital Stewardship Program. These include:

  • say on pay
  • climate risk and greenhouse emission targets
  • labor standards / ILO compliance
  • regulatory reforms
    • proxy access
    • say on pay, and other exec compensation reforms
    • ending broker votes
    • ESG disclosure and clarification of fiduciary standards
    • reinvigorating long-term ownership discussions

Scott Adams described AFSCME’s top three governance priorities as say on pay, proxy access and vote no or withhold campaigns on directors. They will continue pushing majority vote requirements, board declassification, anti-gross ups, and in attempting provisions to recover solicitation expenses. New initiatives this year are requirements to hold equity shares for several years in escrow and to delete golden coffins. They are also working on reforms to reconstruct bond rating agencies.

Richard Metcalf then described LIUNA’s program. They seem to make more of an effort than most (TIAA-CREF in this bunch excepted) to engage companies before filing. They are using a questionnaire to determine if companies have done adequate succession planning. Turnover of CEOs has increased and there is a growing trend of looking to the outside (presumably for a savior). We’ve seen high exposure misfires, such as at Home Depot. They’re also disturbed by conflicts of interest among executive compensation consultants. LIUNA is seeking annual performance reviews by the board, development of criteria for internal candidates, planning three years in advance and annual disclosures on succession planning. He also described efforts to limit the SEC’s “ordinary business” exclusion, which has been used to exclude proposals like those submitted by LIUNA in 2006 seeking evaluation of risk at mortgage lending by home builders. Others thrown out sought to draw attention to credit rating conflicts, succession planning and evaluation of risk. He quoted former SEC Chairman Harvey Pitt, “It is impossible for the SEC to determine what the ordinary business of a corporation really is.”

Session Five

The final session saw brief presentations from Glass Lewis, Corpgov.net, ICCR, and the RiskMetrics Group. Bob McCormick of Glass Lewis led off with a comprehensive presentation that touched on the credit crisis, executive compensation, majority vote for directors, say on pay, M&A, contests, the new administration, initiatives from 2008 and those we will see in 2009. The loss of broker votes, combined with majority requirements, will make a difference in director elections. In his handout, McCormick discusses the Waxman Report on Conflicts of Interest Among Compensation Consultants, which found that almost half of the S&P 500 got executive pay advice from conflicted consultants. Another issue he raised that has been too little discussed is redomestications to lower corporate tax rates. Apparently, several are or were looking to Switzerland. For 2009, he discussed many of the same proposals already mentioned above and the likelihood of SEC and Congressional support for proxy access, eliminating broker votes, say on pay, compensation consultant conflicts, etc.

You can pull up a four-up pdf of my presentation, IncreaseVotingClout4 at and a copy of my very brief paper at corpgov.net/news/2009/GRU.doc. My hope is to generate additional interest and involvement in Proxy Democracy and the Investor Suffrage Movement. If you get inspired or have questions, please contact me. At Proxy Democracy we are primarily seeking funds willing to post their votes in advance of annual meetings; including the reason(s) for votes would be even better. ProxyDemocracy will soon beta test the ability of retail shareowners to vote directly through the site based on information posted there, including votes by trusted funds. At the Investor Suffrage Movement we are developing a network of people willing to present shareowner proposals locally, saving proponents, such as public pension funds, substantial expenses for time and travel. We are also helping shareowners write proposals, defend them against no action requests and, as mentioned, present them at annual meetings.

Laura Berry (left) then gave an impassioned presentation on the Interfaith Center on Corporate ResponsibilityLaura Berry. “Inspired by Faith. Committed to Action.” ICCR represents about 300 faith-based institutional investors with over $100 billion in invested capital. She emphasized how their prophetic voice has anticipated emerging areas of corporate responsibility. Over many years prior to the recent market collapse, they introduced 120 resolutions on subprime lending and securitization. Resolutions allow them to begin a conversation and to educate. This year, they filed 292 resolutions but engaged in 350 dialogues. They introduced some on governance issues, such as executive pay, but many more on social issues, such as: adopt human rights policy, reduce emissions, recycle, health care reform. They are making good use of data developed by Trucost to determine which companies to target on climate risk indicators. One example of their successes is that WalMart is now boycotting Uzbekistan cotton over its use of force child labor during harvest. I have bulletins from ICCR going back a dozen years and, of course, they’ve been around since the early 1970s.

The finCBowieal presentation of the day was from Carol Bowie (right) of the RiskMetrics Group. She described their elaborate process to develop policies and requested feedback on information posted on their Policy Gateway, a really great resource. She also highlighted some of the key policy updates for 2009. I’ve got resolutions in at companies to reincorporate to North Dakota because of their shareowner friendly policies, and was a bit disappointed that RMG is taking a case-by-case approach on such resolutions… better than opposing them all. RMG has come out with a strong bias in favor of pay resolutions calling on executives to hold until retirement and “bonus banking,” holding for years. It appears they are taking a much harder look at executive pay, with revised performance tests. Say on pay factors include:

  • alignment of incentive plan metrics with business goals (something which few CD&As address)
  • peer group benchmarking process
  • performance trend vs. pay trends
  • internal pay disparity
  • balance of fixed vs. performance-based pay
  • poor pay practices
  • information/rationales in CD&A regarding pay determination
  • board’s responsiveness to investor input

See also Hot Proxy Season Topics for 2009 and Explorations in Executive Compensation.

All in all, it was a great conference, close to the airport (less hassle), low key and very informative. Sorry for all the clipped head shots. Next year I’ll bring a camera. I went to a similar conference about 15 years ago in Oakland and there were only about twenty people attending, as I recall. This time there were about 150. Next year, I’m sure attendance will be in the hundreds. Three cheers to the Los Angeles Pension Trustees Network for sponsoring the event.

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July 2008

ESG Gaining Acceptance

Since 2005, KLD has studied the S&P 100’s sustainability reporting practices for the Sustainable Investment Research Analyst Network, a working group of the Social Investment Forum. The 2008 Sustainability Report Comparison reveals encouraging news. Of the 100 largest U.S. publicly-traded companies, 86 maintain corporate sustainability websites and 49 produced sustainability reports in 2007. These numbers represent significant progress over the past three years.

Now, Watson Wyatt says ESG to be one of six major investment trends in next five years. (Responsible Investor, 7/31/08) The rise of integrating environmental, social and governance issues into investing will be predicated on four major trends:

  • demand for big institutional funds to apply responsible investing principles,
  • sustainability and climate change as mainstream or specialized propositions,
  • the impact of politically motivated activism, and
  • responsible investment becoming more personalized through defined contribution pensions saving.

CalPERS: The Opposite

The Opposite” was a famous Seinfeld situation comedy episode where George Costanza decides that every decision he has ever made has been wrong and resolves to do the complete opposite of his normal instincts. He suddenly begins to experience good luck — getting a girlfriend, moving out of his parents’ house, and even landing a job with the New York Yankees. Maybe CalPERS should use the same tactic with regard to its own governance.

When it comes to advising corporations, CalPERS emphasizes transparency, getting input from shareowners and a wide variety of good governance measures. (As I began to write this, I got a press release from CalPERS on improving governance at La-Z-Boy.) I applaud these efforts, which have been widely credited with moving directors to action and increasing shareowner value. Yet, when it comes to their own governance, perhaps CalPERS should adopt the strategy of doing the opposite of what Board members want to do instinctively.

I’ve tangled with CalPERS over many internal governance issues, as documented at PersWatch.net. The latest involves AB 2940, scheduled for hearing in California’s Senate Appropriations Committee. The bill, authored by Kevin de Leon and sponsored by the New America Foundation, would set up a low-cost IRA option administered by CalPERS. The Program would facilitate the ability of millions of Californians to save for retirement, reduce future dependency on taxpayers, increase California’s tax base, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate our defined benefit plans.

The trouble is, as a condition of neutrality, CalPERS asked the author to amend the bill to permanently exempt the Board from contracting and rulemaking laws with respect to the Program. Unfortunately, de Leon was forced to accept those changes if he wanted to see his bill pass. In contrast to CalSTRS, which recently adopted regulations to guard against the appearance of “pay to play” on investment decisions, the proposed new law would open the CalPERS Board to the increased likelihood of such dishonest behavior.

In my letter of opposition for an otherwise excellent bill, I wrote, “One major ‘pay to play’ scandal involving a large sole-source contract could put the whole System in jeopardy, making CalPERS politically vulnerable. Additionally, what moral authority would CalPERS have in advising corporations to be transparent, if its own contracting procedures were suspect?” Additionally, “The language exempting the Board from the APA disenfranchises millions – ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program.”

For many years, CalPERS claimed California Constitution, article XVI, section 17, exempted the agency from the Administrative Procedure Act and other laws that apply to state agencies. That claim was thoroughly rejected by Connell v. CalPERS in appellate court. The APA offers an opportunity to comment and have those comments addressed in a legal framework that includes many protections for public involvement.

I understand the need to keep costs low, especially during start-up. I even suggested that initial contracts could be noncompetitively bid for up to two years and that initial rules could be adopted as permanent “emergency” regulations. However, any such exemptions should be temporary. These suggestions have been rejected by a Board that too often sees itself as above the law.

If successful, the new fund will quickly have assets in the millions, if not billions. Don’t sacrifice good governance for expediency. CalPERS Board members should consider a new mantra with regard to their own governance, “Do the opposite.”

CorpGov Bites

The final version of the AFL-CIO’s 2008 AFL-CIO Key Votes Survey scorecard is now available.

I’ve added implu to our growing list of Stakeholders. Find out about the comings and goings of corporate officers and directors. Plus, the site lists at least rudimentary contact information and sometimes you can even learn about their associations. Enter a list of companies or people and get automatic e-mail alerts.

A total of 70 federal securities class actions were filed during the first half of 2008, a roughly 17% increase from the total filings in the first six months of 2007. (Securities class actions increase in ’08, Investment News, 7/29/08)

Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’? finds they do. “Boards take a variety of value-enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value enhancing, post-campaign operating performance improvements are economically and statistically significantly higher in these sub-samples of target firms.”

Businesses must incorporate environmental, social and governance (ESG) factors into their management strategies, says Peter Kinder, President of KLD Research & Analytics, in Q&A with an Australian business reporter.

ResponsibleShopper.org (updated) ranks companies by industry from best to worst based on global research and campaign information regarding the impact of the largest corporations on human rights, social justice, environmental sustainability and more.

Gibson, Dunn & Crutcher LLP offer advice on “clawbacks” of executive compensation. What is your company doing in this area?

Subchapter S companies owned by their employees through ESOPs generate some 85,000 new jobs each year and create $14 billion in new savings for workers that otherwise would not have been earned. A study by Knoll and Freeman also found S ESOPs’ higher productivity, profitability, job stability and job growth collectively help ESOP companies amass $33 billion more in combined earnings than what they would earn if they were not ESOP-owned S corporations.


Sign-up online to gain free access. Articles in the Summer ‘08 issue include:

  • Non-Deal Roadshows: Latest Developments and Trends
  • Lessons Learned: How Funds Vote on Proxy Proposals
  • Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
  • How Blogging Can Enhance Your Investor Relationships (and Your Career)
  • My Ten Cents: The SEC’s Coming Guidance on IR Web Pages
  • SEC Staff Says “No” to Non-GAAP Financial Statements

Written to aid the corporate investor relations function, InvestorRelationships.com is also a valuable resources for shareowners. Broc Romanek is doing a great job on this new offering.


Broc also posted a podcast interview with another of our favorites. Andy Eggers discusses his website, ProxyDemocracy.org. Their discussions include:

  • Where did you get the idea for the site?
  • How long did it take to launch?
  • What features does ProxyDemocracy.org currently have?
  • Any plans to tweak things going forward?
  • What have been the biggest surprises in how the site is used so far?


Fraud Risk Guide

“Managing the Business Risk of Fraud: A Practical Guide” can be downloaded for free from the sponsoring organizations’ Web sites from sponsoring organizations – the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants (AICPA), and The Institute of Internal Auditors (IIA). Principles for establishing effective fraud risk management, regardless of the type or size of an organization, are outlined in the guide.

According to the ACFE’s 2006 Report to the Nation on Occupational Fraud, U.S. organizations lose an estimated 5 percent of their annual revenues due to fraud. When applied to the estimated 2006 GDP, those losses added up to approximately $653 billion. Organizations with anti-fraud programs – such as fraud hotlines, internal audit departments, and anti-fraud training – lost approximately half as much as those without such programs.

Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

  • Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
  • Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
  • Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
  • Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
  • Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

The new guidance provides a practical approach for companies committed to preserving stakeholder value. It can be used to assess or improve an organization’s fraud risk management program, or to develop an effective program where none exists.

We added a link to the paper from our small list of online articles, as well as a Team Performance Scorecard from Brown Governance for evaluating boards of directors. CorpGov.net depends on input from readers to bring these resources to our attention. Thanks to Scott McCallum, of IIA ,and Dan Swanson of Dan Swanson & Associates.

Say on Pay Denial

Support for an advisory “say on pay” continues to grow, if more slowly than expected, rising from 41% last year to 42% in 2008. Directorship, reporting the results of a Corporate Library study, notes that “say-on-pay proposals received majority support at a total of 15 companies in 2007 and 2008. But not all of those companies are rushing to put the advisory vote in place. In fact, only five of those companies, or roughly two-thirds, have adopted the vote.”

Vote results are lower this year at financial institutions, where CEOs have been replaced with lower compensation packages. (Companies Ignore ‘Say on Pay’ Votes, 7/23/08)

Look for shareowners to increase the pressure on companies that filed to implement resolutions that obtained a majority vote (MV) next year. Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals by Yonca Ertimur, Stephen Stubben and Fabrizio Ferri investigated board responses to advisory shareholder proposals between 1997 and 2004. The frequency of implementation of MV proposals almost doubled after 2002, from approximately 20% (1997-2002) to more than 40% (2003-2004), “consistent with an increase in the cost of ignoring MV resolutions in the post-Enron environment.” “Directors failing to implement majority-vote (MV) proposals are often the target of ‘vote-no’ campaigns and receive a ‘withhold vote’ recommendation by ISS. Firms ignoring MV proposals end up on CalPERS’ ‘focus list’, receive lower ratings from governance services and attract negative press coverage.”

Perhaps more striking is that “implementation of a MV shareholder proposal is associated with approximately a one-fifth reduction in the probability of director turnover at the targeted firm.” In short, the market rewards those companies that follow the advice of shareowners.

Time will tell at Citigroup, which just named new chairs to its audit and risk, nomination and governance, and personnel and compensation committees. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced chairs would be rotated.

But will rotations be enough, especially when two of the three received significant withhold votes at Citigroup’s annual meeting. AFSCME’s Richard Ferlauto says the union sees little value in rearranging committee chairs. “What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business,” Ferlauto told R&GW. (Citigroup Names New Board Committee Chairs, RiskMetrics Group, 7/25/08)

Congratulations Race to the Bottom

Once of our favorite sources of legal commentary, TheRacetotheBottom, has been chosen by the Library of Congress for inclusion in its historic collections of Internet materials related to “Legal Blawgs.”

Aim’s Race to the Bottom

Speaking of a race to the bottom, a study released by PwC found that while 77% of the Aim’s top 100 comply with some aspects of the Combined Code, just 3% chose to fully adopt it. A record 28 companies were suspended, raising doubts about the exchange’s voluntary approach to governance. (Junior index must aim higher to improve reputation, FT.com, 7/24/08)

New Election Rules at CalPERS

New election rules take effect on July 26, 2008, thanks to action taken by Corpgov.net publisher, James McRitchie. At McRitchie’s request, the Office of Administrative Law determined several CalPERS election rules were illegally adopted “underground regulations.” (see 2007 OAL Determination No. 1) The amended regulations clarify many election procedures and significantly reduce the risk of CalPERS members to identity theft.

Back to the top

Further information about the next three items and more at Corporate Watchdog Radio.

Get the Lead Out and Protect Genitals

More than your money is at risk. Independent laboratory testing initiated by the Campaign for Safe Cosmetics in 2007 found that two-thirds of 33 sample lipsticks from top brands contain lead. The Environmental Working Group’s six-month investigation into the health and safety assessments on more than 10,000 personal care products found major gaps in the regulatory safety net. A recent government-funded study by Dr. Shanna Swan links linking phthalate levels with feminized genitals in baby boys. Independent laboratory tests found phthalates in more than 70% of health and beauty products tested – including popular brands of shampoo, deodorant, hair mouse, face lotion and every single fragrance tested. Have I got your attention yet?

If you own shares in a company that makes personal care products or just don’t want to use poison products, check the growing (600) list of those that have pledged to not use chemicals that are known or strongly suspected of causing cancer, mutation or birth defects in their products and to implement substitution plans that replace hazardous materials with safer alternatives in every market they serve. Several major cosmetics companies, including OPI, Avon, Estee Lauder, L’Oreal, Revlon, Proctor & Gamble and Unilever have thus far refused to sign the Compact for Safe Cosmetics.

Take action for safe cosmeticsSign on to have Congress empower the FDA to ensure that cosmetic ingredients and products are safe before they reach store shelves. DisclosureThe publisher of CorpGov.net owns stock in Proctor & Gamble and has requested they join the Campaign for Safe Cosmetics. Please make similar appeals to the companies in your portfolio.

Unfortunately, P&G sent a canned response. “I’m sorry you heard a report that caused you to question the safety of our beauty care products. The claims you’ve heard are completely false. Consumer safety is always our first priority and all our products are tested extensively before going to the market. We stand firmly behind their safety. It’s important to know that cosmetic products sold in the U.S. are regulated by the Food, Drug, and Cosmetics Act. We comply with all legal requirements wherever our products are sold.” Of course this misses the point that current laws are totally inadequate. When I brought this to their attention, investor relations wrote back with an oops; “I can understand your concern and I’m sharing your comments with our Health and Safety Division.”

Chamber Attacks Resolution Process

Members of the U.S. Chamber of Commerce should be questioning use of their dues money for a study that is so deeply flawed it would be laughable, if the money to pay for the study wasn’t coming out of your pocket.

The study, Analysis of the Wealth Effects of Shareholder Proposals by Navigant Consulting, purports to make the following finding: “Taken as a whole, these results provide little evidence that shareholder proposals increase target firm value.” What is the basis of the study?

First, Navigant (under the pay and direction of the Chamber), reviewed the academic literature from about a decade ago and found mixed results. “There is little evidence of measurable improvements in (sort-term or long-term) stock market or (long-term) operating performance in target companies as a result of shareholder proposals.” However, “Certain types of proposals, especially those concerned with removing companies’ takeover defenses, appear to be supported by the market.” Updated findings would probably be different, since their is increasing recognition by shareowners and the market that social and environmental factors can have an economic impact on the firm. Thus, the support for resolutions, such those to address a company’s carbon footprint, have been increasing.

Second, Navigant examined five resolutions for short-term impact and another five resolutions for long-term impact. How did they select these resolutions? Were they randomly selected from all resolutions during a specified period? No, they were picked by the Chamber! This would be like a drug company selecting 10 patients out of thousands to represent the efficacy of their product for FDA review. Even if the resolutions had been randomly selected, the samples would have been too small to have any statistical significance. However, the fact that they were picked by the Chamber, which has for years advocated doing away with the resolution process, completely destroys the potential validity of findings.

Additionally, that portion of the study uses deeply flawed statistical modeling based on “abnormal returns.” The implication is that stock price is predictable. If the academics who invented the Fama-French three-factor model were actually able to predict price, they wouldn’t be working at universities. Instead, they would be reaping huge financial rewards in the stock market.

The study then goes on to look at the cost of the shareowner resolution process and cites an estimate by Bainbridge of $90.654 million, based on an “implied cost” of $87,000 per proposal and the assumption that corporations seek to exclude all proposals. The study fails to note that with e-proxy, costs are going down, sometimes dramatically. (Thanks to William Michael Cunningham of Creative Investment Research, Inc. for providing a copy of his meeting notes and his analysis of the Chamber’s study. This article draws heavily upon those notes but the opinions expressed are those of Corpgov.net publisher, James McRitchie.)

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 in the ass and a circus, but they keep us in touch with what is coming. Social and environmental resolutions often seek to address “externalities,” the costs of business to society. Without such resolutions, shareowners would immediately seek regulations and legislation. 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 single-payer universal health insurance to put an end to our competitive disadvantage due to rising health care costs. They could also 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. Fighting shareowner resolutions pales in comparison.

About a million and a half people have already signed on to support Al Gore’s Challenge to Repower America. McCain said, “If the vice president says it’s doable, I believe it’s doable. Obama said, “I strongly agree with Vice President Gore that we cannot drill our way to energy independence, but must fast-track investments in renewable sources of energy like solar power, wind power and advanced biofuels, and those are the investments I will make as President.” Local chambers and the U.S. Chamber of Commerce should focus on fighting the real issues, not our own shareowners.

Improve Corporate Disclosure

A proposed accounting standard would require corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities. Investor input is critical on these issues, as the corporate lobby is expected to turn out in force to oppose expanded disclosure.

While the proposal is on the right track, it stops short of requiring full disclosure of risks that would impact investors, most notably long-term severe impact risks. The proposal may also allow corporate lawyers to routinely block disclosure of almost any information that they designate as prejudicial.

The proposed FAS 5 changes would be subject to three important exceptions and loopholes, which the Investor Environmental Health Network believes can be addressed by the following changes:

  • FASB should require a disclosure of “severe impact risks” deemed by the reporting company to be remotely possible and long term.
  • FASB should apply the new standard to asset impairments, not just legal liabilities.
  • FASB needs to eliminate or strictly limit this ”prejudicial” exception to avoid misuse.

Submit comments on the Exposure Draft entitled Disclosure of Certain Loss Contingencies to the Federal Accounting Standards Board (FASB) by August 8, 2008. Send them via email to[email protected]. Put File Reference No. 1600-100 in the subject line. For more information, see the relevant FASB documents and IEHN’s Investor Alert and model letter and watch Sanford Lewis, Counsel to the Investor Environmental Health Network discuss the proposal.

CorpGov Bites

Eighty-six percent of companies on the Standard and Poor’s 100 Index have corporate sustainability websites, compared to 58 percent in 2005, according to the “2008 S&P 100 Sustainability Report Comparison” from the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum. (More S&P 100 Companies Reporting CSR Progress: Study, GreenBiz.com, 7/22/08)

ECOFACT has released a report listing the top ten most environmentally and socially criticized companies. The top ten companies were: Samsung, Total, Wal-Mart, China National Petroleum Corporation (CNPC), Shell, ExxonMobil, Citigroup, Nestlé, ArcelorMittal, and Chevron. The companies have been consistently and severely criticized by the world’s media and NGOs for issues including human rights abuses, severe environmental violations, corruption and bribery, and breaches of labor, health and safety standards. Rankings are based on the Reputational Risk Index (RRI), as measured by RepRisk in the first six months of this year. For a copy of the report, please contact Charlotte ManssonDisclosureThe publisher of CorpGov.net is happy to announce he owns none of these companies directly.

“Most big businesses now require directors to be elected by a majority of shareholders, giving board members incentive to court investor goodwill.” Joann S. Lublin, writing for WSJ (New Breed of Directors Reaches Out to Shareholders, 7/21/08) Lubin appears to credit this reform with the fact that more shareowner resolutions are being withdrawn. Think of how many resolutions would be withdrawn or would not even be submitted with a rise in proxy access.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. Boards are also meeting more frequently with investors. Yet, in reading RMG’sPreliminary U.S. Postseason Report, it appears many of those meeting may have been to simply cave on issues where they were likely to lose. For example, 47 of the 90 majority vote resolutions filed have been withdrawn by proponents because companies agreed to adopt their own bylaws. More than 72% of S&P 500 companies have adopted some form of a majority vote standard, according to Claudia Allen, a partner with the law firm Neal, Gerber & Eisenberg.

Highlights included the resignation of Mary Pugh, chair of the finance committee at Washington Mutual, after getting 49.9% opposition in a campaign by CtW. Overall support for “say on pay” advisory vote proposals increased marginally at U.S. companies. Other results:

  • Pay-for-performance proposals have averaged 27.4 percent support over nine meetings where results are known, as opposed to 29.5 percent support over 38 meetings last year.
  • Independent board chair proposals received record support this year–31.3 percent support over 20 meetings, 4.6 percentage points higher than last year, when they averaged 26.7 percent support over 43 meetings.
  • Resolutions asking firms to end staggered boards received slightly less support so far this year, with 60.2 percent average support at 16 meetings where results are known. This compares to 63.9 percent support over 38 meetings in 2007.
  • 2008 is on pace to shatter the all-time record for proxy challenges, although few contests have gone to a vote. Given the market meltdown, many boards have been willing to provide board representation to dissidents… including at Yahoo (Yahoo, Icahn Let Bygones Be Bygone, David Gaffen, WSJ, 7/21/08) and How I Spent My Weekend, The Ichan Report, 7/22/08)

Gretchen Morgenson’s Borrowers and Bankers: A Great Divide clarifies the current conventional wisdom. “Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.”

“Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?” (NYTimes, 7/20/08)

Over the weekend, Jane Bryant Quinn also brought our attention to the question or whether or not the Public Company Accounting Oversight Board, created by Sarbanes-Oxley, is constitutional. The challenge to PCAOB revolves around whether the president rather than the SEC should appoint board members. Because the law lacks a “severability” clause, if one of its provisions is found to be unconstitutional, the whole law may go down. (Lawsuit Threatens Sarbanes-Oxley Act, Washington Post, 7/20/08)

Investors are responding to the sharp falls on equity markets around the world by shifting from what are now being seen as vulnerable emerging markets to relatively safer developed ones. State Street says the flows it tracks amount to a “safety first” mood… MSCI’s emerging market index has lost 0.6% in the past week. The developed market index has gained 1.9%. (See America first? Investors suddenly fleeing emerging markets, Financial Week, 7/21/08) Perhaps a rush to relative corporate governance quality?

Mandatory Reimbursement Bylaw Could Breach Board’s Fiduciary Duty

The Delaware Supreme Court ruled that CA shouldn’t be forced to pay for dissident shareholders’ proxy fights and the SEC issued a no action letter. (decision)

Under a procedure established under Delaware law last year, the SEC asked the state’s Supreme Court to decide whether a bylaw proposal by AFSCME to CA, formerly Computer Associates, was “a proper subject” for shareholder action under state law. The bylaw would have required CA to reimburse a shareowner for proxy costs, including legal expenses, printings and mailings, if the shareowner unseats at least one CA director in a slate of candidates representing less than half the board.

The Court held that the bylaw was a proper subject for stockholder action. However, the Court also held that if adopted the bylaw would violate state law because “the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” (Del. Supreme Court rules for CA on shareholder issue, delawareonline, 7/18/08)

John Olson, a corporate-governance lawyer at Gibson, Dunn & Crutcher, is quoted in the WSJ saying, “The court is soundly affirming that shareholders have the right to propose bylaws relating to the process of electing directors. I think people will try to be creative in ways of using state law to get access to the corporate proxy.”

In the same article, Richard Ferlauto, director of pension investment policy for AFSCME, said discussions about shareholder election rights now focus on “the creation of an appropriate right of shareholder access at the federal level” through the SEC. (Delaware Court Rules for CA in Suit, 7/18/08)

With regard to the question of whether or not he AFSCME Proposal a proper subject for action by shareholders, the court wrote, in part:

The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election…That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action.

With regard to the question of whether adoption of the bylaw would cause CA to violate Delaware law, the court wrote, in part:

As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all. (footnotes omitted) (Supreme Court Decides SEC-presented Delaware Bylaw Issue, Francis G.X. Pileggi, Delaware Corporate and Commercial Litigation Blog, 7/17/08)

Getting into more of the details of the decision, analysis by Travis Laster, reported by Broc Romanek, explains that Section 109 gives stockholders the statutory right to adopt bylaws, which may contain “any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” However, Section 141(a) vests the power to manage the business and affairs of every corporation in the board of directors. Consistent with Delaware’s historic model of director-centric governance, the Supreme Court makes clear that Section 141(a) has primacy over Section 109.

An interesting discussion of implications and possible unintended consequences follows. For example, “A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis.” However, the court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year.” (CA v. AFSCME: The Delaware Supreme Court Giveth and the Supreme Court Taketh Away, TheCorporateCounsel.net Blog, 7/18/08)

AFSCME proposed a similar bylaw change at Dell. At the company’s annual meeting, management noted that a preliminary tally showed the proposal received 33.7% of the vote. A similar proposal last year garnered only 14% of shareholder votes. (Union loses proxy reimbursement battle, but may have won war, Financial Week, 7/18/08)

Much more commentary at Delaware Supreme Court Issues Opinion on Shareholder-adopted Bylaws(The Harvard Law School Corporate Governance Blog, 7/18/08), Delaware Supreme Court Rejects Reimbursement Proposal (Risk & Governance Blog) and in at least a 20 part series atTheRacetotheBottom.org.

If the SEC fails to adopt a proxy access rule this year, where will shareowners concerned with the lack of democracy in corporate elections turn in 2009? One possibility is to seek reincorporation in North Dakota. Such proposals bring up several issues that could be the subject of negotiations. Among the most significant features of North Dakota law are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

No Action Letters

The SEC posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October ’07). According to Broc Romanek, we should expect to see new 14a-8 no-action letters posted going forward – although not likely on a real-time basis during the proxy season. (Corp Fin Goes “Live” with Shareholder Proposal No-Action Letters, TheCorporateCounsel.net Blog, 7/17/08)

I wish they would have posted the letters using a database sortable by resolution type or searchable by word/phrase. If anyone dumps this data into a file and makes it available as a searchable database, please let me know. I’m sure it is available by paid subscription. I want to know if it is available for free. It would be a great resource for small shareowners and for a class I’ll be teaching in the fall.

What is Broadridge Thinking?

About 10 years ago Sona Shah and Kai Barret began filing complaints against their employer, ADP Wilco, now a subsidiary of Broadridge Financial Solutions, for discriminating against its employees based on their citizenship and immigration status. Amazingly, Wilco called its foreign recruitment program ‘Project Delhi Belly.’  Delly Belly is a derogatory slang term coined during the British occupation of India.  If an officer arrived in Delhi and had stomach problems it was called getting a ‘Delhi Belly.’  Why Wilco’s management thought this was an appropriate title for its recruitment of foreign programmers is anyone’s guess but it gives you some sense of their cultural sensitivity.

Their complaints went out to Immigration, Department of Labor, Department of Justice. Their campaign even led to Congressional testimonypress and blog coverage. They also filed with the EEOC and began the currently pending litigation.

The case progressed with usual ups and downs. Lawyers would come into the case attracted by positive publicity and press. Then when they saw how much work was involved they wouldd abandon their effort or seek to withdraw. In 2006 Shah attempted to settle the case but noticed her attorney may have committed fraud with both the settlement and the case.  Simultaneously, Wilco went through a corporate restructuring with Broadridge.

Four months ago Shah attempted a mutual discontinuance but Broadridge refuses. Instead, they continue to spend thousands of dollars on unnecessary legal expenses, with no apparent benefit to shareowners. The disputed settlement sought by Wilco/Broadridge basically pays Shah and her attorneys $100,000. Shah she says the settlement exposes her to tax consequences worse than if she had lost the case, so she opposes it.

Since it appeared that outside counsel seeks to continue the lawsuit simply to continue billing Broadridge, Shah wrote a letter to Broadridge’s CEO of her offer. When there was no response, she began contacting large shareowners, alleging that Broadridge was wasting money on a lawsuit she was willing to discontinue. (typical email) After several investors wrote to the company, Broadridge’s outside counsel then sought to enjoin Shah from communicating with Broadridge’s investors — a motion which the court summarily dismissed.

Investors should ask Broadridge why the company continues to waste potentially hundreds of thousands of dollars defending a lawsuit which the plaintiff is willing to discontinue. For further background information Google Sona Shah or Shah v. Wilco. See also Stipulation to Discontinue.

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Big Changes Coming

E.J. Dionne at Truthdig.com (The Death of Reaganomics) writes, “This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early ’80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What’s becoming the Panic of 2008 will mean an end to the latest Capital Rules era.” Markets need regulated.

Stephen Davis and Jon Lukomnik, writing for Compliance Week, argue “by late next year the United States may well see two things happen that most boardrooms today consider impossible.” The first is “say on pay,” since both Obama and McCain favor it. Votes on resolutions may be lagging public opinion. Mutual funds, pensions and insurance companies that dominate the vote are more tolerant than the public, whose own economic pain adds to the strain. Davis and Lukomnik call say-on-pay in 2009 “a no-brainer, as it shows them (politicians) to be sensitive to the issue without imposing arbitrary caps antithetical to U.S.-style capitalism.”

The second change they see coming is the non-executive chairman. GMI has found that only a bare majority—52%—of companies in its U.S. database now still combine the chairman and CEO roles. Three years ago the figure was 62%. According to Spencer Stuart, 35% of S&P 500 companies separated the posts last year, compared to a 16% in 1998. “The ‘Chairmen’s Forum‘ is to debut with an Oct. 7 session in New York, aiming to adopt best practices and explore collaboration on common issues. The forum stems from a project initiated by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, which will start off serving as secretariat to the group.” Stephen Davis is the project director. That change is expected to take a little more time. (Dreaming the Impossible Governance Dream, 7/8/2008)

Let Them Eat Bugs

Little to do with corporate governance, other than the growing disparity between rich and poor, but I couldn’t resist citing The Economist article with the above title (7/12/2008). “Bugs provide more nutrients than beef or fish, gram for gram.” Feed crops gobble up some 70% of agricultural land but crickets take up just a small space in the home.

E-Proxy Vote Bleak

Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop). (Broadridge’s “Near-Final” E-Proxy Stats for the Proxy Season, TheCorporateCounsel.net Blog, 7/14/2008)

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ICI Defends Mutual Fund Votes

With almost 30% US company shares and 90 million shareholders, how mutual funds vote is a matter of great public importance. That’s why many of us fought to have the SEC require disclosure of votes and policies several years ago. While ICI opposed the measure, they now claim to have embraced their new role and have recommended that Congress require that other fiduciaries also be required to make similar disclosures.

ICI President and CEO Paul Schott Stevens presented a comprehensive new study by the Institute on proxy votes cast by registered investment companies in an address, In the Shareholders’ Interest: Funds and Proxy Voting, at the American Enterprise Institute. Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders, examined more than 3.5 million proxy votes cast by funds in 160 of the largest fund families during the 12 months ending June 30, 2007. The study is the largest known examination of proxy votes cast by funds. Key Findings are as follows:

  • Funds play an important role in corporate governance. Proxy voting is one of several ways that funds promote stronger governance and better management, and in turn promote shareholder value. By law, funds must vote proxies in the best interests of funds and their shareholders.
  • Proxy proposals cover a wide range of governance and other issues. Proxy proposals can be initiated by company boards of directors (“management proposals”) or company shareholders (“shareholder proposals”). More than 80% of management proposals relate to election of company boards and ratification of company audit firms; most of the remainder concern fundamental changes that must be approved by company shareholders. Shareholder proposals cover a range of issues but tend to be sponsored by a small number of individuals and organizations. One-third of the more than 600 shareholder proposals that came to a vote in the year ending June 30, 2007, were sponsored by five individuals and three labor unions.
  • Funds and their advisers devote substantial resources to proxy voting. As part of this effort, they adopt and publish proxy voting guidelines. The guidelines of 35 of the largest fund families indicate that their funds generally support management or shareholder proposals that align the interests of company employees with those of shareholders or that bolster shareholders’ rights, including proposals to remove antitakeover devices such as poison pills or classified boards. Funds’ guidelines are often silent on, or indicate that funds will vote against, proposals on social and environmental issues.
  • Funds supported the majority of management proposals and voted in favor of shareholder proposals about 40% of the time, giving especially strong support to shareholder proposals calling for elimination of antitakeover provisions.
  • Funds’ votes are not outliers. In many areas funds’ votes mirrored the vote recommendations of proxy advisory firms.
  • Funds establish procedures to manage potential conflicts of interest in proxy voting. Academic research indicates that funds’ proxy votes are not influenced by the business interests of fund advisers. Funds’ votes are not swayed, for example, by their advisers’ management of 401(k) plans.

This report certainly represents a step in the right direction. Yet, ICI acknowledges that there are many funds “with broader investment purposes — including about 260 that pursue financial returns in tandem with social, environmental or other objectives, and whose advisers manage with these additional objectives in mind.” Unfortunately, it rationalizes most funds ignoring such issues because there goal is to “maximize financial returns.” Since they “do not have a mandate from their investors to engage portfolio companies on social, environmental or similar issues — valid as these may be,… they neither can nor should vote proxies simply on the basis of these considerations.”

However, many environmental and social issues have direct financial impact. Additionally, consider climate change. Even the wealthiest among us cannot escape the assaults of global warming and acidic oceans. As Robert Monks observes, “The primary thing that workers need for their retirement [is] money, but don’t workers also need a safe, clean, decent world in which to spend it. These ends are not economically exclusive…”

Environmental, social and governance (ESG) issues should be integrated into financial analysis. As Stephen Viederman notes, “There is no triple bottom line. There can only be a single bottom that offers positive social and financial returns against which all business decisions must be measured. Fiduciary duty… must give weight to how ESG factors, more broadly understood than at present, affect both risks and opportunities, now and in the future.”

A more fundamental criticism of the ICI’s methodology is that it only presents aggregated data. It reminds me of Robert Reich’s frequent quip that “basketball player, Shaquille O’Neal and I have an average height of over six feet.” By aggregating the data, voting patterns look normal.

More informative are reports at Fundvotes.com where, as its author Jackie Cook notes, “the most striking thing about the graphical representation of the data by fund family is the difference between fund groups’ voting profiles on various issues.”  “Most reports that criticize mutual funds’ proxy voting, including those mentioned in the ICI report) are more detailed with respect to who are the leaders and who are the laggards in particular areas of voting (for instance, why does one fund family support every board nominee at portfolio companies, whereas others support nominees less than 80% of the time, where the two might hold many of the same securities?), says Cook.  Not only does the ICI report fail to dissaggregate, it doesn’t even tell us which funds are included and which are not.

Unrelated to ICI’s report, but also of interest is a new Morningstar Inc. study which looks at how much managers invest in their own funds. The study looked at 6,000 issues and found that in 46% of the domestic stock funds surveyed, the manager hadn’t invested a dime. Nearly 60% of foreign stock funds reported no manager ownership, two-thirds of taxable bond funds have no managers with money in the fund, up to 70% of balanced funds have no manager cash and some 78% of muni bond funds have shareholder cash only. See table showing fund ownership. (No skin in the game, Chuck Jaffe, MarketWatch, 7/6/08)

Chuck Jaffe seems to believe the report shows Proxy voting (by funds is) more than a rubber stamp(Philiadelphia Inquirer, 7/13/08) However, he also notes that “At most large firms, fund managers still don’t sit on the proxy-voting committee. And so long as investors favor results to disclosures and returns to process – which is true in all funds except for those that pursue a social agenda – there will always be some lingering sense that fund firms don’t care that much about these issues. Further, there are no studies showing any kind of link between how funds vote their shares and how they perform.” Once those two threads are connected, we should see a lot more emphasis on voting. See also Shareholders’ Voices Hold Little Clout, mmexecutive.com, 7/14/08.

Lukomnik to Head IRRCi

The Investor Responsibility Research Center Institute for Corporate Responsibility (IRRCi) hired Jon Lukomnik as program director. Lukomnik will spearhead the Institute’s efforts to become the preeminent source of objective and relevant research examining the intersection of investments with environmental, social and governance issues.

“The Institute will encourage and support important research in the fields of corporate governance and corporate responsibility and will be a convener and coalescing force in this area of growing importance. Jon is the right person to lead us, and our board looks forward to working with him as he develops relationships with educational and other research organizations in these fields which are critically important in the securities markets and for the economy,” said Peter Clapman, Chair of the Institute.

“This is an opportunity of a lifetime – the chance to give back to the industry,” said Lukomnik. “If we do it right, the IRRC Institute will contribute to building the solid, independent research base which will affect how investors view and value corporations’ environmental, social and governance efforts for decades, even while allowing corporations to understand how to profit by being responsible. I envision the Institute as the go-to non-profit organization for such independent, objective research.”

Lukomnik is well-known globally for his corporate governance efforts over a quarter of a century. He is a founder and former Governor of the International Corporate Governance Network which now boasts 500 members representing some $15 trillion of assets under management, ex-chair of the executive committee of the Council of Institutional Investors, former Deputy Comptroller of New York City in charge of investing that City’s pension funds and treasury assets, a founder of GovernanceMetrics International, and co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Bargain price of less than $10 for hardcover edition) Lukomnik will also continue as Managing Partner of Sinclair Capital LLC, a strategic consultancy for the asset management industry.


In a CFA Institute survey of1,956 investment professionals, 11% said they had seen a credit rating agency change a bond grade in response to pressure from an issuer, underwriter or investor.

Many respondents felt the most harmful conflict of interest results from the payment structure under which rating agencies such as Moody’s Investors Service and Standard and Poor’s are paid by the same issuers whose securities they grade. (Investors cite rating agencies’ conflicts of interest, Financial Week, 7/8/08)

An SEC report found that none of the rating agencies examined had specific written comprehensive procedures for rating residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO). Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. (SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors) See also: Rating agencies in-depth, FT; SEC proposed rules.

Procedural Error in SEC Request to Delaware Court

J. Robert Brown argues that the decision by the Delaware Supreme Court to consider the certified question re AFSCME’s Proposed Bylaw at CA violates its own rule. No action letters represent requests for “informal” advice from the staff of the SEC.  The advice is not attributable to the Commission.

The petition provides that the answer “will determine whether the Division will ultimately concur in CA’s view that it may exclude the AFSCME Proposal . . . ”  (emphasis added).  In other words, it will be the staff that rules once the answer has been received, not the entire Commission. The fact that a no action letter is not a position of the Commission means that it can be easily disavowed (by the Commission or the staff) and cannot be challenged as a final action under the APA. Procedures matter. [As Predicted: The SEC and the Further Denial of Shareholder Access (Delaware Supreme Court and the Lack of Jurisdiction)(Part 4), theRacetotheBottom.org, 7/8/08)

TIAA-CREF Faces Pressure at Annual Meeting

Shareholders and advocacy groups will press TIAA-CREF officers on its investment in companies with socially irresponsible practices at its July 15 meeting. After years of pressure, TIAA-CREF agreed to become a shareholder activist on issues of social responsibility. Now it’s time for them to either put pressure on five industry leaders that consistently display egregious behavior or divest their stock, says the Make TIAA- CREF Ethical coalition, which includes Corporate Accountability International (formerly Infact), World Bank Bonds Boycott, Press for Change, Social Choice for Social Change, Canadian Committee To Combat Crimes Against Humanity (CCCCH) , Citizens Coalition (Frente Civico), Educating for Justice, National Community Reinvestment Coalition, Campaign to Stop Killer Coke/Corporate Campaign, Inc., Campaign for a Commercial-Free Childhood, and Sprawl-Busters. The Coalition urges that TIAA-CREF “reform them or dump them.”

  • Nike and Wal-Mart, condemned for selling products produced by overseas sweatshop labor;
  • Wal-Mart, widely criticized for its domestic labor practices, hurting local businesses, and promoting urban sprawl;
  • Philip Morris/Altria, responsible for Marlboro, the leading cigarette for youth;
  • Costco, which promotes police brutality in Mexico and the destruction of its cultural heritage and the environment;
  • Coke, with complicity in widespread labor, human rights and environmental abuses; exploits child labor and aggressively markets harmful products to children.
  • While TIAA-CREF did divest from harmful World Bank bonds, it should now pledge to buy “no more.”

According to coalition group representative Neil Wollman, a Senior Fellow at Bentley College in Massachusetts, TIAA-CREF claims that outside of their socially responsible fund, they cannot use non-financial criteria in their financial decisions. Yet, Wollman asks, “Would TIAA-CREF have invested in the production of Nazi gas chambers in World War II if it meant a healthy financial profit? It’s time for TIAA-CREF to answer that kind of question.” He adds, “Our coalition praises TIAA-CREF for changes over the years in its social responsibility practices often spurred by participant lobbying; but now they need to move on our companies of concern.” For further information, contact Neil Wollman, Ph.D., Senior Fellow (for the Make TIAA-CREF Ethical coalition): 260-568-0116. DisclosureThe publisher of CorpGov.net is a Costco shareowner.

Audit Committee Practices

TheCorporateCounsel.net recently conducted a survey and found that more than 90% review company earnings releases prior to their release to the media. Most hold a meeting by telephone a day or two prior to the release. (Survey Results: Audit Committees and Earnings Releases)

Sweeping Resoution at Hain

Congratulations to Kenneth Steiner and John Chevedden for creating and submitting what is certainly one of the most innovative and important resolutions of 2008. The SEC Rules on Shareholder Resolutions (Rule 14a-8) limit shareowners to one resolution per annual meeting. Yet, Steiner’s resolution to the Hain Celestial Group covers a lot of territory simply by asking Hain to reincorporate in North Dakota.

RMG/ISS blog points out that the United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively. At least we know such proposal aren’t likely to be excluded by “no action” requests.

As RMG/ISS report, there is some dispute as to the benefits to be gained by reincorporation. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.” But being based at the University of Delaware, Elson is hardly be viewed as unbiased.

William H. Clark, Jr., who served as president of the North Dakota Corporate Governance Council, which drafted the statute, of course, sees things differently. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.” (Reincorporation proposal seeks to address “major issues in corporate governance,” 7/2/08)

Regardless of the merits of incorporating in North Dakota, the proposal brings up several issues that could be the subject of negotiations. Among the most significant are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

See text of the law and discussion, The North Dakota Experiment, at Harvard Law School Corporate Governance Blog, 4/23/07, Expect to similar proposals at a great many companies next year.DisclosureThe publisher of CorpGov.net is a Hain Celestial Group shareowner and will be voting in favor of Steiner’s proposal.

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CorpGov Bits

Writing for FT, Kristin Gribben concludes Shareholder democracy is on hold (7/6/08) based on mid-year voting results, which show “say on pay” support has remained flat. However, since both Barack Obama and John McCain have said they support say on pay, why should shareowners exert much effort on such proposals this year? Yes, many are waiting to see what the next administration brings.

One out of every four working Americans (25%) describes their workplace as a dictatorship and only 34% believe their bosses react well to valid criticism, according to a new Workplace Democracy Association/Zogby Interactive survey. 80% of workers said they work better when they are given the freedom to decide how to best do their job. (Workplace Democracy Survey, Workplace Democracy Association and The WorldBlu Blog, 7/5/08) The revolution continues.

A socially responsible investment (SRI) global equity allocation could produce 40% lower CO2emissions than a conventional portfolio indexed to the MSCI World, according to a study by Pictet Asset Management (PAM). Such a portfolio also showed the positive impact on job creation for 2007, creating half again as many as compared to the benchmark increase.

There is growing recognition that proactive management of social and environmental issues by corporations will have a material impact on their long-term value. Pension funds should disclose the extent to which (if at all) LTRI issues are taken into account in investment-related decisions, including proxy voting policies, selection of investments, engagement with companies or regulators, and selection of investment managers. (Responsible investing requires full disclosureDavid Hess, P&I, 6/9/08)

Karthik Ramanna and Sugata Roychowdhury find that outsourcing firms donating to congressional candidates in closely watched races managed their earnings downwards in the two quarters immediately preceding the 2004 election, deflecting attention away from outsourcing and negative media. As expected, such candidates to do better in elections. Conclusion: Accounting Information (can be used) as Political Currency. Ah, another form of corruption. People are so creative.

A bill signed into law in June positions Vermont as a leader in incorporating so-called virtual firms — those without a physical headquarters, actual paper filings, and directors’ meetings (they’re all online.) The state will charge virtual companies the same amount — about $235 per year — that standard corporations pay when filing. (Vermont Wants to Be the “Delaware of the Net,” CFO.com, 6/30/08)

Dennis Johnson, Director of Corporate Governance, will be leaving CalPERS  to become Managing Director of Shamrock Activist Value Fund. He also intends on stepping down from the post as Chair of the Council of Institutional Investors Board of Directors. (press release, 7/2/08) It looks like 3 years is all we can hope for at CalPERS until they move to the private sector for higher pay.

CalPERS also reached an $895-million settlement of a class-action lawsuit brought against UnitedHealth Group, over its stock-option grant practices… probably the largest stock option backdating recovery to date.

The Delaware Supreme Court accepted questions from the SEC on AFSCME’s binding bylaw proposal seeking reimbursement for third-party solicitations at CA. Briefs are due July 7; oral argument is scheduled for July 9. (Delaware Supreme Court: CA/AFSCME Certification Accepted and Fast Tracked, TheCorporateCounsel.net Blog, 7/2/08)

It has now been more than 10 years since DOL wrote a letter to Calvert advising them that the fiduciary standards of ERISA didn’t preclude socially screened funds as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.” (Socially conscious investing blossoms with DOL’s blessing, Investment News, 6/23/08)

Preliminary 2008 AFL-CIO Key Votes Survey Preliminary Scorecard posted.

Former SEC chairman Arthur Levitt Jr. called on the SEC to immediately take up proxy access with “a significant, but not onerous, threshold amount of stock one must own to put forward a vote, a framework regarding disclosure and conflicts of interest, and rules that ensure that any changes to a board do not violate stock-exchange listing standards.” (How to Boost Shareholder Democracy, WSJ, 7/1/08)

Lipton and Democracy

In Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World?, Martin Lipton discusses the pressures that have been “pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization.”

Lipton cries out that “directors risk embarrassment for any misbehavior or other failures of their companies, however diligent they may have been.” Of course, since board minutes are not routinely made public, how can shareowners assign blame other than to responsible committees and their members? “Many active CEOs and other senior business people now restrict themselves to only one outside board…” leading to a situation “where few members are CEOs or former CEOs, and too few members are fully qualified to provide the best possible business and strategic advice.” Yes, shareowners want fully engaged directors with a variety of skills and perspectives, not primarily CEOs.

Of course, not all his criticisms are baseless. For example, he points to a recent study by Bhagat, Bolton and Romano that found “no consistent relation between governance indices and measures of corporate performance… the most effective governance institution appears to depend on context, and on firms’ specific circumstances.” Similarly, Robert Daines and Dave Larker found no correlation between the corporate governance ratings given by four services to various corporations. (Rating the Ratings: How Good Are Commercial Governance Ratings?, Daines, Gow and Larcker, 6/26/08)

The bottomline question for Lipton is, will the subprime and leveraged loan financial crisis sufficiently move us from “director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence.” I certainly hope so, and I’m sure shareowner-centric directors will also offer plenty of excellent advice.

When Berle and Means wrote The Modern Corporation, pointing out the separation between the ownership of property and the control of property, they didn’t blame performance failings on the greed of shareowners but on their passivity. They looked to the court as the ultimate arbitrator of the corporation’s legitimacy and viewed its ultimate purpose as maximizing not shareowner profits but the general interest of society. “The control groups… have placed the community in a position to demand that modern corporations serve not alone the owners or the control but all the society.” (p. 312, 1968, London: Transaction Publishers) As New Dealers, they believed political intervention was necessary to support market forces.

Managers and economists have sought for decades to avoid political regulations by overcoming the inherent inefficiencies of separate ownership and control by relying on and developing more efficient market forces. Through the pure economic model (PEM), financial markets take on the role of the entrepreneur, ensuring profit maximization by directing the flow of capital. However, markets behave more in line with crowds and mass movements, than as rationally efficient. Shareowners seek to exploit imperfect information.

Advocates of PEM have concentrated on designing mechanisms to reduce agency costs, by aligning CEO pay, for example, with stock price. However, PEM depends on all shareowners expecting the same maximized level of profit over the same time and different shareowners have different timeframes. PEM also underestimates the fragmentation of ownership and the consequences for corporate governance.

Lipton is right that costly regulatory checklists could kill the goose that lays the golden eggs, but the solution is not to return to a Fordist management dominated system that worked when corporations were conservative bureaucracies, politically counterbalanced by unionionized employees.

In a recent interview, Bob Monks describes some of his thoughts in returning from the 2008 ExxonMobil meeting. “Coming back from Dallas, I sat down and I began to write, ‘Shareholder Democracy, R-I-P’ which is inscribed on tombstones for Requiescat in Pace, or ‘Rest in Peace.’ Unhappily, the bold experiment that came out of the 1930s and some very idealistic people who tried to repair some of the damage of the Depression has now been thoroughly thwarted by people like Exxon, who view shareholder involvement as being at best a tax and at worst a crime.” (Bob Monks: ExxonMobil Exemplifies Corpocracy, SocialFunds, 6/30/08)

It would be a mistake, however, to think we have moved from a golden age of shareowner primacy. That only existed when corporations were owned, controlled and operated by families. The most interesting book I’ve seen in years on the evolution of the corporation is one that Bob knows well. His cover note says, in part, “The ideal of democratization of economic values, following de Toqueville, is a perilous voyage for which this book is a fine route map. Everyone can benefit from understanding the underlying precepts of tomorrow’s dialogue.”

Entrepreneurs and Democracy: A Political Theory of Corporate Governance by Pierre-Yves Gomez and Harry Korine identifies three “models of reference ” for corporate governance: the familial, managerial and public — each corresponding to distinct stages of evolution. The first stage began with the liberal thought of equal rights and the emergence of private property, which initiated enfranchisement of the entrepreneur. The second stage had roots in the separation of powers between owners and management. The third stage, emerging now, is typified by increasing representation and public debate, giving shareowners effective oversight of the corporation.

Gomez and Krine view the tension between individuals and the collective as opposing forces: that of the entrepreneur, a force necessary for directing and channeling the energies of individuals, and that of social fragmentation, a force that divides and balances individual interests, involving increased exercise of authority and control. Democracy, through institutions and processes, helps to establish equilibrium between these two forces. The governed view governance as legitimate only if there is balance between the directing force of the entrepreneur and the contrary force of fragmentation and independence.

“Management finds itself increasingly subordinated to the markets and has to take investors’ reaction into account to define and weigh decisions.” (p. 184) Shareholders have taken the entrepreneurial mantle and drive the market in two ways. “Investors” exercise the entrepreneurial force by allocating resources to the highest performers based on extrinsic comparisons. “Shareowners” seek to integrate active owners at specific firms based on their interpretation which also includes more intrinsic data. Contemporary corporate governance is characterized by the omnipresence of information, the de-privatization of the corporation, debate and the representation of different interests. Public opinion has become the counterweight to the entrepreneurial force of direction.

Under familial governance, business secrecy was paramount. Under managerial governance, we relied on the primacy of management expertise. Today, good governance depends on a mass of standardized information that allows easy comparison by the investing public of risks and opportunities. It depends both on relatively efficient markets to direct large capital flows and on actively involved shareowners to improve efficiencies at specific corporations.

Under the managerial form of governance that has been in dominant for most of Lipton’s brilliant career, the board is composed of experts and operates primarily to provide internal technical advice. Under public governance, the board is composed of outside directors, shareowner interest groups and even more broadly defined stakeholders to link the corporation to mass markets and society… functions increasingly important for companies operating in a global context.

Lipton’s clients would be better served if he helped them adapt to the process of democratic deliberation, rather than fighting a rear guard action. How can they evolve to a system of selecting board members nominated by and directly accountable to shareowners? How can they supplement the annual meeting with an assembly of elected shareowners who provide advice to management throughout the year? By inviting public discussion in areas heretofore regarded as the exclusive domain of management, companies deliberate matters of public concern in advance and are less vulnerable to the vagaries of market bubbles and crashes. Lipton can best help his clients avoid the imposition of overly burdensome regulations by advising them on how to build democratic mechanisms into the very structures and processes of corporations themselves.

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October 2002

Webster Named

The US Securities and Exchange Commission voted to approve five members of a new national accounting oversight board to be headed by ex-FBI-CIA chief William Webster whose only experience in accounting, as far as we know, was heading the auditing committee of U.S. Technologies, now bankrupt and facing fraud accusations. Shortly before Webster was appointed he told Harvey Pitt but Pitt chose not to tell the other four commissioners prior to their vote.

Webster edged out the much better qualified pension fund chief John Biggs, who would have done much to restore trust. The vote was 3-2. Webster becomes the first chairman of the Public Company Accounting Oversight Board, expected to get up and running early next year.

In addition to Webster, the commission approved former CalPERS attorney Kayla Gillan; accountant and former SEC general counsel Daniel Goelzer; former congressman Willis Gradison; and SEC Enforcement Division Chief Accountant Charles Neimeier. Continue Reading →

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Archives: December 1997

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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