Tag Archives | UK

The Investment Association Statement of Principles

The Investment AssociationThe UK’s Investment Association’s Statement of Principles has now been signed by 25 firms with £1.8 trillion in assets. Does it represent substantial progress or is it simply an attempt to console the investing public? In principle, it all sounds good. I like their pledge:

As signatories to these principles we do our utmost to:

1. always put our clients’ interests first and ahead of our own  Continue Reading →

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Video Friday: UK Law Commission Clarifies Fiduciary Duty?

UK Law CommissionThe UK Law Commission’s final 2014 report and guidance on fiduciary duty:

The Review identified widespread concern about how fiduciary duties were interpreted in the context of investment.  In particular, some stakeholders felt:

  • it was not clear who in the investment chain was subject to fiduciary duties and what those duties were;
  • their fiduciary duties required them to maximise returns over a short-time scale, precluding consideration of long-term factors which might impact on company performance;
  • their obligations were entirely defined and limited to their contractual obligations or required no more than a duty of care.

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Women on Corporate Boards: Global Trends for Promoting Diversity

WomenOnBoardsWe last explored the topic of gender diversity on boards, in particular the underrepresentation of women on them, late in 2012, but much has happened globally on the subject since then. More companies have adopted regulation on the issue that range from “comply-or-explain” rules to quotas for the percentage of women on boards.

A 2014 Grant Thornton report, Women in Business: From Classroom to Boardroom, finds more leaders warming to a quota system, with 45% of international business leaders supporting quotas — up from 37% just a year ago.

Below is a brief summary of some of the most recent developments concerning women on boards. Continue Reading →

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Rise of Pseudo-Rights: Proxy Season Review

Paul Marsland photo

Paul Marsland

Guest Proxy Season Review:  Paul Marsland is a regular panelist and contributor to publications on corporate governance issues and has served in a number of senior roles at PIRC Ltd the UK based corporate governance consultancy most recently as Head of Policy.

Time to take stock of the proxy season. The proxy season means February in Seoul, October in Sydney, June in Tokyo and April in Paris so August seems as good a month as any for a review. Continue Reading →

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Review – The Nature of Corporate Governance: The Significance of National Cultural Identity

TheNatureofCorporateGovernanceThe Preface to this book is so powerful that I have to begin my review with the words of the authors, Janet Dine and Marios Koutsias.

The thesis of this book argues that national corporate governance is extremely important for societies. Recently many scholars have said that a convergence of corporate governance is inevitable. We believe that it is true but like Mark Twain said “the reports of my death are greatly exaggerated.” We show that although there is some convergence, national law of corporate governance is thriving. We also believe that it is necessary for the identity of each country. The reason that national diversity in corporate governance is still widespread is because of the history, philosophy and economy of each county as shown in its cultural heritage, and which it gives its identity. The cultural heritage in each state is identifiable in the company law and corporate governance codes. We consider that this is crucial for the well being of democratic nations. Convergence in corporate governance is a threat to ordered commercial regulations because of the power of the preeminent economic paradigm in the West which is the neo-liberal model. The neo-liberal agenda that predicates deregulation, privatisation and the liberalisation of markets is moulding many jurisdictions into an Anglo- American model of corporate governance which is dangerous for a number of reasons: Continue Reading →

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Video Friday: The Cadbury Archive

Cambridge0judge-logoThe Cadbury Archive at Cambridge Judge Business School has been completed with the addition of copies of all the speeches on corporate governance made by Sir Adrian Cadbury, Chairman of the UK Committee on the Financial Aspects of Corporate Governance. The Archive, established in 2010 and part of the Cambridge Corporate Governance Network (CCGN), is a major source for researchers into corporate governance. Continue Reading →

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Review & Reflections: The Cadbury Committee

TheCadburyCommitteeThe Committee was formed in 1991, the same year I read Power and Accountability: Restoring the Balances of Power Between Corporations and Society by Robert A.G. Monks and Nell Minow. I had spent years in academia searching for the perfect corporate form. I studied corporate systems around the world and headed California’s cooperative development program. It was obvious to me the dominant form of corporate governance in the US and UK needed improvement.

Monks and Minow brought confirmation from experts in the field. The appointment of the Committee on the Financial Aspects of Corporate Governance, better known as the Cadbury Committee, in May that year by the London Stock Exchange, the Financial Reporting Council, and the accountancy profession meant even those running the markets knew something was wrong. Real change was possible.

The Cadbury Committee: A History takes the reader back to those days to see how changes happened and why. Thankfully, Laura F. Spira and Judy Slinn took the initiative to document the Committee’s history while many members are still alive. Continue Reading →

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Review: Directors' Duties and Shareholder Litigation in the Wake of the Financial Crisis


Joan Loughrey

Joan Loughrey

This timely book, edited by Joan Loughrey, brings together academics and practitioners to assess the efficacy of directors’ duties, or lack thereof, regarding shareholder litigation in the wake of the financial crisis. Although primarily focused on the UK and the Companies Act of 2006, the part played by the US and its regulatory scheme is not ignored. Americans reading the book will benefit from a better understanding of the UK framework and how portions may or may not apply here.

For example, the UK Code of Corporate Governance makes boards responsible for determining the nature and extent of the risks that companies should undertake. Yet, even in the wake of extreme circumstances and huge financial losses, Continue Reading →

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Video Friday: Brian Cheffins on Comparative Corporate Governance

Brian R. Cheffins

Brian R. Cheffins

In 2012 Cambridge University launched a Masters degree in Corporate Law (the MCL), which offers students the opportunity to engage in detailed study of the legal and regulatory framework within which companies are governed and financed.

The MCL, a full-time nine-month program, is taught by the Cambridge Law Faculty’s team of corporate lawyers, widely recognized as one of the strongest in the corporate law field. The MCL, the first entirely new degree in Law to be established by Cambridge University since the nineteenth century, has been designed to combine Continue Reading →

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CorpGov Tidbits

PLANSPONSOR.com reports, a provision in President Obama’s Fiscal Year 2014 budget that pertains to employee stock ownership plans (ESOPs) could result in a disincentive for offering the plans.

The provision would eliminate Internal Revenue Code section 404(k), an incentive for ESOP creation and operation that permits a C corporation to deduct the value of dividends paid on ESOP stock passed through to employees in cash, deductions used to pay the ESOP acquisition loan, or when the employee reinvests in more company stock in his/her ESOP account balance. Continue Reading →

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Auto Enrollment for Retirement Savings Begins

Half of employers in the UK don’t offer a pension to their employees. Auto-enrolment, the opt-out defined-contribution system designed to fill this gap, was introduced in the UK on October 1. Top1000Funds.com interviewed Lawrence Churchill who chairs he government-funded pension fund, NEST, one of the funds on offer, during the first day of the rest of the fund’s life. (Feathering NEST, 10/10/2012) Continue Reading →

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Review: Shareholder Democracies?

Shareholder Democracies?: Corporate Governance in Britain and Ireland before 1850 addresses a central issue. Current governance structures often allow managers to pursue their own interests. According to some, a dissemblance of democracy has led to “elitism and self-interest in the boardroom,” resulting in Continue Reading →

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No Employees on Compensation Boards Under UK's Cameron

UK Prime Minister David Cameron rejected a Labor Party proposal that an ordinary employee sit on a company board compensation committee, noting that having an employee on the committee would break an important principle of not having people on a remuneration committee who will have their own pay determined. Since when are boards setting the pay of ordinary employees? Continue Reading →

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CII Contract with Equilar a Positive Step But More Needed to Address Pay Issue

Equilar, the leading provider of executive compensation benchmarking and research solutions, announced the release of its Pay-For-Performance Analytics suite yesterday, along with the fact that the Council of Institutional Investors (CII), whose members hold $3 trillion in assets, has signed on as the first client. According to the press release:

By combining an innovative market-based algorithm to identify peer companies with a realizable pay methodology using long Continue Reading →

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Funds Should Attend More Annual Meetings

The Financial Reporting Council (FRC), UK’s independent regulator “responsible for promoting high quality corporate governance and reporting to foster investment,” is also in charge of the Stewardship Code for institutional investors.

The FRC, 230 pension schemes, fund managers and service-providers have  signed up for the Stewardship Code, including “most of the major investors in UK equities.” According to Financial News (Shareholders: Turn up to meetings!, 12/14/2011), the FRC not only warned companies Continue Reading →

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Deadline for Golden Peacock Awards: September 14

If you know of good candidates for the Golden Peacock Awards, instituted by Institute of Directors in 1992, now is the time to get nominations in, since they are due September 14, 2011. Below are the categories:

A.      Golden Peacock Global Awards

  1. Sustainability
  2. Excellence in Corporate Governance

B.       Golden Peacock National Awards

  1. Climate Security
  2. Sustainability
  3. Excellence in Corporate Governance
  4. Innovation Management

The application form cum guidelines can be obtained by sending an Continue Reading →

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Why Routinely Approve Auditors?

Ever since the demise of Enron, I’ve wondered why the vote by shareowners to approve auditors is considered such a routine nonevent. Ask anyone who used to work for former big five firm Arthur Andersen LLP. Yet, “ratification” of auditors remains among the last holdouts of broker voting.

Who watches the watchers in the world of big business? That question is asked by corporate governance consultant Pirc in its Annual Stewardship Review. Reviewing voting results over the last five years, they couldn’t find a single instance of any vote of more than 20% against an auditor appointment. According to Alan MacDougall, managing director at Pirc:

We’re surprised that even after the financial crisis, shareholders don’t seem to make the connection between value destruction and the fairly closed world of auditing UK plc.

John Gray, a member of the investment panel of the London Borough of Tower Hamlets pension fund, says trustees and local authority panels need to devote far more time to their fiduciary duties. He shows faith in the newly formed Association of Member-Nominated Trustees.

The FT article ends with a quote from Lord Myners: “You don’t wash or service a rented car because you expect to give it back. I still get the impression that shareholders treat their holdings like a rented car. For the efficient use of capital, that attitude has to change.”

via FT.com / FTfm / FTfm Structured Products – Review questions positon of auditors.

Pirc makes valid points that his American counterparts should also be raising. Where was/is the outpouring of votes against the auditors who dropped the ball in their audits of American banks during and proceeding the financial crisis?  Shouldn’t we be voting down auditors who so obviously failed us?

The best solution I have seen is Mark Latham’s proposal that would allow shareowners to recommend auditors from a pool of qualified applicants, rather than asking us to approve one chosen by management.  For an example, see Latham’s proposal to USG dated November 17, 2002 at VoterMedia.org.

I also like the idea of an Association of Member-Nominated Trustees. The closest the US comes to that, as far as I know, is the effort led by CalPERS and CalSTRS to develop a primarily digital resource, the Diverse Director DataSource (or 3D), devoted to finding untapped diverse talent to serve on corporate boards. (see 3D Advisory Panel Named)

It would be good to see this group or another also take on the additional aims of the UK’s Association, which include:

  1. To support the development of member nominees and to enable them to perform their role to the best of their ability.
  2. To provide member nominees with a collective voice, and if desired, to lobby on pension matters with the Regulator, within the pensions industry and through the professional associations and trade bodies.
  3. To provide or guide access to training services which meet member nominees’ needs.
  4. To help identify and champion best practice among pension schemes – including scheme governance, performance and communications.
  5. To provide a networking environment through which member nominees can share their experiences and challenges with other member nominees in confidence.
  6. To provide support for sponsors through targeted services – including for example a member nominee selection process.
  7. To conduct research or studies which may help MNs become more effective in their performance.

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PhD Student Wanted to Research Uk Stewardship Code Implementation

Oxford Brookes University Business School wants to test the proposition that Shareowner Engagement is having an impact. They are looking for a PhD student to investigate the Stewardship Code, which “aims to enhance the quality of engagement between institutional investors and companies to help improve long-term returns to shareholders and the efficient exercise of governance responsibilities.”

Proposed areas of research include how institutional investors adopt the Code; whether the Code leads to increased shareholder engagement and better governance; whether and how shareholders make use of the information supplied by institutional investors. If I were twenty years younger, I’d be there.

To find out more about the project and to apply, contact either Dr. Sandra Einig or Professor Laura Spira.

via Doctor of Stewardship Wanted « Manifest – The Proxy Voting Agency.

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Worried About Women on Boards? Don't Be

A U.K.-government-commissioned review by former trade minister Lord Mervyn Davies into board diversity, published Thursday, recommended FTSE 100 boards should aim for a minimum 25% female representation by 2015, up from 12.5% in 2010. Unlike Norway and Spain, Lord Davies doesn’t believe in setting hard quotas. Worryingly, he doesn’t rule them out if a business-led approach doesn’t yield change. (HEARD ON THE STREET: Corporate U.K.’s Limited Gene Pool – WSJ.com, 2/24/2011)

Worryingly? The “shallow pool of candidates” is pure bunk. Directors don’t need to be CEOs or exCEOS. As I heard about the Norwegian experience last year at ICGN, brining women on boards increased qualifications. (ICGN Day 1: CorpGov.net Coverage, 1/16/2010) “In Norway, which instituted a 40% requirement, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up.”

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Cambridge Launches Masters Degree in Corporate Law

The University of Cambridge has announced its first entirely new degree in Law since the 19th century with the launch of a Master’s degree in Corporate Law (the MCL).

The MCL will begin in the academic year 2012-13 and will operate as a full-time nine-month programme, offering students the opportunity to engage in a detailed study of the legal and regulatory framework in which companies are governed and financed.

The MCL will cover key fields such as corporate governance, the regulation of financial markets and pensions, offering a wider and more diverse range of corporate courses than a typical Masters degree programme.

The course, in addition to offering in depth analysis of legal rules, will provide students with the opportunity to understand how “real world” corporate deals are structured and run.

The MCL will be taught by the Cambridge Law Faculty’s team of corporate lawyers, widely recognised as one of the strongest in the field. The intake will be approximately 25 students per year.

Applications will be accepted from September 2011. Further information is available on the MCL webpage on the Law Faculty’s website. Wow, corporate governance is helping Cambridge move from the 19th to the 21st century. With their help, maybe this will be the century we shift focus to governance. Bob Tricker has often proclaimed the 19th century the entrepreneur’s, 20th century management’s, and 21st that of governance.

We certainly see focus swinging to questions of legitimacy and effectiveness in wielding power worldwide. By the time the 22nd century dawns, corporate power may actually be exercised “in a way that ensures both the effective performance and appropriate social accountability and responsibility… rooted in rigorous and replicable research,” as Tricker envisions. We should all welcome University of Cambridge’s new program.

Activism is an attractive alternative to takeovers as a way to push through corporate change. Two out of three mergers fail to make money for the buyer, and the failures can be spectacular, as seen with AOL Time Warner or the purchase of ABN Amro. The disaster that followed the ABN Amro takeover makes contested takeovers especially unlikely in the financial services industry, leaving activism as the only avenue for change. (Forget corporate governance – vive la révolution, Financial News, 2/14/2011)

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Belgian Companies to "Comply or Explain" Re Women on Boards

The Belgian Corporate Governance Commission (CGC) has implemented gender diversity into its governance code on a ‘comply or explain’ basis. Listed companies are encouraged to increase the number of women serving boards to at least 30% within seven years. The Confederation of British Industry sent a similar request last year in its submission to Lord Davies’ review into the shortage of women on UK company boards. (Belgium backs 30% gender target, PIRC Alerts, 1/25/2011. See also: Women on Board: The Norwegian Experience)

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Compensation Committees Should Include Employee or Shareowner Representatives

The membership of remuneration committees should be widened to allow employee or shareholder representatives to participate in order to make their operation more effective and facilitate pay restraint, according to Europe’s largest independent proxy agency PIRC.

In its submission to the Department of Business, Innovation and Skills (BIS) consultation on short-termism, PIRC argues that encouraging remuneration committees to hear divergent views could improve decision-making. This might include allowing employee or shareholder representatives to participate. PIRC’s proposal is influenced by research into group decisions by Cass Sunstein, co-author of the book Nudge which has influenced Coalition thinking on designing effective policy. Alan MacDougall, PIRC’s managing director, said:

Various solutions have been tried over the years to address accelerating executive pay with little success. It is time that we looked properly at the dynamics of remuneration committees. Broadening the membership to include different viewpoints could improve the decisions committee members make, and introduce some restraint where it has clearly been lacking. Given the Coalition’s interest in the policy applications of research into behavioural influences this seems to be an idea whose time has come.

PIRC also calls for the UK Government to consider the benefits of putting more ‘sand in the wheels’ in respect of merger and acquisition activity. PIRC suggests that the Government carry out proper analysis of the benefits of introducing a minimum holding period before shareholders can vote on acquisitions, upping the threshold for a deal to be passed, and giving shareholders in the acquirer a vote. According to MacDougall.

There are compelling arguments for ensuring that the long-term owners of public companies have the opportunity to have more of a say on proposed acquisitions. It is also interesting to note that under the current legal framework it can be more difficult to change a company’s articles than to decide who owns it. It seems entirely legitimate to question whether this is an appropriate balance.

To help embed stewardship responsibilities within pension funds, PIRC suggests that pension fund trustees be required to undertake an annual review of how they have met their responsibilities as owners during the year. PIRC also argues that that the Government should define fiduciary duty as it applies to institutional investors’ stewardship activities.

PIRC is the largest independent European provider of corporate governance, proxy voting and corporate social responsibility investment research and advisory services. Their clients include pension funds and fund managers with combined assets of over £1.5 trillion.

In books such as Going To Extremes and Why Societies Need Dissent, Cass Sunstein has explored group decision-making. His research into decisions made by US judicial panels with political appointees found that if the panel is made up solely of Democrats they take more ‘liberal’ stances on issues than their individual views would predict, and Republicans shift to a harder conservative position. PIRC believes that a similar process may occur where remuneration committees are comprised of individuals who share the same views on high pay.

Shareowners and/or employees on compensation committees could reduce the likelihood of group think. US firms and shareowners should consider similar options. ISS, CalPERS, John Chevedden and others please take note.

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FRC Recommends Shareowner Involvement in Choice of Auditor

The Financial Reporting Council, the UK financial reporting watchdog, wants shareholders to have more say in choosing the firms which audit corporate accounts.

The suggestion is among a raft of ideas the FRC is putting forward for debate in a bid to improve corporate reporting in the wake of the financial crisis. The FRC argues annual reports have become too cluttered, reducing their value for investors.

“There should be greater investor involvement in the process by which auditors are appointed,” the FRC said.

“We recognise that although shareholders confirm auditor appointments, management is perceived to determine the appointment (or reappointment) and remuneration of auditors and that, therefore, auditor independence is compromised.

“There is a case for the independence of the decision to be reinforced by the Audit Committee seeking greater shareholder involvement.” The comments come in the new Effective Company Stewardship: Enhancing Corporate Reporting and Audit report

There are two options. Either company audit committees should be required to explain why they appointed the auditor, or they could discuss the appointment “with a number of principal investors”- and then report on that consultation to shareholders generally… Responsible Investor.

There is, of course, a third option. Shareowners could select the auditor from a group of qualified contenders. For more on that option, see Proxy Voting Brand Competition by Mark Latham.

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UK Looks at Short-termism

UK’s Secretary of State for Business, Vince Cable, launched a consultation into corporate governance and whether failures in that process are stoking a trend for short-termism in investment that damages the long term interests of companies and many of their investors.

Vince Cable, BBC photo

The consultation will examine allegations that publicly quote companies are being run in order to create short-term spikes in share value, rather than for the long-term benefit of the company, the economy and its longer term shareholders. Said Cable,

The paper I am issuing today is a call for evidence from across the corporate world and beyond to examine whether the system in which our companies and their shareholders interact promotes long-term growth – or undermines it. I want a serious examination and debate into the role of investors and the time horizons over which they operate; the factors influencing board decisions; the reasons for the growth of directors’ pay; the impact of the investment chain; why returns from equity have reduced; and why takeovers that are economically damaging still take place.

Comments can be submited via “the response form.” The form can be submitted by letter or email to: Adam Gray Long-term Focus Consultation Corporate Law and Governance Department for Business, Innovation and Skills 1 Victoria Street London SW1H 0ET [email protected].

The consultation provides a nice very brief overview of history and regulatory framework. Key questions posed include:

  1. Do UK boards have a long-term focus – if not, why not?
  2. Does the legal framework sufficiently allow the boards of listed companies to access full and up-to-date information on the beneficial ownership of company shares?
  3. What are the implications of the changing nature of UK share ownership for corporate governance and equity markets?
  4. What are the most effective forms of engagement?
  5. Is there sufficient dialogue within investment firms between managers with different functions (i.e. corporate governance and investment teams)?
  6. How important is voting as a form of engagement? What are the benefits and costs of institutional shareholders and fund managers disclosing publically how they have voted?
  7. Is short-termism in equity markets a problem and, if so, how should it be addressed?
  8. What action, if any, should be taken to encourage a long-term focus in UK equity investment decisions? What are the benefits and costs of possible actions to encourage longer holding periods?
  9. Are there agency problems in the investment chain and, if so, how should they be addressed?
  10. What would be the benefits and costs of more transparency in the role of fund managers, their mandates and their pay?
  11. What are the main reasons for the increase in directors’ remuneration? Are these appropriate?
  12. What would be the effect of widening the membership of the remuneration committee on directors’ remuneration?
  13. Are shareholders effective in holding companies to account over pay? Are there further areas of pay, e.g. golden parachutes, it would be beneficial to subject to shareholder approval?
  14. What would be the impact of greater transparency of directors’ pay on the linkage between pay and meeting corporate objectives performance criteria for annual bonus schemes relationship between directors’ pay and employees’ pay?
  15. Do boards understand the long-term implications of takeovers, and communicate the long-term implications of bids effectively?
  16. Should the shareholders of an acquiring company in all cases be invited to vote on takeover bids, and what would be the benefits and costs of this?

This seems to me to be a very positive step. I’d like to see the SEC in the US issue a concept release, perhaps even more focused on the issue of short-termism, or perhaps this is something their yet to be reconstituted Investor Advisory Committee could initiate. I think we’ve been too focused on liquidity and not enough on encouraging long-term investment.

Also of interest, UK Takeover Panel Publishes Review of Takeover Rules (HLS Forum on CorpGov and Fin Reg, 10/30/2010). “amendments to the Code will clarify that target boards may “take more account of the position of persons who are affected by takeovers in addition to offeree company shareholders,” primarily employees of the target company.  Offeree companies will “not be limited in the factors they may take into account in giving their opinion” on a bid, and the Code will be amended to require disclosure of additional information so that “the offeree company board and all other interested constituencies [can] consider the long term effects of an offer on the merged business in all circumstances.”

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