Archive | December, 2007

Archived News From December 2007

2007 News Highlights and ESOP Links

I went through all news items posted in 2007 and selected 1-3 from each month to represent 2007 News Highlights: Selected Trends. This should give readers a quick review of important developments in the field during the year.

Additionally, I added a section on Employee Ownership to our Links page. More democratic and flexible workplaces make fuller use of employee capacities and yield tangible economic benefits. Yet managers faced with a potential loss of status and power have been slow to change. By adding this set of links, perhaps we can make resources slightly more available to those considering employee stock ownership plans.

As we head into 2008, please let us know how Corpgov.net can serve you better.

Foundations Better Aligned

Major charitable foundations, with the notable exception of the Gates Foundation, are initiating or strengthening efforts to harmonize the social and environmental effect of their endowment investments with their philanthropic goals, according to a report in the LATimes. (Foundations align investments with their charitable goals, 12/29/07)

The article cites moves at the $8.5-billion William and Flora Hewlett Foundation, $6.1-billion John D. and Catherine T. MacArthur Foundation, $7.8-billion W.K. Kellogg Foundation, and a litany of others have finally joined the Ford Foundation, the nation’s second-largest, and some smaller foundations, such as the F.B. Herron Foundation, the Jessie Smith Noyes Foundation and the Nathan Cummings Foundation, which have long worked to align their charitable and investment practices.

The Times reported in January 2007 that much of the Gates Foundation’s $35-billion portfolio was invested in companies whose poor records on environmental stewardship, governance or human rights — in some cases involving the exploitation of child slaves — worked counter to the foundation’s charitable goals. That article sent shock waves though the foundation community and led to better alignment and many. At first, the Gates Foundation said it would examine its investment policies — but they later backed away from any reform.

Two Giants Leave the Field

At the end of December, two longtime trustees will retire from America’s two largest public pension fund boards, taking collectively nearly 60 years of experience and institutional knowledge. Robert Carlson joined the CalPERS board in 1971 when it boasted about $4.3 billion in assets. Today, CalPERS assets are around $250 billion. During Gary Lynes’ tenure, CalSTRS assets grew from $12.4 billion in 1984 to about $174 billion today. (Guiding hands for CalPERS, CalSTRS set to retire, Sacbee, 12/27/07) Both institutions became leaders in corporate governance, responsible for reforms that have transferred power from CEOs to boards. The next period will likely see a shift in power from boards to investors themselves as these giants continue to influence markets to become more democratic.

With Your Help, Mandatory Arbitration May End Soon – But SEC Oversight of SRO’s Needs Fundamental Reform

Les Greenberg, who teamed together with me in restarting the proxy access movement in the summer of 2002, may soon be getting some traction in his battle to revoke mandatory arbitration. Please write to your Congressional Representatives in support of Senator Russ Feingold’sArbitration Fairness Act of 2007. Also needed is your support for a Congressional investigation of the links between the SEC and SROs (self-regulating organizations like the stock exchanges) they regulate. Join with Greenberg in demanding Congress throw off the bedcovers.

Public customers of securities brokerage firms are required to agree to arbitrate disputes. Although arbitration can be a fair and efficient way resolving disputes when both parties choose it after the dispute arises, high administrative fees, a lack of discovery protections, and a lack of meaningful judicial review of arbitrators’ decisions all act as barriers to the fair and just resolution of an individual’s claim. When arbitration is required rather than voluntarily chosen, customers lose.

For example, in a survey of 100 financial advisers by Vestment Advisors, nearly 20% said they knew of someone who knowingly had violated compliance rules and regulations. Cited were cheating on computerized training, signing account forms for clients, not sending e-mail to the compliance officer for review and not processing checks the day they were received. (Advisers often skirt compliance rules, survey finds, Investment News, 5/29/07)

Brokers have the upper hand in arbitrations. That’s the conclusion of a 10 year study. The bigger the claim and the bigger the broker, the less likely the recovery. (Advisors Score Big in Arbitration Study, OWS Magazine, 6/2007)

Public Citizen, a Washington-based consumer watchdog group, reported that consumers won 4% of 19,000 California cases decided by one arbitration firm between January 2003 and March 2007. The study found one arbitrator who rendered 68 decisions in one day — “one every eight minutes,” said Laura MacCleery, director of the consumer advocacy group Public Citizen’s Congress Watch. “Consumers won zero.” Bills aim to get consumers their day in court, LATimes, 12/17/07)

Drawing on 30 years of experience serving as an NASD arbitrator and as legal counsel for either claimants or respondents, Greenberg’s filed a rulemaking petition in May 2005 to the SEC andSupplement that would have required a number of reforms: Others picked up on the cause. For example, in June of 2007 Daniel R. Solin petitioned the SEC to prohibit broker-dealers from requiring investors to accept mandatory arbitration clauses and Greenberg filed a letter in support.

As indicated above, Senator Russ Feingold introduced the Arbitration Fairness Act of 2007. Passage of that bill now appears more likely than enactment of SEC rules, so we ask for your support in that effort. However, Greenberg’s investigation also led down another even more disturbing path — the relationship between the SEC and SROs.

Through FOIA requests, which sought all communications between the industry dominated Securities Industry Conference on Arbitration (SICA) and the SEC, including SICA Meeting Minutes, Greenberg determined why the SEC didn’t comply with rules requiring them to respond to rulemaking petitions. Such petitions, which often deal with conflicts of interests within the SROs, are sent to the SROs for recommendation. That’s fine, but It turns out the SEC has essentially rewritten the rules because they don’t set a return deadline and if the SRO fails to take up the public Petitions, the SEC Staff takes no action at all.

Greenberg filed a Complaint for Declaratory and Injunctive Relief with the United States Securities and Exchange Commission (USDC Case No. CV 06-7878-GHK(CTx) alleging violation of the Federal Advisory Committee Act.  Additionally, Greenberg wrote to Barney Frank, Chairman of the House Committee on Financial Services, requesting a Congressional investigation of the above-described egregious conduct of the SEC Staff, which stifles the legitimate rights of the investing public. Please join with us in writing to Rep. Frank in support of Greenberg’s request. Ask Frank to open a Congressional investigation into the relationships between the SEC, SROs, and SICA to determine what reforms are needed to ensure the best interests of the investing public will be served.

How Long Should Recommendations Take?

Ten years ago the Public Investors Arbitration Bar Association (PIABA) petitioned the SEC under section 192 to: (1) establish the American Arbitration Association as an alternative venue for customer arbitrations; (2) change the composition of arbitration panels hearing customer arbitrations; and (3) provide for a rotational system for the selection of arbitrators.

The rule requires the Secretary to refer such petitions to the appropriate division or office for consideration and recommendation to the Commission. From documents obtained through a FOIA request by Les Greenberg, it appears the SEC’s willingness to defer to SROs has no time limit, despite the legal requirement that recommendations are required. After 10 years, SEC staff has not made the required recommendation.  The Staff wants what it is doing to be considered “normal,” but how long should the rights of non-SRO sponsors be deferred? A pdf copy of those documents is available at http://www.LGEsquire.com/PIABA Petition 4-403.pdf. One no longer has to wonder why securities arbitration rule reform (to level the playing field) has not occurred.

Greenberg has written extensively on how to improve the securities arbitration process. See hisPetition for Rulemaking (SEC File No. 4-502) (severe problems with NASD arbitration and questionable SEC oversight).  The Petition has received favorable media coverage, e.g. 9/1/05, Registered Representative Magazine, “The Real Arbitration Nightmare“; 7/31/05, San Diego Union-Tribune, “Stockbroker losses bring no trials, lots of tribulations“; 7/17/05, Pittsburgh Post-Gazette, “Systems for resolving disputes may need an overhaul.” However, the SEC has failed to act on it as well. We may see international arbitration first.

Martin Lipton

Martin Lipton of Wachtell, Lipton, Rosen & Katz, addressed the Mergers, Acquisitions, and Split-Ups course at Harvard Law School, on the topic The Future of M&A. Lipton provides a fairly brief but interesting history of M&A and the developments that led to the conception of modern merger defenses, including his development of the poison pill. This was followed by questions from the audience and a very informative discussion. Be ready to set aside a couple of hours. Find links on the Harvard Law School Corporate Governance Blog at Martin Lipton on the Future of Mergers and Acquisitions. The only downside to the video is the clicking of students on their laptops, which sounds like constant rain.

Also of interest on the HLSCG Blog is an ealier post, Some Thoughts for Boards of Directors in 2008, from Lipton. Below are a few highlights:

  • A key challenge facing boards of directors has emerged with new urgency: the task of promoting long-term value for shareholders in the face of tremendous pressures to realize short-term stock-market gains.
  • Majority voting will become universal. In light of the ISS position and in an effort to avoid shareholder proxy proposals, it is advisable for companies to consider proactively adopting a majority voting bylaw.
  • Companies should carefully weigh opposition to shareholder proxy resolutions that can be accommodated without significant difficulty or harm to the company.
  • Where the corporation has significant performance or compliance issues, direct contact between institutional shareholders and non-management directors may forestall a proxy initiative by shareholders.
  • To the extent that these (“say on pay”) measures are designed to usurp the power of the compensation committee to use its judgment in determining executive compensation, they should be strongly resisted.
  • While there is no formal requirement in the NYSE rules or in the Sarbanes-Oxley Act that a company have a lead director, the independent directors should have a leader who is not also the CEO.
  • The governance and nominating committee will increasingly come to the fore, as companies must navigate and respond to pressures resulting from majority voting standards, withhold-the-vote campaigns, proposals for shareholder access to company proxy statements, and other governance issues.
  • In the current environment for director compensation, restricted stock grants, may be preferable to option grants, since stock grants will align director and shareholder interests more directly and avoid the perception that option grants may encourage directors to support more aggressive risk taking on the part of management to maximize option values.
  • Full disclosure of all material related party transactions and full compliance with proxy, periodic reporting and financial footnote disclosure requirements is essential.
  • directors must review and understand the registration statements and other disclosure documents that the corporation files with the SEC.

Corpgov Bits

There was 43% increase in class-action lawsuits over last year, according to a joint study by Stanford Law School and Cornerstone Research due for release in January, many due to fallout from the subprime mortgage market. (Securities Class-Action Lawsuits Rise 43%, WSJ, 12/21/07)

With 42% of Bombay Stock exchange companies having family shareholdings exceeding 50%, India’s fortunes are closely linked to the way family businesses conduct themselves. How to deal with this large and important fact apparently became the major topic of discussion at the third CII Corporate Governance Summit in Mumbai. (Do family run corporates live up to investor expectations?, The Economic Times, 12/21/07 and Adopt a minimally prescritive approach towards corporate governance: Mr. Damodaran, SEBI, The Confederation of Indian Industry)

HVS’ 2007 Chief Executive Officer/Chief Financial Officer Compensation Report (Chain Restaurant Edition) profiles detailed compensation information and trends as it pertains to these two positions. Shareholders, activists,and compensation committees should find the report of interest.

Corpocracy and How to Get Our Democracy Back

One book on corporate governance made Ralph Nader’s list of Nine Books That Make a Difference: A Reading List for the Holidays. Here’s his brief review:

Corpocracy by Robert A.G. Monks (Wiley Publishers) summarizes its main theme on the book’s cover-”How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine-and How to Get it Back.” Corporate lawyer, venture capitalist and bold shareholder activist, Monks gives us his inside knowledge about how corporations seized control from any adequate government regulations and especially from their owners, their shareholders, and institutional shareholders like mutual funds and pension trusts. This is a very readable journey through the pits and peaks of corporate greed and power that shows the light at the end of the tunnel.

From a review of the same book, Philip L. Levine writes “Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.” Nell Minow also sings the book’s praises:

Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of “aha” moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.

Sir Adrian Cadbury, most noted for the Cadbury Code, a code of best practice which served as a basis for reform of corporate governance around the world, wrote a lengthily review posted atAmazon.com. (Or course, it wasn’t nearly as long as my rambling review.) Below are a few bits:

The balance of power between boards and CEOs in the United States remains a paradox, given the country’s regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by “ballot stuffing”, nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.

In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system… The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.

I was lucky enough to get a pre-print, which I read in a couple of sittings within a few days of its arrival. Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back both delights and informs in a way only Bob Monks can, because he has been at the center of so many of the important battles to make corporations more accountable. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about “How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine” because no one else has been as engaged as Bob Monks from so many angles.

His insights into pivotal points of view and decisions are enlightening. For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg’s view, according to Monks, people aren’t motivated by moral or social obligation but by simple desire and cost-benefit analysis. Then there is Bob analysis of Lewis Powell’s court decisions. His finding of a constitutionally protected right to “corporate speech” provided the judicial framework for management “to commit untold corporate resources to influence public opinion and public votes – resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections.” And, of course, the Business Roundtable hold a special place in Bob’s heart. The “BRT has come to function in significant part as an agent for the CEOs…who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves.”

Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into “a gigantic, round-the-clock casino that runs the biggest game the world has ever seen.” Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the “How to Get it Back” portion of the book..

Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. Through many books, Monks repeated what became almost a mantra that “no new laws” are necessary. I don’t recall seeing that in Corpocracy, although Cadbury repeats the phrase in his review. I think Bob is weakening on this point. However, he still seems too confident in the power of persuading elite leaders of the need for change. I’m with John Edwards, when he said recently, “It is unrealistic to think that you can sit at a table with drug companies, insurance companies and oil companies and they are going to negotiate their power away.”

When Les Greenberg, of the Committee of Concerned Shareholders, and I started preparing ourpetition on proxy access in July of 2002, I remember e-mailing Bob, asking if he would sign on with us. It was late in the week when Bob e-mailed back that he had a meeting scheduled with then SEC chairman Harvey Pitt on Monday. If we could get him the proposal over the weekend, he might be able to discuss it at his meeting. We did. My impression is that Bob’s primary focus was on Pitt’s 2/12/02 response to a letter Ram Trust Services had sent 13 years earlier where Pitt clarified the SEC’s stance that proxy voting is in fact an investment adviser’s fiduciary responsibility, generally governed by state law. I think Monks was asking Pitt for regulations to enforce that duty through required disclosures. Pitt was apparently won over by Monks, Amy Domini, and others.

My little story has two points. First, most of us don’t routinely meet with SEC chairmen. Bob’s history of involvement in corporate governance has been as one member of the elite meeting with other members of the elite. Like the fictional character, Forrest Gump, Monks met with many historical figures and has influenced important development. Unlike Gump, Monks has done so with candid intelligence and a deep awareness of the significance of his actions. Second, like the earlier Avon letter, the Ram Trust letter and follow-up eventually led to regulations. Monks may espouse “no new laws or regulations are needed” but several of his most important actions have led down that path.

Perhaps Monks is correct, as Cadbury points out in his review, that foundations have a special obligation to reform the market system which sustains their existence. That’s where Monks places much of his emphasis in the “How to Get it Back” portion of the book. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. “The framework is in place. The laws exist,” he insists.

Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment “was not meant to protect the Church from government intrusion, but rather to protect the government… We need similar protection today from the dominant institution of our own time, the corporation.” He defines corpocracy as “government by the corporations; that form of government in which the sovereign power resides in corporations, and is exercised either directly by them or by elected and appointed officials acting on their behalf.” I can’t help but believe that the tide won’t turn until the rabble of individual investors demands change. Individual investors have a vote in electing government representatives — the sovereign power; institutional investors don’t.

Lucian Bebchuk and Zvika Neeman, in a recent paper entitled Investor Protection and Interest Group Politics, also proceed on the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.” Yet, their own model contains the following hypotheses.

  • Investor protection will be higher when the fraction of the electorate that directly or indirectly owns shares in public companies is large.
  • Investor protection will be higher when individuals investing (directly or indirectly) in public companies are more financially educated and when the media is more active.
  • Investor protection will be higher following scandals or crashes that make the problems of insider opportunism more salient.

Therefore, educated individual investors are critical if we have any hope of electing public officials who will protect politics from corporate influence and who will revise the legal framework so that it better combines wealth creation with societal interest. Roger Headrick’s “win” last year at CVS/Caremark, based on a margin decided by broker votes, lead to additional calls for the SEC to approve NYSE’s proposal to bar brokers from casting uninstructed investor votes in board elections.

According to Broadridge Financial, broker votes on average account for about 19% of the votes cast at US corporate meetings. However, the elimination of broker voting, if the SEC ever gets around to approving it, just takes 60-70% of retail shareowners out of the picture. It doesn’t address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? There are dozens of possible reforms. Here are seven worthy of further attention:

1. Proxy Assignment

Drawing from the other six, this may be the easiest to implement with a relatively large possible impact. That’s why I’m working on it. We need system(s) or perhaps just instructions, so that lazy but somewhat conscientious shareowners can assign their votes to others based on reputation, rather than tossing their proxies in the shredder. I surveyed brokers and determined that making such assignments will not be a problem at most. Now I simply need to find an institution or two willing to take the proxies. Of course there are lots of technical and legal details but they don’t appear insurmountable.

2. My Proxy Advisor

That’s the working name for a project Andy Eggers started. Andy is working on a PhD in political science at Harvard. The project is now housed within a nonprofit, Proxy Democracy, which Andy also founded. Here’s part of what he has posted as a brief description:

Before each voting deadline, we find out how respected institutional investors with a variety of voting philosophies have chosen to vote their shares. We’ll help you figure out which funds have similar voting philosophies to yours. When a fund you agree with makes a decision on a stock you own, we’ll send you a free alert. You’ll have a week or two to look at their decisions and cast your own ballot.

The system appears to depend on funds posting how they voted or intend to vote prior to the shareholder’s meeting…with Andy’s software crawling the internet to gather the information. This may work well in high profile cases. However, we’ll need more institutions to routinely post votes in advance.

3. Proxy Exchange

Glyn Holton outlined how a “proxy exchange” could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). His proposal lays out a fairly complex system involving four classes of participants:

  1. Assigners: institutions such as mutual funds, brokerages, and pension plans that legally assign proxy rights to the exchange;
  2. Beneficiaries: the beneficial stock owners-primarily individual investors-on whose behalf those rights are assigned to the exchange;
  3. Aggregators: anyone willing to accept rights from beneficiaries or other aggregators through the exchange;
  4. Voters: parties who ultimately make voting decisions.

4. A US Shareholder’s Association

Shareholders in Europe “are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07)

The Times goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads. Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, says sacrifices for short-term gain would remain exceptions because short-term investors could only sell their shares at a profit if they find new investors who believe in the long-term potential of the revamped company.

In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education.

Although their goals include helping their members to “learn, share, grow and more fully experience the rewards of investing success,” I find no mention on their site equivalent to the UK Shareholders’ Association’s vow to “protect your rights as a shareholder in public companies and promote improved standards of corporate governance.” It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers at the casino.

The US hasn’t had an effective advocate for retail shareholders since United Shareholders Association. Deon Strickland , Kenneth Wiles and Marc Zenner documented that USA’s 53 negotiated agreements are associated with a mean abnormal return of 0.9 percent, a $54 million shareholder wealth gain. Although Peter Kinder, President, KLD Research & Analytics, Inc., tells me USA “was a significant factor in turning ‘good governance’ into a checklist of factors that made easy or easier ‘maximizing shareholder value’, i.e., flipping or extorting the corporation” — something we obviously have to guard against in any new iteration.  I’ve repeatedly contacted the National Association of Investors Corporation (NAIC) but they do not appear interested in governance issues. As I recall, USA was originally funded by a shareholder’s lawsuit. Maybe we need another.

5. Shareholder Advocacy Trust

Richard Macary’s AVI Shareholder Advocacy Trust presents an innovative mechanism to combine small shareowners to advocate changes in corporate governance. The Trust sets out its goals, makes its case to shareholders, and then is dependent on contributions. The Trust depends on a monitoring/activist agent who is so compelling that shareholders freely pony up contributions to support work that might pay off. Free rider issues abound.

The Trust is not a “for profit” vehicle nor can any contributor expect to get any kind of return on their contribution. In a way, it’s similar to contributing to a campaign or political action committee where you agree with their platform or want to see a specific candidate elected, so you contribute. Your only upside in that scenario is that if your candidate wins, you believe it will be good for you or your position, be it lower taxes, a cleaner environment, less regulation, etc. The trust is also set up to compensate the managing trustee, who is essentially the coordinator, director and general contractor of the effort. The trustee is very much like a general contractor in that he, she or they will essentially hire and direct all of the professional and advisors needed to execute upon the trust’s goals.

6. Collectively Paid Proxy Research

Because of the expense and free rider issues, the only reason most institutions vote are the federal regulations Bob Monks helped to create that require pension and mutual funds to vote stock in their beneficiaries’ interests. Of course another of Bob’s important contributions was founding Institutional Shareholder Services, increasing the research done on proxy issues and its availability. The biggest obstacle to voting now is not the time it takes to vote but the research needed to make an informed vote. Most people realize that just going along with the board of directors for lack of an easy alternative is not a meaningful vote. But understanding the proxy issues requires too much time and expertise, especially for individuals.

On that front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Latham’s system allows shareholders to allocate collective corporate funds to hire a monitoring firm to advise them on the issues and how to vote. Latham’s system would eliminated free rider issues and creates an incentive to pay for much more research.

“Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.

Mark proposes use of shareowner resolutions to choose an advisor from among competitors. Any proxy advisor could offer its services, specify its fee, and have its name and fee appear in the ballot. The winner would give proxy advice to all shareowners in that company for the coming year. The advice would be published on a website and in the next year’s proxy. The company would pay the specified fee to that advisor. The voting could even be designed to hire more than one advisor, with a separate yes/no vote on each candidate. Advisor name brand reputation can make these voting decisions feasible without another level of paid voting advice. (see Proxy Voting Brand Competition, Journal of Investment Management, Vol. 5, No. 1, (2007).

7. Provide Full Public Disclosure of Votes as Tabulated

This is more of a technical fix, rather than a monumental reform that will bring in more individual investors but I thought I’d just stick it in here at the end of “how to’s” Bob might have discussed. Yair Listokin’s Management Always Wins the Close Ones highlights the need for open ballot counting.

Informational asymmetries between management and potential opponents should be mitigated by allowing anyone to obtain a real-time update of the voting. The status quo allows management to obtain frequent vote updates, while shareholder opponents of management often have no comparable knowledge. This allows management to win votes when underlying shareholder preferences are against a proposal because management can tailor its expenditures as needed; if management sees that it is well behind, it can undertake an extraordinary effort, while its opponents have no obvious way of responding. If all parties had the same knowledge about the likely outcome of the vote, then managerial opponents could respond and potentially neutralize management’s efforts to push the vote in a particular direction.

Obviously, anything we can do to make corporate elections less rigged will also help to bring shareowners out to vote. Why bother if the fix is in? My hope is that once shareowners get used to voting in their best interests in corporate elections, that behavior will also carry over to civic elections. Activists in either social institution will likely carry over to the other.

Kerrie Waring Joins ICGN

The International Corporate Governance Network (ICGN) announced the appointment Kerrie Waring to a new senior executive position of Chief Operating Officer. Waring joins the ICGN from the Institute of Chartered Accountants, England & Wales, where she has been Corporate Governance Manager. The COO position has been created following a rapid growth in ICGN’s membership which now exceeds 500 in 40 countries worldwide. ICGN members include institutional investors responsible for global assets of US$15 trillion.

Anne Simpson, ICGN’s Executive Director commented “ICGN has grown rapidly in recent years and the creation of the COO position will enable us to meet the expectations of our increased membership. We’re delighted that Kerrie will be joining the team given her strong track record in business and financial management within the global governance industry. She has tremendous energy and initiative both of which will be a great asset to the organization.”

ICGN Chairman, Peter Montagnon “This is a key appointment for ICGN given the organisation’s position of growing influence as the leading international voice for governance. As the range and scope of our work increases, the COO role will be critical. Kerrie brings the ideal combination of experience with membership bodies, with an impressive range of skills from the international arena.”

Waring comes to the ICGN with a wide range of professional experience in corporate governance. At the ICAEW she led their US-UK cross border initiative under the “Dialogue in Corporate Governance” project. In her prior role as International Professional Development Manager at the Institute of Directors she led the development of several initiatives including the Global Director Development Circle linking board training institutions in the US, UK, Australia, New Zealand and Canada.

She was co-author and editor of the Handbook of International Corporate Governance: A Country by Country Guide and co-author of the World Bank-OECD’s GCGF global director training toolkit. Waring also wrote a series of papers for the ICAEW under the “Beyond the Myth of AngloAmerican Corporate Governance” initiative.

Waring is a professionally qualified Chartered Company Secretary, having won the JC Mitchell Prize for best paper in the corporate governance section. She has an honours degree in International Business and Japanese, and speaks Japanese fluently. She holds both UK and New Zealand passports.

What the SEC Didn’t Do and Interest Group Politics

Excellent commentary by Ted Allen on the Risk & Governance Blog. Instead of simply stripping shareowners of the right to proxy access, the SEC could have

  • adopted a rule of limited duration (e.g., that would apply to corporate meetings until Dec. 31, 2008, or Dec. 31, 2009) that would permit investors to file only non-binding access proposals.
  • adopted a rule to address its disclosure concerns without barring access proposals completely by amending Rule 14a-12(c) to clarify that investors who make director nominations pursuant to an access bylaw must also file a Schedule 14A detailing their ownership, background, and solicitation efforts.

Additionally, the SEC could have sought public comment on the New York Stock Exchange’s proposal to bar the counting of uninstructed broker votes in uncontested board elections. (Commentary: A Missed Opportunity on Proxy Access, 12/19/07)

But they didn’t. Are they protecting investors, as the law mandates, or protecting the vested interests that brought them to power or will reward them after service at the SEC? It would make an interesting case study for the framework outlined by Lucian Bebchuk and Zvika Neeman in a paper entitled Investor Protection and Interest Group Politics. (see also the Harvard Law School Corporate Governance Blog)

That paper highlights the fact that “the legal rules themselves are partly a product of an agency problem, as insiders might use direct corporate lobbying efforts in ways that serve their own interests.” Of course, institutional investors can’t influence regulatory activities using such corporate funds.

One flaw in the paper, or at least I certainly hope it is a flaw, is the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.”

Apparently, that is what many would like us to believe. As I recall, the only representative of individual investors invited by the SEC to roundtable discussions on proxy access was Evelyn Y. Davis, who kept insisting she was “prettier” than Nell Minow. Yet, groups of individual investors in countries outside the US have been critical in achieving reforms and protections.

On a State Department sponsored visit to Korea to discuss the need for corporate governance reforms, I remember visiting representatives of People’s Solidarity for Participatory Democracy (PSPD), specifically their Participatory Economy Committee. The PSPD uses shareholder proposals, civil and criminal lawsuits and lobbying to improve corporate governance. I’m sure many other countries have similar organizations.

Some believe, the United Shareholders Association, a now defunct Washington group financed by Texas oilman T. Boone Pickens, played a largely positive role in the 1980s here in the United States and might have accomplished much more, had it continued. The authors should revise their model to include such a possibility, especially given the key role that individual investors play in several of their predictions (hypotheses).

  • Prediction 5: Investor protection will be higher when the fraction of the electorate that directly or indirectly owns shares in public companies is large.
  • Prediction 8: Investor protection will be higher when individuals investing (directly or indirectly) in public companies are more financially educated and when the media is more active.
  • Prediction 9: Investor protection will be higher following scandals or crashes that make the problems of insider opportunism more salient.

Clearly individual investors can have an important role to play in establishing investor protections, even if they were largely ignored in the SEC’s recent deliberations regarding proxy access.

Damon Silvers on Corporate Watchdog Radio

Corporate Watchdog Radio co-hosts Francesca Rheannon and Bill Baue attended the Summit on the Future of the Corporation in mid-November in Boston, a gathering to consider a fundamental re-design to integrate sustainability into the corporate structure.  There, Rheannon interviewed two prominent thought-leaders:  Arie de Geus, a former Shell executive and orignator of the “Learning Organization” concept, and Damon Silvers, General Counsel for the AFL-CIO. Rheannon speaks briefly with de Geus about human capital in business. Then she talks more extensively with Silvers about the labor movement’s role in creating a more sustainable business model.  Stream or download via the web. Better yet, subscribe to the podcast.

Corporate Governance Index in Shanghai

Shanghai Stock Exchange (SSE) and China Securities Index Co., Ltd. (CSI) co-announced that the SSE Corporate Governance Index will be officially published on the first trading day of 2008. (Shanghai bourse to launch Corporate Governance Index in 2008, Antara News, 12/19/07; Shanghai Stock Exchange To Improve Corporate Governance Through New Systems, mondovisione)

The corporate governance index was, apparently, established via voluntary application. In addition to self-evaluation, threre was an expert review. As earlier reported, to qualify, listed firms must have a listing history of no less than 12 months on the SSE or on other stock exchanges, and meet relevant corporate governance requirements. Those under ST or *ST status are barred from consideration. (SSE corporate governance index in the pipeline, Market Avenue)

CorpGov Bits

The average length of reports from the largest 350 London-listed companies was nearly 140 pages, twice as long as ten years ago, according to a survey by Deloitte. Ironically, the consultancy blames the increase on additional sections extolling corporate social responsibility. The Economist points to the “dense legalese. (Heavy Reading, 12/18/07)

Securities Investors’ Association, Singapore (SIAS) highlighted in New Delhi’s Business Standard (India needs the right investment culture, 12/19/07) SIAS has been helping citizens with financial planning, spreading awareness about investors’ rights and fighting for corporate transparency. Though we represent small investors, world-class institutions like Standard & Poors’, PricewaterhouseCoopers, Singapore Stock Exchange, the Business Times and the Straits Times among others have joined hands with SIAS to grade and award public listed companies for their best corporate governance practices.

To prepare directors for these challenges, the Wharton School of the University of Pennsylvania has partnered with Spencer Stuart, one of the world’s leading executive search consulting firms, to jointly offer Corporate Governance Essentials for New Directors. The three-day program will be offered at Wharton’s Philadelphia campus on March 17-19, 2008. Preceding the program, on March 16, participants may attend an optional “Immersion Day” — a full-day session outlining the foundations of finance and accounting as a refresher from a broad perspective for all board members.

The Corporate Library released CEO Pay 2007, covering over 3,000 US corporations, based on the latest available data from proxies filed through October 25, 2007.

‘The U.S. Department of Labor plans to start fining defined contribution plan administrators up to $1,000 a day if they fail to disclose certain documents to participants. (Plans to be fined on disclosure issues, InvestmentNews, 12/18/07)

Workforce Planning Database

The Conference Board has launched an Employer-Practices Locator, a Web-based database that includes specific actions employers have taken to address challenges presented by the mature workforce. “Employer-Practices Locator aims to help individuals, companies, and institutions who are actively addressing the challenges of the maturing workforce by giving them a way to find the latest ideas and practices in this rapidly changing field.” Thanks to plansponsor.com for bringing to my attention. Although far from complete, the framework is promising if the Conference Board continues buildout.

Corporate Governance Survey

Sherman & Sterling’s fifth annual Corporate Governance Survey of the 100 largest US public companies finds:

  • Intense shareholder pressure focused on the voting standards in director elections. Fifty-six of the 100 companies surveyed now require directors to be elected by a majority of the votes cast rather than a plurality.
  • The number of companies with “poison pills” and/or classified boards decrease to 17 compared to 33 2004. Only 33 of the companies had classified boards, down from 54 in 2004.
  • No discernible standard with respect to disclosure of related person transactions has emerged but 71% disclosed at least one related person transaction.
  • 22% separate individuals chairman and CEO but only 5% have adopted policies requiring separation.
  • Requiring term limits for directors rose steadily between 2004 and 2006 but dropped this year from 71 to 66.

New this year is a compensation survey, which found:

  • Many companies failed to provide “analysis” in the Compensation Discussion and Analysis disclosure about the “how” and “why” of their compensation policies.
  • Only 45% disclosed the specific targets for the performance metrics used to determine the annual bonuses paid to their Named Executive Officers (NEOs). Of the 55% failing to disclose, only % explicitly noted the omission was due to confidentiality concerns.

Evidence of Corporate Governance Failure

William Wright, Editor of Financial News, says “the problem is that too many people understand corporate governance in its narrowest definition as a set of rules, instead of in its broader sense as a set of concepts to overcome the inevitable agency cost that comes with the separation of ownership from management.”

The box-ticking approach of Sarbanes-Oxley fails and Wright cites 3 major pieces of evidence:

  • We’ve done nothing to address the cult of the Napoleonic leader and the failure of boards to challenge the executive management.
  • The dramatic rise of hedge funds and private equity firms, which act more as owners of companies instead of just holders of their securities.
  • Institutional shareholders fail to engage with management, outsourcing this engagement to proxy voting companies.

The height of failure, according to Wright, can be seen in the IPO for Blackstone. Their prospectus warned investors they would “have limited ability to influence decisions regarding our business.” Shareholders piled in; shares surged 18%; and have since plunged more than 40%. (Governing excess in financial markets, 12/17/07) However, blaming shareowners may be blaming the victim. Until shareowners have the right to replace directors with those of their own choosing, their tools may be too limited to get the job done.

Jones to Take Seat on CalPERS Board

Henry Jones, retired Chief Financial Officer (CFO) for the nation’s second largest school district (Los Angeles Unified), has apparently won his bid to represent retirees on the $259 billion California Public Employees Retirement System (CalPERS) Board of Administration. According to the preliminary count, of the 124,112 votes cast, Jones received 64,116, for a 4,120 vote margin victory.

Jones managed a $7 billion budget, oversaw the District’s investment practices and also managed the implementation of CalPERS and CalSTRS reporting requirements for more than 90,000 employees. Jones’ extensive experience in advising on pension fund issues includes having been twice-elected as Treasurer of the Council of Institutional Investors, a shareholder rights organization comprised of more than 100 public, labor and corporate pension funds with assets then totaling more than $1 trillion.

I said, he may well be the most highly qualified candidate in history to ever run for the CalPERS Board. Many others were similar in their praise. Jones received endorsement from a wide variety of constituents, including at least 18 employee/retiree organizations and four current board members.

Jones will replace Robert F. Carlson, who is retiring in January after serving 37 years on the CalPERS Board. Jones will be sworn into office in January. 

Another Strike Against Cox’s SEC

Gretchen Morgenson discusses a report by the Government Accountability Office, “Opportunities Exist to Improve Oversight of Self-Regulatory Organizations,” to be released 12/17/07, which finds the SEC fails to make good use of internal audits conducted by the nation’s stock and options exchanges. The GAO had the same finding three years ago.

Additionally, “when referrals come in to the S.E.C. from the exchanges, they enter a digital netherworld where investigators can search by stock ticker, date of the unusual activity and type of trading, but not by the name of someone or some firm who may be under scrutiny.” “…Call it one more data point for those who increasingly wonder whose side the S.E.C. is on.” (Quick, Call Tech Support for the S.E.C., NYTimes, 12/16/07)

Update:  The GAO report is now available: highlights or full.

Blaming Campos

Pretty unbelievable, eh? According to a post by John F. Olson (Partner, Gibson, Dunn & Crutcher LLP and Visiting Professor, Georgetown Law Center) on the Harvard Law School’s Corporate Governance BlogChairman Cox’s Statement on Proxy Access (12/13/07), the real culprit for the SEC overturning proxy access is Roel Campos, who denied Cox the ability to garner a 3-2 vote by leaving the Commission.

I posted two responses. The first, addressed Cox’s misleading argument concerning the impact of Long Island Care on AFSCME v AIG.

The second noted, The truth of the matter is that Chairman Cox refused to make changes to the draft rule (around the 5% and the disclosure provisions) that would have made it palatable to investors in July — the very changes he then said at the November open meeting he wanted to make.

Roel Campos had real family reasons for leaving, and felt there was no point in putting it off just to vote “no” on an unacceptable proposal.

The reality is that Cox always had the power to do the right thing — to put out a good rule with the support of Roel Campos and Annette Nazareth, or to do nothing once Campos had left. These choices were Cox’s to make. To blame Campos is incredulous.

Former SEC official, Lynn E. Turner, also weighed in, noting that while Cox “speaks of favoring access for investors, his actions speak much louder than any spoken words, and show that he truly opposes shareholders receiving equal rights and access with management to the proxy.” (Heroes and Villains, 12/17/07)

GorpGov Bits

I’ve patched the Seach Hints page, so now you can more easily limit your search to some of the best corporate governance sites, including CorpGov.net. (That’s how I find obscure archived news on my owh site.) The very small box at the bottom of the page is the newest feature and searches on it include two of my personal favorites, TheCorporateCounsel.net blog and TheRacetotheBottom.org. within the group. Yes, I know, you can’t even see what you’ve typed in the small box… but it works.

InvestmentNews ran my letter to the editor under the title, Sticking head in sand won’t solve climate change. The paper’s editorial said the SEC should not require disclosure of business risks due to climate change, “since there are so many unknowns.”

Russia is a step closer to joining the Paris-based Organization for Economic Cooperation and Development (OECD), since Poland dropped its objection to their entry. The Economist asks if Russia will raise its standards to the required levels of transparency and good government. If it fails to do so, will the OECD will turn a blind eye, or will the accession talks fizzle out? If Russia only pretends reforms, “the developed world will be without its best watchdog on issues of global importance, including money laundering, bribery, corporate governance and reform of bureaucracy.” (Club rules, 12/13/07)

In a case that tested the bounds of auditor liability, a jury in Virginia found accounting firm Goodman & Company guilty of aiding and abetting a client company that allegedly breached its fiduciary responsibilities. Yet despite the guilty verdict, the jury did not award damages to the plaintiff, hedge fund Costa Brava Partners. (Jury Finds Accounting Firm Guilty, CFO.com, 12/14/07)

Chuck Jaffe offers good advice on the next proxy access go-round: Allow access to those “who have been shareholders of record for along time, say five or 10 years and up,” as well as to those with a 5% stake. “Meanwhile, investors who want to be activist shareholders should write their favorite corporate executives, asking them to allow shareholder access; corporations can allow access on their own without an SEC rule requiring it. And those same investors should watch these proceedings and make sure the next proposals from the SEC get many more comment letters.” (A proxy for elitism, MarketWatch, 12/13/07) How we can get more than 34,000 letters is hard to imagine… but we’ll need to give it our best shot.

In Non-Access, the SEC, and the Restrictions on Shareholder Rights: An Arbitrary Exercise of Rulemaking, J. Robert Brown presents an important conflict beweeen the adopting release and Cox’s opening statement. “To the extent an access proposal is submitted and excluded in the 2008 proxy season and litigation results, plaintiffs will likely raise the argument and there is a substantial likelihood that they will prevail.”  

A resolution from the Indiana Laborers’ Pension Fund submitted to Beazer asks the board to make a report to shareholders within 90 days of the annual meeting detailing how many of the company’s mortgages are subprime, as well as the regions most reliant on subprime mortgages and the firm’s expectations of mortgage defaults. The proposal also asks for the identity of the purchasers buying mortgage loans on the secondary market. Beazer sought to exclude the proposal but the SEC rejected their “no action” request. Exect a flood of simlar resolutions at other builders, mortgage companies, and financial firms. (Agency Rejects Beazer’s Request to Omit Mortgage Report Proposal, RiskMetrics Group, 12/14/07)

New York Common to Improve Ethics

New York Governor Eliot Spitzer, State Comptroller Thomas DiNapoli and Insurance Superintendent Eric Dinallo proposed a new set of regulations for the $154.5 billion New York State Common Retirement Fund, which will improve efficiency, protect the pensions of one million government employees, and help reduce potential conflicts of interests.

According to the press release, “the new regulations will create a new audit committee, mandate an actuarial committee to review actuarial standards, establish clear standards for evaluating investment performance and risk, and strengthen the investment advisory committee.”

In addition, under the terms of the proposed regulations the Comptroller will:

  • establish conflict of interest disclosure and reporting standards for the Comptroller, members of all committees, and all outside consultants and investment managers;
  • establish an independent audit committee with members not affiliated with the comptroller or the Fund to review and report to the Comptroller on the internal and external audits of the Fund;
  • post the Fund’s investment policy statement on the web, including investment objectives, guidelines, limits and standards for evaluating investment performance and risk;
  • develop transparent procurement rules;
  • establish an actuarial committee with unaffiliated members to review actuarial decisions and standards and the financial soundness of the retirement system (Note: such a committee already exists, though it is not required by law or regulation); and
  • post all standards, policies and disclosures on his office’s public website.

Although it does not appear as strong as regulations recently set by CalSTRS, the proposed rules would certainly be a step in the right direction. Can CalPERS and other large funds be far behind?

Some Foundations Get Active

Nice overview in the January/February 2008 issue of Corporate Board Member, Foundations Join the Ranks of Shareholder Activists.

Mentioned are the two foundation members of CII: the Lens Foundation for Corporate Excellence, founded by veteran shareholder activist Robert A. G. Monks specifically to promote corporate responsibility, and the Nathan Cummings Foundation, which is funded from the estate of the founder of the company now known as Sara Lee Corp. and has some $575 million in assets.

The Noyes Foundation is cited as using the whole panoply of shareholder-activist tactics. During the 2007 proxy season, it voted in support of dissidents on each of the 31 shareholder resolutions filed at 18 targeted companies on declassifying boards, providing more detailed reports on political and charitable contributions, separating the jobs of chairman and CEO, limiting executive pay, etc.

In late 2002, members of the Rockefeller family asked Rockefeller Philanthropy Advisors to “figure out how foundations could influence corporations on social issues,” says the firm’s Doug Bauer. Looking around for someone to help him out with the assignment, he discovered the As You Sow Foundation in San Francisco, a group that describes itself as “dedicated to ensuring that corporations and other institutions act responsibly and in the long-term best interests of the environment and the human condition.” Together they created Unlocking the Power of the Proxy, a 64-page how-to guide for would-be foundation trustees and staff members. Bauer says that about 11,500 copies have been distributed since then, either in printed form or by downloading. (see also Gates Foundation Investments At Odds With Mission, Corpgov.net, January 2007) When they update the guide, we’ll let you know.

Japanese Hybrids

In the late 1990s, after a decade of stagnation, Japan began to embrace more of an American corporate governance model. Then the dotcom crash and the Enron scandal caused a loss of lustre.

Support for reform began to fade as the the Japanese economy started looking better. An article inThe Economist, “Going hybrid,” notes that Japan is having a debate about shareholder versus stakeholder capitalism. (11/29/07)

SEBI Chair Questions Board Independence

SEBI chairman M. Damodaran suggested raising the bar for representatives on company boards. Addressing a CII conference on corporate governance in Mumbai, India he questioned the role of government nominees on the board of state-owned companies.

“Do people, who represent a certain constituent, continue to represent them when they get into the boardroom? Sometimes it appears that they seem to forget the source from which they have come from,” said the SEBI chief. He also suggested a cap on the number of boards a person can be a director. (SEBI chief questions role of govt nominees on boards, The Economic Times, 12/13/07)

More importantly, will compliance with the 50% nonexecutive directors mandate be again be postponed? Additionally, like the USA, India may need to look at what it takes to ensure directors are really independent.

Fitch Evaluation

A new Fitch Ratings report, Evaluating Corporate Governance, emphasizes the following five overarching categories: Board Effectiveness, Board Independence, Management Compensation, Related Party Transactions, Integrity of Accounting and Audit.

“Credit investors need to be aware that while sound governance generally serves the interests of all stakeholders, there can be discrepancies between the interests of bond and equity holders particularly around questions of promoting short-term performance over long-term stability,” according to Dina Maher of Fitch’s Credit Policy Group. For example, stock options that vest in the medium term, rather than quickly, give management incentives that are more in line with creditors’ interests.

Regarding board independence, the report implicitly acknowledges the weakness of current standards and notes, “The purpose of assessing independence is to uncover trends or patterns that might suggest a more pervasive campaign to stock the board with individuals who are beholden to management and unlikely to question the decisions management makes concerning the company. In this context, it may be important to identify and evaluate board interlocking relationships, where a director may sit on boards of several companies that do business with each other. These relationships could undermine the spirit of independence, and thus should be adequately disclosed and reviewed.”

The report also includes an important discussion of majority-owned companies, where a small circle of individuals own or control the company and often also hold key executive and managerial positions.

“Best” Corporate Citizens May Include Worst

CRO released Part 2 of its 10 Best Corporate Citizens By Industry 2007. The latest rates the citizenship disclosures, policies and performance of large-cap, public companies in the Auto & Vehicles; Paper; Technology Hardware; Technology Software; Transport; and Travel & Lodging industries. Part 1 rated Chemical, Energy, Financial, Media and Utilities industries.

Many question how can companies like Monsanto come to the top of the list, while at the same time they are continuing destructive practices GMO’s, terminator seeds, etc. Harrington Investments, for example, introduced a binding amendment to Monsanto Corporation’s corporate bylaws that could bar corporate indemnification of directors who fail to adequately oversee corporate activities that cause “harm to the natural environment, public health, or human rights.”

“We chose Monsanto as our target for this new approach, because we view this company as facing significant legal and reputational liabilities that might have been prevented with better board oversight. These include allegations of selling potentially dangerous products abroad, bribing foreign government officials, and releasing genetically engineered products that have not been proven safe for human consumption or the natural environment. Such activities are bad for our company’s reputation, and could lead to substantial liabilities,” said Harrington. The press release goes on to list several lawsuits and settlements. (Shareholder Proposal Revisits Fiduciary Duty at Agribusiness Goliath, Monsanto, CSRwire, 12/11/07)

Light Sentences for Corporate Crime

Sixty-one percent of defendants sentenced in the Bush administration’s crackdown on corporate fraud spent no more than two years in jail. In the past five years, 28% of those sentenced got no prison time and 6% received 10 years or more, according to a review of 1,236 white-collar convictions. Former WorldCom Chief Executive Officer Bernard Ebbers is serving 25 years and ex-Enron CEO Jeffrey Skilling 24.

“Sentencing white-collar defendants to two years or less does not send a strong deterrent message,” says Joshua Hochberg, who ran the U.S. Justice Department’s criminal fraud section from 1998 to 2005. “On the other hand, convicting a lot of defendants sends the message that you will be caught and there are consequences.” (Bush Fraud Probes Jail Corporate Criminals Less Than Two Years, 12/13/07)

WSJ Editorial Countered

The WSJ published two letters to the editor in response to their editorial “Union Proxies,” which applauded the SEC’s decision to deny shareowners proxy access rights. One was from Glenn Cooper of London. I suspect this is the same Glenn Cooper who led a campaign by activist shareholder Efficient Capital Structures calling on Vodafone to spin off its minority stake in Verizon Wireless. Cooper countered the WSJ with, “Experience from the U.K., with one of the world’s most shareholder-friendly corporate governance regimes, demonstrates that shareholders will engage with shareholder-initiated actions only to the extent they are serious and further shareholder value.”

The second letter from Richard L. Trumka, AFL-CIO Secretary Treasurer, pointed out the “sole support” cited for WSJ’s view was “an unpublished, non-peer-reviewed graduate student paper.” Countering the findings of that paper, Trumka notes, “AFL-CIO are determined by independent proxy voting consultants who vote the proxies of AFL-CIO and non-AFL-CIO pension funds the same way. They do not have access to systematic data on whether those companies’ employees are represented by unions, and if so, by which union.”

I’m sure WSJ received a great many letters protesting the editorial. Mine was as follows:

Cox didn’t vote to maintain a status quo “unchallenged for 30 years.”  From 1976 to 1990, the SEC allowed access proposals. Back then, even the Business Roundtable wrote that proxy access would simply “enable shareholders to exercise rights acknowledged to exist under state law.”

In 1990, when shareholder proposals began to pass, the SEC reinterpreted its rules without seeking public comment.

The student paper you cite found AFL-CIO funds more likely to vote against directors when their unions are involved in plant-level conflict. It also found, “Non-AFL-CIO labor union pension funds do not exhibit the same changes in voting behavior.”

You say Cox is sticking up for our interests by refusing to buckle to unions and “barons on Capitol Hill.” Frankly, I trust my elected union and Congressional representatives more than the Wall Street Journal. Let’s not deny the benefits of democracy. Motivations differ, but voting reflects the majority.

From Zac Bissonnette’s BloggingStocks.com, “Denying proxy access because many candidates would have special interests is like arguing that union members shouldn’t be allowed to vote or run in political elections because they have ulterior motives. Maybe they do, but that’s up to the voters to decide!”

Rupert Murdoch completed his acquisition of Dow Jones. Will this mean more anti-shareowner editorials?

Another Blogging Activist

And speaking of Zac Bissonnette, he is pressing for governance and executive compensation changes at Adams Golf through BloggingBuyouts.com.

Interviewed by DealScape, he said, “I really believe that the Internet is already starting to and will, much more so in the future, make it easier for very small shareholders to effect change through reasoned arguments on blogs and message boards,” Bissonnette said. “If you think about it, you really shouldn’t need to be a 13-D filer to have your concerns heard. If your ideas make sense, they should be listened to.” (Blogger wages shareholder activist campaign, 12/12/07)

ESRC Seminar on Corporate Governance and Political Economy

The Economic and Social Research Council will hold a seminar series on Corporate Governance, Regulation and Development in 2008-09. The four seminars will be hosted by Queen’s University Belfast (John Turner); University of Birmingham/Loughborough University (Victor Murinde/Chris Green); Oxford University (John Armour); Thankom Arun (University of Central Lancashire).

The first seminar takes place on Friday 4th April 2008 at the Queen’s University Management School, Belfast. The theme of this seminar is the political economy of corporate governance and will focus on how political and legal systems affect corporate governance in developed, transition, and developing
economies.

The ESRC has made limited travel and subsistence funds available for participants. Travel and subsistence costs will be reimbursed to PhD students who attend the seminar. Presenters of accepted papers will have travel within the UK and subsistence costs reimbursed. For more information, see their call for papers.

Dallas Joins F&C

F&C Investments, which manages over £100 billion of assets on behalf of more than 3 million people, announced that it has recruited George S. Dallas as Director, Corporate Governance. Mr. Dallas joins F&C from Standard & Poor’s in London where he has been Managing Director with responsibilities in the areas of analytical policy and research.

Dallas has written extensively on corporate governance and international finance and edited the book Governance and Risk (McGraw Hill, 2004; see Benchmarking Corporate Governance Risks). He is member of the advisory board of Duke University Global Capital Markets Center, is a professorial fellow at Tilburg University in The Netherlands and a member of The Conference Board’s European Council on Corporate Governance and Board Effectiveness, the European Corporate Governance Institute and the International Corporate Governance Network.

More UK Pensions Dabble in Hedge Funds

The number of UK pension schemes allocating to hedge funds has increased ‘dramatically’ to 47.8 pct this year, compared to 17% in 2006, according to a new survey by Barings Asset Management. However, the average proportion of a scheme’s total assets allocated to hedge funds is still relatively low at 3.7%, up from 3.4% last year. (UK pension funds ‘dramatically’ increase allocation to hedge funds, Thomson, 12/11/07)

Pakistani Judges Learn Corporate Governance

The International Finance Corporation (IFC), a member of the World Bank Group, started training the judiciary in Pakistan to equip judges with knowledge on issues and best practices related to corporate governance. (Judges trained in corporate governance, The News, 12/11/07)

CalSTRS Board Positions Filled

A Malibu high school teacher and two incumbents have won election to the board of the $180 billion CalSTRS. Returning for another four-year term are board Chairwoman Dana Dillon of Weed, Siskiyou County, and Trustee Carolyn Widener of Los Angeles. Harry M. Keiley, a teacher in the 12,000-student coastal Santa Monica-Malibu Unified School District, earned his first stint on the 12-member governing board. (Malibu teacher joins CalSTRS board, Sacbee, 12/11/07)

Cox’s Rationale Questioned

Bill Baue’s SEC Sacrifices Shareholder Rights to Achieve Temporary Certainty (SocialFunds.com, 12/11/07) nicely summarizes the SEC’s recent action to withdraw proxy access rights from shareowners, especially with regard to Chairman Cox’s rationale. One revelation for me, in reading Baue’s article, is that in an 11/16/07 letter to the SEC, AFSCME laid out several relevant requirements they have included in their proxy access proposals that could have served as the template for similar disclosure rules by the SEC. AFSCME concludes:

If the Commission believes that neither the requirements of the proxy access proposals nor the language of Rule 14a-8(i)(3) provides sufficient assurance that proxy access would not permit an “end run” around the Commission’s disclosure requirements applicable to contested elections, the Commission could amend the Election Exclusion to allow exclusion of proxy access proposals that do not satisfy those Schedule 14A requirements. Doing so would allay the Commission’s concerns about the adequacy of disclosure in a proxy access regime while preserving shareholders’ rights under state law to alter the procedures by which directors are nominated and elected.

It now appears Cox had everything he needed if his real concern was protecting shareowners from potential conflicts of interest. That leaves his decision even more baffling. J. Robert Brown came up with an explanation that may make sense for those at the SEC who want to keep making the rules as they go along, without public input. “The Commission is using the non-access issue to sneak into Rule 14a-8 language that will make it far more difficult for shareholders to propose other types of changes connected to the election/nomination process, a substantial change in the status quo.”   

The language adopted by the Commission is extraordinarily broad on its face and is not significantly limited by the adopting release.  The staff can, as it did with the 1976 proposals, turn it into whatever it wants, even changing the interpretation contained in the adopting release (which of course is what the Commission argues is permissible under Long Island Care).  And, there is no denying that the language of the rule puts into play a much wider category of proposals than had previously been the case.

Brown makes a good case that the recently adopted rule is ”arbitrary and would allow the staff to exclude any proposal that it decided was likely to increase the likelihood of a contest.” Anyone concerned with the direction of shareowner rights should read his recent post, Non-Access, the SEC, and the Restrictions on Shareholder Rights (Part 3), 12/11/07.  

Women Directors Have 100 Year Lead in Norway

As the scramble intensifies in Norway for companies to meet the legal mandate of women filling 40% of corporate board seats by January 1, growth in the US remains flat.

Women hold 35% of the seats at 500 companies covered by the law in Norway, up from 7% in 2002. Contrast that with 14.8% of the board seats at the 500 largest companies in the US. At 59 of those companies, there are no women directors. The Norwegian experience appears positive from a report in the Wall Street Journal (Behind the Rush To Add Women To Norway’s Boards, 12/10/07), with the possible exception that some women may be serving on too many boards.

In the US, Catalyst research shows a substantial correlation between corporate financial performance and women’s representation in leadership positions. Yet, self-perpetuating boards don’t seem to care. One bright spot, according to Catalyst; women are gaining a slight bit of ground as chairs of nominating/governance committees. (2007 Catalyst Census Finds Women Gained Ground as Board Committee Chairs, 12/10/07) If the US keeps up its current progress of .2% increase per year, we may get close to where Norway is now in 100 years.

Bandits Fork Over Part of Take

Gretchen Morgenson discusses UnitedHealth Group’s recovery of nearly $1 billion in pay from former executives involved in options backdating. Dr. William W. McGuire, UnitedHealth’s CEO, will cough up $418 million worth, in addition to the almost $200 million he already forfeited. He still holds options worth $800 million but is also barred from joining a public company board for 10 years.

Compensation committee members, Thomas H. Kean, the former governor of New Jersey, and Mary O. Mundinger, dean of health policy at Columbia University’s nursing school, who oversaw the agreement weren’t penalized. However, the board set up a committee of representatives from four long-term institutional investors to advise on director candidates and qualifications.

Morgenson believes the agreement “will force boards to institute clawback provisions in all employment agreements with top officers and then enforce them.” (Sharper Claws for Recovering Executive Pay, NYTimes, 12/9/07) Although it is great news, it still feels a little like getting bank robbers to turn back only a portion of the loot. Unfortunately for shareowners, that’s progress.

WSJ on No Access Vote

In an op-ed, Union Proxies (12/6/07), the WSJ attempts to justify SEC Chairman Chris Cox’s vote to strip the right of proxy access from shareowners.

The op-ed is factually wrong from the beginning, “He voted to maintain a status quo that had gone unchallenged for 30 years until last year.” Someone at the WSJ should read the AFSCME v AIGdecision if they are going to write about proxy access. It really is educational.

In truth, the same year the SEC revised the election exclusion it issued an interpretive statement. The court found, “The 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.” It is clear that in 1976 and until 1990, the SEC allowed proxy access proposals.

In 1977 the CEO’s exclusive lobbying organization, the Business Roundtable, even wrote to the SEC, “to permit shareholders to propose charter or bylaw amendments to provide access to the nomination process by way of management’s proxy materials would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” In 1980 a shareholder of Unicare Services was able to place a proposal on their ballot permitting any three shareholders to nominate board candidates and have them placed on the proxy.

AFSCME v AIG goes on to cite several other cases where companies sought to exclude access proposals but the SEC refused to allow it. The court found, “It was not until 1990 that the Division first signaled a change of course by deeming excludable proposals that might result in contested elections, even if the proposal only purports to alter general procedures for nominating and electing directors.”

Why the change in course? In 1990 more shareholder proposals passed than in the proceeding 40 years combined. Access proposals could begin to have real consequences. (Jane W. Barnard, “Shareholder Access to the Proxy Revisited,” Catholic University Law Review, Volume 40, Fall 1990, Number 1) Beginning in that year, the SEC reinterpreted its rules, without going through the rulemaking process or seeking public comment.

The WSJ article then asserts, “[W]hat really matters is whether such proxy slates serve the interests of all shareholders, or merely a few.”  Les Greenberg, one of many who sent me a copy of the article asks, “But, who decides — the few members on the entrenched BOD or the shareholders, the true owners?”  [Background note: Les Greenberg (on behalf of the Committee of Concerned Shareholders) and I filed Petition No. 4-461, which the Council of Institutional Investors said "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." See Equal Access - What Is It?]

The WSJ goes on to cite “a recent study by Ashwini Agrawal of the University of Chicago” who examined the voting patterns of AFL-CIO-controlled pension funds over a four-year period. Mr. Agrawal’s student paper found that AFL-CIO funds are more likely to vote against directors of firms during collective bargaining and union member recruiting, when they are involved in plant-level conflict between labor unions and management. Yes, some shareholders vote against directors partly to support other interests, rather than to increase shareholder value alone. However, Agrawal also found, “Non-AFL-CIO labor union pension funds do not exhibit the same changes in voting behavior.”

The first clause of the Magna Carta guarantees “freedom of elections” to clerical offices of the English church. This was designed to prevent the king from appointments officials and siphoning off church revenues. Proxy access is essentially a shareholder’s Magna Carta. It would allow shareowners to prevent managers and self-perpetuating boards from having a lock on who sits on corporate boards and would substantially reduce their opportunities to siphon off corporate assets.

Should we deny democracy because a few voters bring their own agenda to the polls or proxy? I think not. Everyone brings their own motivations, but voting demonstrates the concerns and expressed wishes of the majority.

The WSJ goes on to assert that if proxy access were of real value investors would insist on proxy access. “That no such premium exists explains why investors at large aren’t clamoring for this kind of proxy ‘reform.’” Yet, investors are clamoring for proxy access. When the SEC proposed an unnecessarily complicated proxy access in 2003, the concept received more comments in support than any previous rulemaking in the agency’s history. Similarly, this year there was record breaking support for the concept.

The most self-ingratiating statement comes at the end of the op-ed, “Mr. Cox is sticking up for their interests by refusing to buckle to political pressure from unions, some SEC staff, left-leaning media and barons on Capitol Hill. Average investors should be grateful.” Who are these groups again?

  • Unions, who represent millions of Americans and have a fiduciary duty to protect our pensions.
  • Media. For a somewhat dated table, see the National Organization of Women’s Who Controls the Media? The media is hardly left-leaning.
  • Barons on Capitol Hill. Oh, the WSJ means our elected officials.

Who are we going to trust, our unions, our press, our elected officials, or the Wall Street Journal? Maybe Rupert Murdoch is already exerting too much influence on their editorial content.

News Bites

Morningstar and SmartMoney picked up an abbreviated form of my article questioning SEC Chairman Cox’s late and erroneous use of the Supreme Court’s Long Island Care decision (TALK BACK: SEC Chairman’s Last-Minute Proxy-Access Problem, 12/4/07 and 12/05/07). The SEC’s response clarifies that the decision probably came to their attention after the July meeting. Therefore, Cox probably did not intentionally wait to introduce a new argument. However, it does nothing to explain how Long Island Care added additional uncertainty to AFSCME v AIG, when it more obviously added clarification. The best course for the SEC to conform with Long Island Care would have been to reaffirm their 1976 Statement that supported the SEC’s original rule.

According to a report in the Sacramento Bee, “Anne Sheehan, chief deputy director of policy at the Department of Finance, was unanimously elected by the state Personnel Board as its CalPERS representative for 2008…. At CalSTRS, Sheehan played a key role in the fund’s adoption of groundbreaking limits on campaign contributions that Wall Street money managers can make to trustees, the governor and other elected officials. CalPERS is expected to consider rules modeled after those approved by the teachers’ fund.” (Sheehan elected CalPERS trustee, 12/5/07) I welcome her addition. I’ve been pushing for CalPERS to address potential conflicts of interest since 1997. [see Letter to CalPERS on Closed Meetings (June 23, 1997), Letter to LA Times. CalPERS: Not Quite Clean Enough (Feb. 12, 1998), and Petition for adoption of regulations re conflicts of interest at CalPERS (Feb. 21, 1998)]

The Corporate Library has released Paul Hodgson’s report, Subprime Golden Parachutes. The nine page study of ‘subprime’ lenders presents an examination of 16 companies, finding that the average severance benefit for the ‘subprime’ CEOs is close to setting a new record. “At companies like Bank of America (BAC) or Countrywide Financial (CFC), the bulk of a CEO’s exit package is tied up in retirement benefits. At companies such as Lehman Brothers (LEH), Morgan Stanley (MS), JPMorgan Chase (JPM), and Goldman Sachs (GS), most of a CEO’s expected termination benefits come in the form of restricted stock… At the top of pack—and far ahead of his colleagues in financial services—is Lehman’s Fuld, who could be entitled to an exit package worth nearly $299 million.” (Soft Landings for CEOs, BusinessWeek, 11/15/07)

“People who do not have financial and economic expertise have the common sense and judgement that experts sometimes do not have and these people make sure experts are clear because they ask questions like ‘what is this investment and what is the risk,” according to Antoine de Salins, head of France’s 33.8 bln eur FRR, the pension scheme. (Non-financial directors improve governance in pension reserve funds – FRR, Thomson, 12/5/07)

Representative Henry Waxman (D – California) chaired a hearing and released a report detailing conflicts of interest at executive compensation firms. According to the report, “Over 100 large publicly traded companies hired compensation consultants with substantial conflicts of interest in 2006. In many cases, the consultants who are advising on executive pay are simultaneously receiving millions of dollars from the corporate executives whose compensation they are supposed to assess.

  • The fees earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation.
  • Some compensation consultants received over $10 million in 2006 to provide other services.
  • Many Fortune 250 companies do not disclose their compensation consultants’ conflicts of interest.
  • There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay.

CalPERS CEO Fred Buenrostro, selected as the most influential player in the first corporate governance ranking by Directorship magazine will address the 8th annual Directorship Institute on December 11 in New York. Directorship announcement has the links.

ESG Handbook Available

The Boston College Institute for Responsible Investment released their Handbook on Responsible Investment across Asset Classes, funded by the F.B. Heron Foundation, in collaboration with theSocial Investment Forum and the European Social Investment Forum.

Compared with public equities, relatively little attention has been paid to ESG considerations for other asset classes. Even has been written on what opportunities for engagement are available to responsible investors in fixed income, private equity, real estate, venture capital, or even commodities. The Institute hopes the Handbook will help investors:

  • Incorporate responsible investment methods into their investment mandate;
  • Identify and evaluate opportunities for responsible investment; and
  • Coordinate the vocabulary and metrics used to measure social and environmental outcomes.

Each chapter focuses on a single asset class, identifying three key issues and challenges for responsible investment, including real-world examples of responsible investment underway in each area. Each section includes information on how to:

  • Design a responsible investment strategy;
  • Identify opportunities for market-rate responsible investments;
  • Incorporate engagement strategies into investment strategies. 

Severance Less Important Than Succession Planning

“Other than rare cases when boards use significant discretion, we don’t pay much attention to the actual severance payout when evaluating the quality of corporate governance in rated companies,” says Moody’s Analyst Drew Hambly. “Instead, we focus on signs of inadequate succession planning, mishandling the CEO search, or a lack of willingness by the board to restructure pay when the departing CEO’s pay had been high relative to peers.”

Analyzing Unexpected CEO Departures and Severance Payouts for Signs of Weak Governance is a new report from Moody’s. According to the report, signs of weak governance, in the wake of an unexpected CEO departure, are:

  • Limited internal candidates, suggesting inadequate succession planning.
  • Board mishandles the CEO search and eventual transition.
  • Board pays new CEO well above peers, provides highly favorable contractual terms and does not link pay to performance.

Board Practices Study

RiskMetrics Group released its 2008 Board Practices Study. Key findings include:

  • Board independence levels rose to 74% in 2007 after having leveled off at 72% in 2006 (the first year no increase at all was found from the prior year’s levels).
  • 45% of major U.S. companies had separated the posts of chairman and CEO at the time of their most recent shareholder meeting—an increase of 20% since 2000, and four percentage points over the previous year.
  • The number of companies with staggered boards continued to decline in 2007, to 52% overall, down from 55% in 2006.

Proxy Access: Was Long Island Care a Deception?

During his testimony before the Senate Banking Committee on Nov. 14, Cox said the AFSCME v AIG decision “applies only in one of the 12 judicial circuits in America. And it has created great uncertainty and danger for every stakeholder in our public markets.” He then led us to believe the AFSCME v AIG decision was in conflict with a more recent Supreme Court decision.

This uncertainty is compounded by a recent decision of the U.S. Supreme Court, which creates doubt about the state of affairs even in the Second Circuit. The Supreme Court reversed another panel of the Second Circuit in a similar case of an agency that changed its interpretation of its rules. Just as in the proxy access case, the Second Circuit rejected the agency’s more recent interpretation. Justice Breyer’s opinion for the unanimous Court held that the agency’s interpretation of its own regulations is controlling unless plainly erroneous. As a result of this decision, it is more likely today that even a Second Circuit court would uphold the agency’s longstanding interpretation of our proxy access rule. In this escalating state of confusion, the only rule across America at the moment is every litigant for himself.

He wanted the ”legal uncertainty” created by these two apparently contradictory court decisions cleared up before the 2008 proxy season begins next spring. That’s the logic he used to sell to the public on why the SEC needed to adopt a new rule this year. The other primary reason was the need for “important shareholder protections, such as disclosure and antifraud rules” if proxy access were to be implemented.

As Commissioner Nazareth said in her statement on the day the no access rule was passed, theLong Island Care v Coke Supreme Court case that Cox alluded to was decided “six weeks before our July open meeting. Yet, the Long Island Care decision was not mentioned in any of the discussion at the open meeting nor in the proposing release. I find it striking that so much emphasis is now placed on a case that apparently no one thought worthy of discussing at the proposing stage and that, as far as I am aware, did not appear in any of the literally thousands of comment letters we received on the non-access proposal.”

Nazareth also noted, the disclosure proposed in the access rule (which I presume was approved by Cox), “would have been more burdensome than in the takeover context.” If additional disclosure requirements were advised, why didn’t the Commission consider options “such as applying existing disclosure requirements and prohibitions on false and misleading statements to nominations done through bylaw procedures. Alternatively, the Commission could have proposed revising Rule 14a-8(i)(8) to allow companies to exclude proposals that do not require a nominating shareholder to comply with the proxy contest disclosure rules.”

The disclosure requirements Cox apparently wants, especially those that would have been required for simply introducing a proxy access resolution, appear to be were designed not primarily to protect investors but to impose such a burdensome process that it would discourage such filings. (see mycomments on the limited access rule)

The more pressing issue of the two was clearly the “escalating state of confusion” caused by the conflict between Long Island Care and AFSCME v AIG. In Long Island Care decision, the Supreme Court reversed a decision by the Second Circuit and concluded that the Department of Labor (DOL) was entitled to deference, since the agency had arrived at its rule through public notice and comment. In the words of the Court, “That the DOL may have interpreted the two regulations differently at different times in their history is not a ground for disregarding the present interpretation, which the DOL reached after proposing a different interpretation through notice-and-comment rulemaking …” (my emphasis)

In the AFSCME case, the SEC adopted amendments to Rule 14a-8 through notice and comment in 1976, and in a Statement accompanying the adopting release, announced an interpretation that would allow for shareholder access proposals.

According to the AFSCME ruling, the 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals dealing with identified board seats in an upcoming election not shareholder proposals that would institute procedures making such election contests more likely in future elections.

As the AFSCME decision notes, SEC staff, changed its interpretation over time, not through notice and comment as was the case in Long Island Care, but inconsistently through no action letters, without “reasoned analysis.” The Second Circuit found that “The SEC fails to so much as acknowledge a changed position, let alone offer a reasoned analysis of the change.”

Chairman Cox created the impression that Long Island Care resulted in confusion. However, if Long Island Care had any bearing at all on AFSCME, it was that deference must be given to the SEC’s original interpretation and the 1976 Statement that supported the rule. Long Island Care didn’t create confusion, it resulted greater certainty.

Does Cox really believe Long Island Care conflicts with AFSCME or led to created greater confusion? If so, how? If the two decisions are truly in conflict why didn’t the Business Roundtable or other opponents, who can afford the highest paid attorneys in the land, make that argument that during the public comment period?

If Cox read Long Island Care before the SEC’s July hearing on proxy access, why didn’t he bring it up then? Did he intentionally spring the case on the public just before adoption to reduce the time for analysis.

Cox clearly appeared to rely on the confusion argument in convincing the public of the need to move forward now, if not the other Republican Commissioners. Is it mere irony that if the rule adoption goes unchallenged, the SEC’s new rule might be protected by the very Long Island Care decision that Cox said created uncertainty? Now, if the no access rule goes to the Supreme Court, the SEC can point to the fact that, like DOL in Long Island Care, the SEC went through public notice and comment and is due the same deference.

If such a rule had been adopted in California, it might face a serious procedural challenge since agencies are required to include in the original notice “each technical, theoretical, and empirical study, report, or similar document, if any, upon which the agency relies in proposing the adoption…” A California state agency that relied on a decision, such as Long Island Care, as the rationale for enacting a rule would probably have to go out for an additional public comment period if the agency failed to discuss or reference that case in its public notice. If federal rulemakings procedures don’t require something similar, they should.

What I find disturbing is that Cox misled the public into thinking that because of Long Island Care, AFSCME would have been overturned… when Long Island Care actually made the exact opposite more likely.

One-two Punch as Bush Administration Begins Wrap-up

According to a report in the NYTimes, business lobbyists are stepping up their efforts in Washington, “in the belief that they can get better deals from the Bush administration than from its successor.” “Documents on file at several agencies show that business groups have stepped up lobbying in recent months, as they try to help the Bush administration finish work on rules that have been hotly debated and, in some cases, litigated for years.”

Poultry farmers want an exemption for chicken manure fumes. Businesses want a roll back of family and medical leave requirements. Electric power companies relaxed pollution-control requirements. Trucking companies want to increase the maximum number of hours commercial truck drivers can work. Automakers want less stringent standards for car roofs. Coal companies want to dump rock and dirt from mountaintop mining operations into nearby streams and valleys. “Some of the biggest battles now involve rules affecting the quality of air, water and soil.” (Business Lobby Presses Agenda Before ’08 Vote, 12/2/07)

Of course, Cox’s recent action to revoke shareholder proxy access could be characterized in the same vein. Gretchen Morgenson’s article in the same paper, however, frames it in terms of a one-two punch. Shareowners lost billions to subprime loans or fallout and then lost their best shot at firing incompetent directors. Morgenson appears to agree with most shareowners; he should have left the AFSCME v. AIG decision to guide at least the next proxy season, allowing continued proxy access.

“A look at boards of companies with some of the biggest write-downs shows few members with expertise in mortgage trading or even in the securities business, Morgenson writes and then goes through examples. “With so few capable directors who hold themselves accountable to owners at public companies, is it any wonder that pension investors are turning to alternatives like private equity? Those managers act like owners. The downside is that private equity managers extract huge fees, reducing pensioners’ gains.” The obvious answer is to get directors to think like owners by making them directly accountable to shareowners through proxy access. Morgenson is clearly in the camp of shareowners. (Fair Game: S.E.C. Sends Investors to the Children’s Table, 12/2/07)

The first two words in the title of Morgenson’s article are “fair game.” It is clear the rules of corporate governance, as played in the US, tip strongly in favor of CEOs and self-perpetuating boards. Another interesting question would be, “Was the recent rulemaking was conducted fairly?” I hope to touch on that question in a future post.

Corrections

30 Years

Mr. Dash concludes his article, “SEC Bars Investors’ Directors” in the NYTimes (11/29/07) with the following, “Until last year, the S.E.C. had told companies for more than 30 years that they did not have to allow a vote on changing the rules for the election of directors.”  (my emphasis) That statement is clearly in error. 

From AFSCME v AIG court decision,  “The SEC’s first interpretation was published in 1976, … The Division of Corporation Finance …continued to apply this interpretation consistently for fifteen years until 1990, when it began applying a different interpretation, although at first in an ad hoc and inconsistent manner.”

One example of many; in 1980 Unicare Services had to include a proposal on their ballot permitting any three shareholders to nominate board candidates and have their name placed on the proxy. A similar proposal the same year allowed a “reasonable number of stockholders” to place candidates on the proxy statement of Mobil. There are many other examples. Then in 1990 the SEC issued a series of no action letters ruling that proposals concerning board nominations could be excluded. 

I discussed this change and the possible reasons behind it in my article entitled “Toward Democratic Board Elections,” in the July/August 2003 edition of The Corporate Board — more than two years before the AFSCME v AIG decision, but a year after petitioning the SEC with the Committee of Concerned Shareholders to restore proxy access.

Marketplace Falls for Status Quo Explanation from Cox

In a short number, explaining “proxy access, the normally astute folks at Markeplace said, “Activists hope to change that and give some stockholders a chance to have more say. Well, this week the SEC thought about it … and decided to keep things as is.”

Wrong. The status quo was proxy access. The decision of AFSCME v AIG restored that right at the end of 2006… a right the SEC had stripped away in 1990, not by writing new rules but by reinterpreting existing rules without public notice or comment. Marketplace misleads its listeners by accepting Cox’s unfounded “status quo” explanation. (Buzzword: Proxy access, 11/30/07)

Take Action Now on Access Rule

Readers concerned with the SEC action to curtail the rights of shareowners should consider sending a note, such as the following, to each of the declared presidential candidates.

Where does (candidate name) stand on corporate governance, specifically shareowner access to the proxy?

Presidential candidate Senator Dodd and 8 other senators made their position on two SEC proposals clear (see http://dodd.senate.gov/index.php?q=node/4113).

Does (candidate name) stand with investors and pension funds representing trillions in assets held for millions of Americans or with the 160 members of the Business Roundtable? Under a (candidate name) administration will we see greater democracy in how corporations are governed?

The SEC met on November 28th and stripped shareowners of rights recently reaffirmed in the decision of AFSCME v. AIG.

Not only did US investors oppose these rules, many foreign investors also opposed them, since they resulted in significantly fewer rights in the US than they have internationally. This move cannot help the competitiveness of the US capital markets.

At a time when there is a very high level of volatility, uncertainty and lack of transparency in the markets, how will does the Commission’s action to betray shareowners instill investors confidence? Investors are also becoming increasingly aware that business and Wall Street sold us a bill of goods when it came to subprime investments. Now the SEC, mandated to protect investors, has reduced our right to replace directors who failed us.

How will (candidate name) advocate reforms at the SEC to deliver proxy access and protect shareowners?

Sincerely,

(Your Name and Contact Information Here)

Contact Information for presidential candidates:

Biden: info@JoeBiden.com or press@JoeBiden.com
Clinton: http://www.hillaryclinton.com/help/contact
Edwards: http://johnedwards.com/about/contact/form
Gravel: http://www.gravel2008.us/contact.php
Kucinich: info@dennis4president.com
Obama: http://my.barackobama.com/page/s/contact2 orhttp://my.barackobama.com/page/s/mediarequests
Richardson: research@richardsonforpresident.com
Giuliani: webteam@joinrudy2008.com media call 646-943-7890
Huckabee: information@explorehuckabee.com or Pressroom@explorehuckabee.com
Hunter: margaret@gohunter08.com media dlhunter08@yahoo.com
Keyes: contact@alankeyes.com Media: media@alankeyes.com
McCain: http://www.johnmccain.com/Contact
Paul: mail@ronpaul2008.com or press@ronpaul2008.com
Romney: http://www.mittromney.com/CommentForm
Thompson: http://www.fred08.com/Contact/Contact.aspx

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Corpocracy and How to Get Our Democracy Back

One book on corporate governance made Ralph Nader’s list of Nine Books That Make a Difference: A Reading List for the Holidays. Here’s his brief review:

Corpocracy by Robert A.G. Monks (Wiley Publishers) summarizes its main theme on the book’s cover-”How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine-and How to Get it Back.” Corporate lawyer, venture capitalist and bold shareholder activist, Monks gives us his inside knowledge about how corporations seized control from any adequate government regulations and especially from their owners, their shareholders, and institutional shareholders like mutual funds and pension trusts. This is a very readable journey through the pits and peaks of corporate greed and power that shows the light at the end of the tunnel.

From a review of the same book, Philip L. Levine writes “Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.” Nell Minow also sings the book’s praises:

Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of “aha” moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.

Sir Adrian Cadbury, most noted for the Cadbury Code, a code of best practice which served as a basis for reform of corporate governance around the world, wrote a lengthily review posted at Amazon.com. (Or course, it wasn’t nearly as long as my rambling review.) Below are a few bits:

The balance of power between boards and CEOs in the United States remains a paradox, given the country’s regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by “ballot stuffing”, nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.

In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system… The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.

I was lucky enough to get a pre-print, which I read in a couple of sittings within a few days of its arrival. Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back both delights and informs in a way only Bob Monks can, because he has been at the center of so many of the important battles to make corporations more accountable. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about “How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine” because no one else has been as engaged as Bob Monks from so many angles.

His insights into pivotal points of view and decisions are enlightening. For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg’s view, according to Monks, people aren’t motivated by moral or social obligation but by simple desire and cost-benefit analysis. Then there is Bob analysis of Lewis Powell’s court decisions. His finding of a constitutionally protected right to “corporate speech” provided the judicial framework for management “to commit untold corporate resources to influence public opinion and public votes – resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections.” And, of course, the Business Roundtable hold a special place in Bob’s heart. The “BRT has come to function in significant part as an agent for the CEOs…who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves.”

Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into “a gigantic, round-the-clock casino that runs the biggest game the world has ever seen.” Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the “How to Get it Back” portion of the book..

Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. Through many books, Monks repeated what became almost a mantra that “no new laws” are necessary. I don’t recall seeing that in Corpocracy, although Cadbury repeats the phrase in his review. I think Bob is weakening on this point. However, he still seems too confident in the power of persuading elite leaders of the need for change. I’m with John Edwards, when he said recently, “It is unrealistic to think that you can sit at a table with drug companies, insurance companies and oil companies and they are going to negotiate their power away.”

When Les Greenberg, of the Committee of Concerned Shareholders, and I started preparing our petition on proxy access in July of 2002, I remember e-mailing Bob, asking if he would sign on with us. It was late in the week when Bob e-mailed back that he had a meeting scheduled with then SEC chairman Harvey Pitt on Monday. If we could get him the proposal over the weekend, he might be able to discuss it at his meeting. We did. My impression is that Bob’s primary focus was on Pitt’s 2/12/02 response to a letter Ram Trust Services had sent 13 years earlier where Pitt clarified the SEC’s stance that proxy voting is in fact an investment adviser’s fiduciary responsibility, generally governed by state law. I think Monks was asking Pitt for regulations to enforce that duty through required disclosures. Pitt was apparently won over by Monks, Amy Domini, and others.

My little story has two points. First, most of us don’t routinely meet with SEC chairmen. Bob’s history of involvement in corporate governance has been as one member of the elite meeting with other members of the elite. Like the fictional character, Forrest Gump, Monks met with many historical figures and has influenced important development. Unlike Gump, Monks has done so with candid intelligence and a deep awareness of the significance of his actions. Second, like the earlier Avon letter, the Ram Trust letter and follow-up eventually led to regulations. Monks may espouse “no new laws or regulations are needed” but several of his most important actions have led down that path.

Perhaps Monks is correct, as Cadbury points out in his review, that foundations have a special obligation to reform the market system which sustains their existence. That’s where Monks places much of his emphasis in the “How to Get it Back” portion of the book. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. “The framework is in place. The laws exist,” he insists.

Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment “was not meant to protect the Church from government intrusion, but rather to protect the government… We need similar protection today from the dominant institution of our own time, the corporation.” He defines corpocracy as “government by the corporations; that form of government in which the sovereign power resides in corporations, and is exercised either directly by them or by elected and appointed officials acting on their behalf.” I can’t help but believe that the tide won’t turn until the rabble of individual investors demands change. Individual investors have a vote in electing government representatives — the sovereign power; institutional investors don’t.

Lucian Bebchuk and Zvika Neeman, in a recent paper entitled Investor Protection and Interest Group Politics, also proceed on the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.” Yet, their own model contains the following hypotheses.

Therefore, educated individual investors are critical if we have any hope of electing public officials who will protect politics from corporate influence and who will revise the legal framework so that it better combines wealth creation with societal interest. Roger Headrick’s “win” last year at CVS/Caremark, based on a margin decided by broker votes, lead to additional calls for the SEC to approve NYSE’s proposal to bar brokers from casting uninstructed investor votes in board elections.

According to Broadridge Financial, broker votes on average account for about 19% of the votes cast at US corporate meetings. However, the elimination of broker voting, if the SEC ever gets around to approving it, just takes 60-70% of retail shareowners out of the picture. It doesn’t address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? There are dozens of possible reforms. Here are seven worthy of further attention:

1. Proxy Assignment

Drawing from the other six, this may be the easiest to implement with a relatively large possible impact. That’s why I’m working on it. We need system(s) or perhaps just instructions, so that lazy but somewhat conscientious shareowners can assign their votes to others based on reputation, rather than tossing their proxies in the shredder. I surveyed brokers and determined that making such assignments will not be a problem at most. Now I simply need to find an institution or two willing to take the proxies. Of course there are lots of technical and legal details but they don’t appear insurmountable.

2. My Proxy Advisor

That’s the working name for a project Andy Eggers started. Andy is working on a PhD in political science at Harvard. The project is now housed within a nonprofit, Proxy Democracy, which Andy also founded. Here’s part of what he has posted as a brief description:

Before each voting deadline, we find out how respected institutional investors with a variety of voting philosophies have chosen to vote their shares. We’ll help you figure out which funds have similar voting philosophies to yours. When a fund you agree with makes a decision on a stock you own, we’ll send you a free alert. You’ll have a week or two to look at their decisions and cast your own ballot.

The system appears to depend on funds posting how they voted or intend to vote prior to the shareholder’s meeting…with Andy’s software crawling the internet to gather the information. This may work well in high profile cases. However, we’ll need more institutions to routinely post votes in advance.

3. Proxy Exchange

Glyn Holton outlined how a “proxy exchange” could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). His proposal lays out a fairly complex system involving four classes of participants:

4. A US Shareholder’s Association

Shareholders in Europe “are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07)

The Times goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads. Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, says sacrifices for short-term gain would remain exceptions because short-term investors could only sell their shares at a profit if they find new investors who believe in the long-term potential of the revamped company.

In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education.

Although their goals include helping their members to “learn, share, grow and more fully experience the rewards of investing success,” I find no mention on their site equivalent to the UK Shareholders’ Association’s vow to “protect your rights as a shareholder in public companies and promote improved standards of corporate governance.” It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers at the casino.

The US hasn’t had an effective advocate for retail shareholders since United Shareholders Association. Deon Strickland , Kenneth Wiles and Marc Zenner documented that USA’s 53 negotiated agreements are associated with a mean abnormal return of 0.9 percent, a $54 million shareholder wealth gain. Although Peter Kinder, President, KLD Research & Analytics, Inc., tells me USA “was a significant factor in turning ‘good governance’ into a checklist of factors that made easy or easier ‘maximizing shareholder value’, i.e., flipping or extorting the corporation” — something we obviously have to guard against in any new iteration.  I’ve repeatedly contacted the National Association of Investors Corporation (NAIC) but they do not appear interested in governance issues. As I recall, USA was originally funded by a shareholder’s lawsuit. Maybe we need another.

5. Shareholder Advocacy Trust

Richard Macary’s AVI Shareholder Advocacy Trust presents an innovative mechanism to combine small shareowners to advocate changes in corporate governance. The Trust sets out its goals, makes its case to shareholders, and then is dependent on contributions. The Trust depends on a monitoring/activist agent who is so compelling that shareholders freely pony up contributions to support work that might pay off. Free rider issues abound.

The Trust is not a “for profit” vehicle nor can any contributor expect to get any kind of return on their contribution. In a way, it’s similar to contributing to a campaign or political action committee where you agree with their platform or want to see a specific candidate elected, so you contribute. Your only upside in that scenario is that if your candidate wins, you believe it will be good for you or your position, be it lower taxes, a cleaner environment, less regulation, etc. The trust is also set up to compensate the managing trustee, who is essentially the coordinator, director and general contractor of the effort. The trustee is very much like a general contractor in that he, she or they will essentially hire and direct all of the professional and advisors needed to execute upon the trust’s goals.

6. Collectively Paid Proxy Research

Because of the expense and free rider issues, the only reason most institutions vote are the federal regulations Bob Monks helped to create that require pension and mutual funds to vote stock in their beneficiaries’ interests. Of course another of Bob’s important contributions was founding Institutional Shareholder Services, increasing the research done on proxy issues and its availability. The biggest obstacle to voting now is not the time it takes to vote but the research needed to make an informed vote. Most people realize that just going along with the board of directors for lack of an easy alternative is not a meaningful vote. But understanding the proxy issues requires too much time and expertise, especially for individuals.

On that front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Latham’s system allows shareholders to allocate collective corporate funds to hire a monitoring firm to advise them on the issues and how to vote. Latham’s system would eliminated free rider issues and creates an incentive to pay for much more research.

“Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.

Mark proposes use of shareowner resolutions to choose an advisor from among competitors. Any proxy advisor could offer its services, specify its fee, and have its name and fee appear in the ballot. The winner would give proxy advice to all shareowners in that company for the coming year. The advice would be published on a website and in the next year’s proxy. The company would pay the specified fee to that advisor. The voting could even be designed to hire more than one advisor, with a separate yes/no vote on each candidate. Advisor name brand reputation can make these voting decisions feasible without another level of paid voting advice. (see Proxy Voting Brand Competition, Journal of Investment Management, Vol. 5, No. 1, (2007).

7. Provide Full Public Disclosure of Votes as Tabulated

This is more of a technical fix, rather than a monumental reform that will bring in more individual investors but I thought I’d just stick it in here at the end of “how to’s” Bob might have discussed. Yair Listokin’s Management Always Wins the Close Ones highlights the need for open ballot counting.

Informational asymmetries between management and potential opponents should be mitigated by allowing anyone to obtain a real-time update of the voting. The status quo allows management to obtain frequent vote updates, while shareholder opponents of management often have no comparable knowledge. This allows management to win votes when underlying shareholder preferences are against a proposal because management can tailor its expenditures as needed; if management sees that it is well behind, it can undertake an extraordinary effort, while its opponents have no obvious way of responding. If all parties had the same knowledge about the likely outcome of the vote, then managerial opponents could respond and potentially neutralize management’s efforts to push the vote in a particular direction.

Obviously, anything we can do to make corporate elections less rigged will also help to bring shareowners out to vote. Why bother if the fix is in? My hope is that once shareowners get used to voting in their best interests in corporate elections, that behavior will also carry over to civic elections. Activists in either social institution will likely carry over to the other.

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