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Current News & Commentary. 2009: March, February, January, 2008: December, November, October, September. News Archives back to 1995. Corporate governance defined. Disclaimers, Copyright & potential Conflicts of Interest. Book bites. Support Investor Suffrage Movement & Proxy Democracy. Credit Cards | UK Pension for Private Investors March 2009 Ceres Conference 2009 Ceres, the world's largest network of investors, environmentalists, social activists and companies united for sustainable prosperity, is increasingly integrating corporate governance concerns. I'll be at this year's conference. Will you? 4/15-16/2009 at the Fairmont Hotel in San Francisco. Among many topics of discussion:
Insurgents United Almost. According to a post by Broc Romanek, separate insurgent shareowners will be able to “round out” their short slates as long as they are not forming a group and not agreeing to act together. So, while they can't unite together, they can, in essence, unite against incumbents. The no-action grant was made in response to requests by Carl Icahn and Eastbourne Capital Management to the SEC. As Romanek concludes, "this unique scenario might become a little more common going forward as shareholders turn increasingly active." (Novel No-Action Response: Ability to "Round Out" Minority Slates with Other Insurgents, DealLawyers.com Blog, 4/1/09) Resolutions Up As of 3/25, 283 shareholder proposals had been disclosed they season, compared with 252 for the same period last proxy season, according to a report in the NYTimes. The rise is largely attributable to corporate governance proposals related to boards of directors, takeover defenses and executive compensation, which have increased to 199 this year, versus 174 in the same period last year. "The biggest jump is in the number of proposals seeking to grant shareholders the right to call special meetings. There have thus far been 21, versus 10 in the comparable period in 2008." Fights for board seats are also up slightly. (Target’s Challenge, 3/31/09) Less Troublesome Plan for Toxic Assets Lucian Bebchuk offers a sensible amendment to Geithner's proposal for "troubled assets" that involves competition among bidders for the proportion of the upside or contribution. "Adding a market mechanism for setting the level of government subsidy is necessary to reduce the program's cost to taxpayers and would leave the government with the most ammunition for the tasks that still lie ahead." (A Fix for Geithner's Plan, Washington Post, 3/31/09) Rule 452 and Averages Comments are all in now on the SEC's proposed approval of amendments to NYSE Rule 452 to Eliminate Broker Discretionary Voting. I glanced at some and found few surprises. Investors favor doing away with broker votes. Businesses favor delay in conjunction with a review of the entire proxy and shareowner communication process. Businesses did a better job of mobilizing comments. At least one broker, Charles Schwab, said they have adopted a proportional voting policy, which they believe is fair and reduces costs to issuers Broadridge, which process most of the votes, reviewed their data and contends elimination of broker voting will have only a minimal impact on elections, especially given that an estimated 45% of accounts are already voted on a proportional basis. Although Broadridge didn't overtly recommend what action to take, they did offer up two considerations. Proportional voting could be implemented on a broker-by-broker basis to reflect the sentiment of retail investors only. To avoid unnecessary solicitation costs for the vast majority of companies whose elections are without controversy, rules could be defined to eliminate broker votes in elections where there is controversy, e.g., criteria could be established for “Just Vote No” campaigns or certain other situations. According to Broadridge, in companies with plurality voting policies directors received, on average, 1.97% more votes with broker voting than counting returns actually voted by shareowners. "When plurality elections were re-run as being voted on a majority basis, broker votes impacted 68 directors out of a total of 5,094, or 1.3%." But, of course, many plurality elections remain and averaging all votes in every election does not reflect the real picture. As Robert Reich is fond of saying, "Shaquille O'Neal, the basketball player and I have an average height of six feet." However, neither Reich or O'Neal are close to average. Broadridge appears to assume that elections at every company reflect the statistical averages but at most companies there is no contest at all with regard to director elections. Therefore, where there are contests, the likely difference between votes with broker votes and those without will be much greater than their exercise found by averaging all elections. I hope the SEC won't be deceived. Despite Broadridge's statistical exercise, broker voting represents a substantial thumb on the scales and should be eliminated. Fiduciary Lemmings In Modernizing Pension Fund Legal. Standards for the 21st Century (pdf download), Keith L. Johnson and Frank Jan de Graaf review pension investment practices and conclude that "what functioned as a 'prudent expert' fiduciary standard 30 years ago has become more of a 'lemming standard' that increases the severity of booms and busts and discourages adoption of improved practices that are not yet used by peers." Funds should adopt a more balanced approach that considers long-term risks. Fiduciaries should not only consider typical financial measures but risk factors such as environmental, social and corporate governance issues. Additionally, funds need to improved their own governance. Recent research finds that better governed pension funds outperformed poorly governed funds by 2.4% per year. (The Pension Governance Deficit: Still with Us, Rotman International Journal of Pension Management, Vol. 1, No. 1, 2008) Key factors included: Selection of directors with relevant skills and knowledge Development of a board self-improvement culture Insulation from conflicts of interest, political and third party agendas The authors recommend regulators should: Clarify that practices of other funds are merely a reference point for establishment of a prudent investment program. Emphasize the duty of impartiality and the long-term inter-generational nature of pension funds. Encourage fee structures that better align interests. Confirm the importance of extra-financial measures to identify and manage risk, consistent with principles of inter-generational fairness. Convene a market-specific best practices commission to develop standards for fiduciary education, allow members to petition for the removal of unfit trustees, audits of fund conflict of interest policies, management of proxy votes, etc. Organize education programs to improve trustee skills and the adoption of best practices. Special News Supplement: Equity Compensation Post-Meltdown The financial markets have been in meltdown for months. Many stocks, including those of high tech companies in Silicon Valley, are down 50% -- or more. Stock options are materially under water. Should companies grant new equity to key employees? New options? New restricted stock units (RSUs)? What tax and accounting issues must be addressed? How will shareholders and gatekeepers (e.g., ISS/RiskMetrics) react? These were the topics of discussion on March 19, 2009 as the Silicon Valley Chapter of the National Association of Corporate Directors met. Read the full post. Encouraging Press Carl Ichan contributed an op-ed to the NYTimes (We’re Not the Boss of A.I.G., 3/28/09) that addressed the fact that shareowners, even those with 80% ownership, have little control over their companies. Hopefully, the government’s experience with AIG "will demonstrate to Congress how little power shareholders actually have, and how important corporate governance reform is." Under current laws, suing isn't much of an option because of the broad latitude given boards under the business judgment rule. Replacing board members generally requires an expensive proxy fight over several years, especially if the board has staggered terms. Say on pay, when passed by shareowners is advisory. Boards are free to reject such votes and institute entrenchment devices, like poison pills. Ichan suggests a key reform, a federal law that would allow shareowners to reincorporation in more shareowner friendly states, like North Dakota, by a majority vote, overriding current state laws that leave such decisions to incumbent boards who could lose power. This would "encourage the states, which profit from the tax revenues that flow from corporations, to compete with one another by reorienting their laws on corporate governance to benefit shareholders." Wouldn't it be wonderful to see a race to the top, instead of the bottom? For an intersting commentary on Ichan's piece, see J. Robert Brown's AIG, the Delaware Model, and the US Government, 3/31/09. The same day, Gretchen Morgenson's Shareholders Who Act Like Owners (NYTimes, 3/28/09) praised the Louisiana Municipal Police Employee Retirement System for "doing what responsible owners should do: quietly and methodically demanding answers and accountability from directors who awarded the handsome payout" at Chesapeake Energy, where directors awarded a $75 million bonus to its CEO even as the company’s stock plummeted. Also encouraging is the attention given to the split chair/CEO issue by Joann Lublin in the Wall Street Journal (Chairman-CEO Split Gains Allies, 3/30/09) and the good work in this area being done at the Millstein Center for Corporate Governance and Performance at Yale University's School of Management. The issue continues to rage even in the UK, where separation of the roles is widely recognized as avoiding the problems of concentrated power. The Local Authority Pension Fund Forum, whose members own more than 1% of Marks and Spencer shares filed a special resolution, which requires the support of investors owning 75% to require enactment in July. (Marks & Spencer Head to Face New Vote on Top Roles, NYTimes, 3/30/09) Broker Voting: One Last Time (again) Comments on the NYSE’s proposed amendment to essentially eliminate broker discretionary voting in director elections are due March 27th. The BRT's Shareholder Communications Coalition has launched a campaign to again delay the rulemaking. Dozens of CEOs and their employees have written in requesting the rule be delayed until the SEC "undertakes a comprehensive review of the entire proxy voting process." Come on readers. Yes, three of the Commissioners favor the change but let's give them some cover with additional e-mails and letters of support. Once this rule is implemented, the ballot stuffing will end. However, with only 5-6% of retail investors voting, it may be difficult to get a quorum. The changes to Rule 452 should result in a push to get more retail shareowners to vote. Let's make sure those votes are educated. Comments can be e-mailed to Elizabeth M. Murphy, Secretary, SEC at Rule-Comments@SEC.gov. Be sure to put File Number SR-NYSE-2006-92 in the subject field. See my comments and those of others. Please encourage the SEC to not only approve the proposed rule immediately but to educate the public on the importance of proxy voting, encourage institutional investors to announce their proxy votes in advance of meetings, and facilitate the development and spread of systems like Investor Suffrage Movement and Proxy Democracy, which help retail investors vote more intelligently. Stress Test Boards The Global Financial Tsunami brought a wake up call to many boards. The good ones are able to admit they failed to recognize the dynamics of risks, that they have been too complacent and assumed what were fatal risks. The bad ones are still at a loss. Boards must do a stress test on themselves. They must quickly find ways to relink and extend their information network to their customers, suppliers, and staff if they are to survive this storm. Download a commentary by Dr. Gregg Li, the Principal of Corporate Governance at Aon Global, Corporate governance insights from the global financial crisis. Corpgov Bites RiskMetrics Group reports that the SEC granted fewer “ordinary business” exclusions this year. "In a notable ruling, the staff rejected an ownership eligibility challenge by AMR, the parent of American Airlines. The proponents, John Chevedden and Patricia Kennedy, aggregated their holdings to meet the $2,000 minimum stake required by section 8(b). As Chevedden notes, this ruling may have more significance in 2010 if more individual investors see their holdings in firms shrink below $2,000." (Risk & Governance Weekly, 3/27/09) Where Wall Street Trades in Political Currency (NYTimes, 3/26/09) reports the tip of the iceberg. The comments are as good as the article. "11 of the 27 companies we identified as “troubled” had at least one overboarded director. Six had more than one; at Merrill Lynch, there were five. By comparison, fewer than 30 percent of S&P 500 companies have even a single overboarded director, and fewer than 5 percent have more than one,” says Nell Minow of The Corporate Library. (The Buck Should Stop with the Board: Nell Minow on the Risks of Poor Governance, KLD Blog, 3/26/09) Susan Mangiero posts on recent GAO study about conflicts of interest and impact on retirement plans as well as Congressional testimony on the subject at Pension Risk Management. WSJ reports Policy Makers Work to Give Shareholders More Boardroom Clout (3/26/09) Schapiro outlines sweeping SEC reform agenda, reported by Investment News (3/26/09) As Oversight Plan Is Unveiled, Turf Battle Begins to Unfold, Washington Post (3/27/09) Progress is being made. Deal Lawyers reports on The Big Reversal: Lyondell Chemical Company v. Ryan. The Delaware Supreme Court reversed the Court of Chancery and entered summary judgment in favor of the defendant directors. I am all for holding directors accountable, but this decision seems like the right one to me, given what I've read. See also Wilson Sonsini Goodrich & Rosati alert Win for Investors Against Genocide TIAA-CREF usually takes a position of quiet engagement on social issues. However, if they never disclose just what actions they've taken, just what they have recommended, we never know if they are really living up to the high ethical standards many invested in the system want. Investors Against Genocide, a non-profit organization dedicated to convincing mutual fund and other investment firms to change their investing strategy so as to avoid complicity in genocide, recently won major victories at Vanguard and TIAA-CREF. The group withdrew its shareholder proposal from TIAA-CREF after TIAA-CREF decided to vigorously engage PetroChina and other problem companies partnering with the Government of Sudan and to divest from those companies if they continue to substantially contribute to genocide or crimes against humanity. On March 10, Vanguard announced that it had implemented a new, corporate-wide policy that it said was "substantially identical" to Investors Against Genocide's shareholder proposal regarding investments in companies connected with genocide and crimes against humanity. (TIAA-CREF Announces Escalation in Efforts to Avoid Investments in Companies with Ties to Genocide, CSRWire, 3/26/09) Survey of Internal Auditors The Institute of Internal Auditors' (IIA's) released a survey of 364 internal auditors in the United States, 117 of which work in the financial services sector, and 34 that work for Fortune 100 companies. Since internal auditors have such an insider’s view of what goes on in an organization – the survey can be used to get an additional perspective on what happened, and how companies are dealing with the resulting risks and environment. Key findings include: A sizable percentage (42 percent) of respondents working in the financial services sector felt better risk management practices could have helped prevent their organization's current financial situation, although a majority of the respondents overall did not feel this way. Within organizations receiving stimulus or rescue funds, almost half (44 percent) of internal audit activities have not addressed risks related to the funding. Organizations are redirecting their internal audit resources away from covering previous risks, such as U.S. Sarbanes-Oxley Act of 2002 testing, to cover recession-related risks. Is Comply or Explain Dead? Five weeks ago US investors with assets of more than $1.3 trillion under management sent a letter to President Obama, House Speaker Pelosi, and Senate Majority Leader Reid urging reforms, including the adoption of a "comply or explain" disclosure requirement by 2010 regarding conformity to best practices determined through an "interactive process involving companies, investors, regulators and other stakeholders (such as accounting, compensation design, proxy voting and consumer representatives)." After discussing the Tuner Review and other recent developments in the UK, PIRC declares "the 'comply or explain' era is now effectively over. Instead, a new regulatory framework for corporate governance with effective market oversight, intelligence gathering and adequate resources is now required." (FSA treads on governance turf, PIRC alerts, March 24, 2009) PIRC argues the financial crisis has already brought a "tilt away from a shareholder-centric governance model. As such it is timely (and surely no coincidence) that the Financial Reporting Council (FRC) has announced another review of the Combined Code. This review will look at all aspects of the content and application of the Code, and the use made of ‘comply or explain’. But is it too late?" Interesting also is PIRC's comment on a finding of the Review: "Excessive risk taking, at least at the top management level, may be driven more by broad behavioural and cultural factors than by a rational consideration of the precise incentives inherent within remuneration contracts: dominant executive personalities have a strong tendency to believe in their own strategies." Says PIRC, "if incentives did not drive behaviour (even the wrong behaviour) then what function are they fulfilling? We believe that in light of the evidence emerging from the financial crisis investors may need to fundamentally review their understanding of the link between reward and performance. As a starting point how about funding some research into what impact incentives really do have on behaviour?" What a novel idea. Too Big to Fail Thanks to James Pruett of GREENmail (discussed a couple of posts down) for sending me a link to The Big Takeover, by Matt Taibbi. (Rolling Stone, 3/19/09) Most of what is in the article has been discussed elsewhere, but it is nice to have it in a big clump and a few items were news to me. However, I could have done without the profanity and characterization of so many anti-heroes as fat and balding Brad Pitt wannabes. Being over sixty, I probably have a lot more friends in that category than Taibbi... but on to the muckraking. Taibbi hits on volume. $7,750 per second to AIG. Billions spent on campaign contributions by Wall Street firms and much more on lobbying. He takes us from gutting Glass-Steagal to shifting oversight of financial giants to tiny or nonexistent regulators, with Goldman Sachs and its alumni in charge of watching out for the public good. I certainly wasn't aware that it is the Accounting and Auditing Act of 1950, 31 USC 714(b), that prohibits congressional audits of the Federal Reserve from including "deliberations, decisions and actions on monetary policy matters"in its review of the Fed. Not much left, eh? The heart of Taibbi's article is that the bailout continues to consolidate power in megafirms, just as deregulation fed "all the little fish in the sea to an ever-shrinking pool of Bigger Fish. To fix this problem, the government should have slowly liquidated these monster, too-big-to-fail firms and broken them down to smaller, more manageable companies. Instead, federal regulators closed ranks and used an almost completely secret bailout process to double down on the same faulty, merger-happy thinking that got us here in the first place, creating a constellation of megafirms under government control that are even bigger, more unwieldy and more crammed to the gills with systemic risk." Instead of breaking up AIG, they took years breaking up that fearsome monopoly, Whole Foods Market, because of its supposed stranglehold on organic food. Paulson and his cronies turned the federal government into one gigantic, half-opaque holding company, one whose balance sheet includes the world's most appallingly large and risky hedge fund, a controlling stake in a dying insurance giant, huge investments in a group of teetering megabanks, and shares here and there in various auto-finance companies, student loans, and other failing businesses. Like AIG, this new federal holding company is a firm that has no mechanism for auditing itself and is run by leaders who have very little grasp of the daily operations of its disparate subsidiary operations. The real question, according to Taibbi, is whether or not the Obama administration will move the financial system to a place where the general public "can have a say in things." Having Geithner at the helm isn't promising. He helped design the original bailouts, picked a former Goldman lobbyist for his top aide, and committed a number of sins, including a failure to pay taxes (which Taibbi leaves off his list). By making an already too-complex economy even more complex, Wall Street has used the crisis to effect a historic, revolutionary change in our political system — transforming a democracy into a two-tiered state, one with plugged-in financial bureaucrats above and clueless customers below. Even if he wants to effect at least transparency, what power does Obama have over the Fed? And, where is the plan to breakup not just companies in trouble but any company that is too big to fail? Corpgov Conference Updates After AIG: New Rules for Financial Sector Compensation? The AIG bonus controversy has intensified the spotlight on compensation policy for financial firms. In recent years, Wall Street bonuses have been 10 or 20 times many employees' base salary. Top players in the financial markets have taken home nine-digit and sometimes even ten-digit compensation packages. Are these compensation packages merited? Do they provide incentives for executives, traders and others to engage in excessively risky and short-term-oriented behavior? Should Wall Street bailout monies require limits on employee compensation? Is there a public interest in limiting financial sector employee compensation or regulating compensation incentives? Are there downsides to such limits or regulation? Corporate Governance and Shareholder Rights in a Time of Financial Crisis:
How the North Dakota Publicly Traded Corporations Act Changes the Landscape The state of North Dakota received national attention after the 2007 legislative session passed the North Dakota Publicly Traded Corporations Act (NDPTCA). The NDPTCA challenges many assumptions previously held by corporation laws regarding the management of public corporations. The goal of the NDPTCA was to create shareholder friendly corporations through requirements such as: limiting director term limits, restricting poison pills, separating the role of chairman and chief executive officer, permitting votes on compensation reports, and altering plurality voting to majority voting when electing directors. The NDPTCA is an incredibly novel approach to governing publicly traded corporations and preventing crimes against the public. The symposium brings together a long list of fantastic commentators to explore issues such as: executive compensation and director liability. Shareholders have traditionally been viewed as the owners of a corporation, while the directors’ duty was to do what was best for the corporation. The financial scandals that have occurred in the last decade, as well as the recent financial bailouts, have helped cast a new light on the duties directors owe to the corporation and the rights of the shareholders. The symposium explores the evolving tug of war between shareholders and directors, through the lens of the Act. Developing Governance Models of Corporate
and Intergovernmental Institutions with Shareholder Voting The Voting Power in Practice (VPinP) initiative focuses on the application, dissemination and evaluation of research in voting power for improved governance and policy-making. Important areas of application include the design of decision- making systems based on weighted voting such as are used in many national and international organisations, political parties, parliaments and business corporations. The scope of the workshop will include both joint stock companies and intergovernmental organizations. The unifying feature is that all these institutions employ systems of weighted voting by members – shareholders in the case of joint stock corporations – and ideas of voting power and corporate control are central. institutions Papers on any of the following questions are sought, but those dealing with other relevant topics are also welcome: Why are shareholders not more active? How many shareholder votes are needed in practice for company control through voting at AGMs? Voting power and shareholder concentration. What are shareholders voting about? Epistemic versus procedural perspectives: voting as discovering the best strategy versus voting about shareholders’ preferences. Anatomy of a Stickup Officers and Directors of public companies are increasingly being sued in state and federal courts in what are called “shareholder derivative lawsuits.” These lawsuits are often initiated by plaintiff lawyers asserting the claims by a company against its officers and directors. Recently, a number of federal judges including several in California, Texas and North Carolina, have turned the typical lawsuit settlement process on its ear by rejecting agreed-upon settlements of the lawsuits. Three panelists, including two corporate directors who have lived through this process, will provide a layman’s explanation of the internal workings of derivative suits, derivative settlements and the facts of specific cases that have hit the headlines. The 20th Annual SRI in the Rockies Conference SRI in the Rockies is the premier annual gathering for sustainable and responsible investment professionals and related organizations. The conference provides a forum to meet and learn from passionate, creative people from all corners of the sustainable and responsible investment industry in the United States and around the world. SRI in the Rockies is produced by First Affirmative Financial Network in collaboration with the Social Investment Forum. Asian Business Dialogue on Corporate Governance 2009 The ACGA conference brings together a group of high-level speakers and delegates from around Asia and other parts of the world for thought-provoking discussions on practical issues of corporate governance for business in Asia. GREENmail GREENmail is an alternative approach to ethical investment proposed by James Pruett that would basically ransom companies to obtain desirable changes in corporate behavior by threatening proxy action. "To date, ethical investing has focused on slowly accumulating positions in ethical companies while screening out unethical ones and passively holding out for change. But today, ...advances in communication technology have enabled massive investing groups to form. Ownership and control of major, public corporations are up for grabs by purposeful masses, making radical change truly possible... Return on investment, risk aversion, portfolio balance, and diversification are secondary considerations to the collective goal of achieving a large enough share position to achieve fundamental change within the target company. To transform GM, it would take less than 5,000 investors at $100,000 each. I hope they do it, since it would certainly would be cheaper for the rest of us than another tax payer bailout. As Pruett points out, when successful, GREENmail "may often lead to lower stock prices as a result of the investment communities’ belief that socially responsibility may conflict with the target firms profit goals." Sure, if you are forcing one company to put in pollution controls that are beyond what regulations require, their competitors could have a cost advantage. On the other hand, the company may gain advantages from being an early adapter, if the costs aren't too high. This strategy reminds me of one I proposed when I first ran for the CalPERS board, about 25 years ago, that I think still has a leg up on Pruett's proposal. Large funds like CalPERS, CalSTRS and TIAA-CREF could drive corporate behavior, especially if they worked in harmony, by investing in "best of class" companies, dumping "worst of class" companies, and urging their members and the public to boycott those "worst of class" companies until they institute changes. They could short these companies before announcing their campaigns and then go long as agreements are reached. Unlike Pruett's model, this one would likely make money... unless legal costs outweigh profits. Nevertheless, I wish Pruett the best of luck with his GREENmail proposal. Corporate Governance Roundup 2009 Yippee-i-o-ki-ay! From the conference flyer, I half expected Will Pryor, Director of the IAFF Local 1014 and conference "go-to" guy, to show up in chaps, especially with his e-mail encouraging attendees to dress casually. Well, maybe next year. Suits and jackets prevailed in the fashion arena but there was little in the way of pretense as funds from all over California and as far away as the UK expounded on their 2009 programs. Read the full post. CalPERS: Focus List and Elections CalPERS announced the four companies that are on its 2009 "focus list," based on poor corporate governance and lagging financial performance: Eli Lilly, Hill-Rom Holdings, Hospitality Properties Trust, and IMS Health. CalPERS engaged 13 firms, most of which agreed to governance reforms, such as annual elections, say on pay, majority voting for directors, separate chair and CEO roles, improved board diversity, and “claw back” policies to recapture bonus payments in the event of fraud or misconduct. James McRitchie, the publisher of CorpGov.net, also publishes PERSWatch.net. Even more so than CorpGov.net, PERSWatch.net needs cleanup and updating that I never seem to get around to, like cleaning out the attic. It was initially a vehicle for my own campaigns to get elected to the board. While relatively dormant most of the time, I spring the site to life when there is an election and generally support one of the candidates after weighing the issues. Part cot the reason for my coverage is that mainstream news has historically given these races virtually no coverage or endorsements, even though the System has 1.5 million members and $170 billion in assets. Of course, the other reason is that I want to influence outcome and be in a position to advise board members from the start. This year an election is scheduled for the Fall of 2009 for the two "At-Large" or system-wide seats, voted on by all members of CalPERS. The 4-year terms runs from January 16, 2010 through January 15, 2014. The seats are currently held by Charles P. "Chuck" Valdes and Kurato Shimada. Shimada has expressed his intention to run for re-election. I can only remember one incumbent ever losing; they did virtually no campaigning. Therefore, I'm not likely to spend a lot of effort covering that seat. However, Valdes will not seek re-election. Potential candidates start collecting signatures on a petition beginning March 23. I will survey candidates and post their responses. PERSWatch.net is mostly focused on ensuring good governance practices are not only advocated by CalPERS but are also followed by the system itself. For example, I recently testified at the Performance and Compensation Committee that the bonus structure CalPERS uses for internal fund managers encourages excessive risk. Like “pay for performance” at many corporations, bonus pay for portfolio managers is based on points awarded for beating benchmarks but no negative points are awarded for falling below benchmarks. Additionally, bonuses awarded to unrealized gains which turn into losses after they are marked to market are not clawed back, although the results are reduced because of a formula emphasizing long-term gains. My testimony is posted on the news page. Associated with PERSWatch site is a Yahoo message group. I occasionally send out e-mails to that group on the issues. If you would like to subscribe, please do so using the form below. The Will to Regulate Under the Bush Administration, America lost the will to regulate... a further erosion of trends under recent administrations. The New York Times warns that a systemic-risk regulator should not be viewed as a "quick fix for the hard work of regulatory reform. To do so would squander current public support for re-regulation and would ultimately leave the system vulnerable to a repeat of the same calamities that afflict it today." (It’s the Regulations, Not the Regulator, 3/18/09) Broc Romanek's post of a dozen pearls of wisdom from former SEC Chief Accountant Lynn Turner, The Systemic Dismantling of the System, at TheCorporateCounsel.net Blog. Normally, I'd provide a brief summary but Turner already keeps it very brief. I don't see how investors will regain confidence in markets until most of these issues are addressed. I'm sure throwing trillions of dollars into the economy helps but the framework is equally important. BAC Gets Fingered Finger Interests, Ltd., a long-term shareowner of more than 1 million common shares of Bank of America (NYSE: BAC), launched an exempt solicitation and campaign for a change in BAC governance at the bank’s April 29, 2009 annual shareholders meeting. Theyare advising shareowners to vote against the re-election of Kenneth Lewis, BAC Chairman and CEO; O. Temple Sloan Jr., Lead Director, Chair of the Compensation and Benefits and Executive Committee, and member of the Corporate Governance Committee.; and Jacqueline Ward, Asset Quality Committee Chair. "We believe the board allowed management to pursue acquisitions that have permanently reduced shareholder value through dilution, particularly with the acquisition of Merrill Lynch approved by shareholders without access to full disclosure on December 5, 2008. The board – including its leadership - and management knew, or should have known, of massive fourth quarter losses at Merrill during October and November prior to the shareholder vote, but did not communicate those losses or amend the proxy that shareholders used to vote on the merger. Since the announcement of the merger, the market capitalization of BAC has fallen by over 80%," said Jerry Finger who is on the board of the Financial Institutions Center at the Wharton School. Their bacProxyVote.com web site asserts arguments for change, including: The merger agreement with Merrill Lynch was reached over a weekend, with little opportunity for BAC to conduct due diligence on the assets, liabilities and business of Merrill Lynch. The price paid for Merrill Lynch was a 60% premium over its last closing price, a premium that was unnecessary. Bank of America agreed to issue 1.4 billion new shares, which even before the unexpected losses was dilutive to earnings for shareowners. The board and management must have known, or in exercise of reasonable care, should have known, about the massive Merrill losses before the 12/05/08 shareholder vote. Three days after BAC and Merrill Lynch shareholders approved the merger on 12/5/08, Merrill’s CEO told the Merrill board that Merrill had suffered major losses in November that were in line with BAC’s estimates. Neither BAC, nor Merrill, nor any executives or directors ever disclosed such estimates to shareholders in the proxy statement or subsequent SEC filings. Despite threatening to renegotiate or terminate the merger, BAC’s CEO instead agreed to issue an additional $24 billion of preferred stock at a coupon of 8% to the government for capital and debt guarantees. The preferred dividend is payable is in after-tax dollars, and commits Bank of America to over $1.6 billion in annual payments. The government capital injections are senior to BAC common shareholders, and will therefore further dilute common shareholder earnings. BAC did not disclose Merrill losses to shareholders before announcing that the merger closed on 1/1/09, and did not issue an updated proxy disclosing the losses. The losses were only disclosed on 1/16/09 in BAC’s fourth quarter earnings release. By their failure to disclose, the board and management violated their fiduciary responsibility and also violated Section 14(a) of the Exchange Act and SEC Rule 14(a)-9(a). The company also urges a vote in favor of the following proxy items (see proxy card): PROPOSAL 3 - advisory (non-binding) vote on approving executive compensation PROPOSAL 5 – advisory vote on executive compensation (proponent Kenneth Steiner, agent John Chevedden) PROPOSAL 6 - Stockholder Proposal on Cumulative Voting For Proxy (proponent Nick Rossi, agent John Chevedden) PROPOSAL 7 – Stockholder Proposal re Special Meetings (proponent Ray T. Chevedden, agent John Chevedden) PROPOSAL 8 - independent board chairman PROPOSAL 11 – limits on executive compensation For additional coverage, see Ex-Houston banker, son battle Bank of America (Houston Chronicle, 3/16/09) and BofA Gets The Finger (Forbes, 3/13/09) We've added a link to bacProxyVote.com at the Shareowner Action portion of our Links page. Blame SOX While not as glib as my headline, Gordon R. Caplan and Andrew A. Markus, of Willkie Farr & Gallagher LLP, characterize the Sarbanes-Oxley Act of 2002 as one factor contributing to the financial meltdown. The current crisis isn't about massive public fraud, like Enron or Madoff, but is a system-wide failure of risk assessment. "SOX helped shift the focus of corporate directors away from risk management and the preservation of shareholder value to a more procedural focus on regulatory compliance, independence and personal liability." They argue the "strict independence requirements" for directors may have led to less conflicts of interest, but it also led to a "paucity of knowledge, applicable experience and industry insight. By mandating independence, SOX and its related reforms effectively ensured larger but less experienced and knowledgeable boards." The authors point approvingly to the fact that large private companies are typically dominated by "major shareholders and founders" with deep experience and economic stakes in the business, concluding SOX's "mantra of independence for independence sake should be reconsidered to encourage highly experience and knowledgeable people to serve on boards within industries they understand, particularly in complex industries." (Independent Boards, But Ineffective Directors, The Corporate Board, 3-4/09) I'm not sure how much SOX caused directors to take their eye off the ball. However, I do agree that SOX relies too heavily on so called "independent directors." These independent directors are still too frequently beholden to the CEO for perks, strokes and being on the board. The real need is for directors who are dependent on shareowners. Majority vote increases the likelihood of dependence, as will the end of broker votes, but true dependence isn't likely until proxy access. When directors can be replaced by unhappy shareowners, directors will act in their interests. FASB Roundtable Sanford Lewis reported from the Financial Accounting Standards Board 3/6/09 Roundtable on Contingent Liability Disclosure (FAS 5). Abstract: Convergence of opinion on several points, such as needs to avoid requiring “prejudicial” disclosures, and the need to mandate disclosure of severe risks even if viewed by management as “remote” and “long term.” • Questions for investors: How much of a priority is it for FASB to: (a) Require companies to seek and disclose third party liability estimates in lieu of disclosure of their attorneys' projections? When should this be required? (b) Require disclosure of severe “remote” risks, such as science showing nanotech hazards that could amount to the "next asbestos"? (See his Corporate Disclosure Alert) Bogle: Fiduciary Duties Should Apply to Investment/Financial Advisors John C. Bogle notes that ownership of stock by individuals is fading into history, our financial agents are looking out more for their own interests than ours, short-term speculation has overtaken long-term investment, and our constant drive to beat the market has driven up costs and lowered returns. These trends all point to a rational "abandonment of investor concerns about corporate governance, and the inadequacy of investment research and security analysis." The solution he appears to offer in a speech entitled Building a Fiduciary Society (3/13/09) is to extend the legal duties of fiduciaries per ERISA to all investment and financial advisors. Although I think that would be a positive step, it isn't clear that it will move the focus of the mutual fund industry from marketing to increasing the welfare of clients and improving corporate governance. I once asked the Department of Labor how many enforcement actions they had taken to ensure proxies were voted solely in the interest of beneficiaries, as required by ERISA. The answer was none. CorpGov Briefs Carl Ichan gave two of my favorite causes, Proxy Democracy and the Investor Suffrage Movement, a nice publicity boost by allowing me to post Voting by Brand: Next Stage in Shareowner Empowerment on The Ichan Report. Corporate Governance is also the name of a relatively new blog (new to me anyway) from Bob Tricker and Chris Mallin. Both are former editors of Corporate Governance: An International Review and both are distinguished scholars. Recent posts explaining rights issues (something much on the rise), lamenting the state of auditing (and recommending changes), and, of course, the current financial meltdown. Stephen Davis, interviewed by WSJ's Muchelle Wu, gives brief reviews of several recent books in Survival Guides For Governance. Hain Celestial The Hain Celestial Group (Hain) is a leading natural and organic food and personal care products company in North America and Europe. It is engaged in manufacturing, marketing, distributing and sale of natural and organic food products.. At its recent stockowner meeting there was a vote on a resolution asking for an Advisory Vote on executive pay sponsored by Walden, the Tides Foundation and North Star Asset Management. It received a remarkable 62% vote. If not the highest vote on Say on Pay, it must be close. All three funds announcing votes in advance that are posted on ProxyDemocracy voted in favor. Unfortunately, all three funds recommended against a proposal to have the company reincorporate to shareowner friendly North Dakota. Still, the proposal by Ken Steiner (with help from John Chevedden) got almost 10% of the vote, which is very positive for the first season of a little understood proposal. No, we don't really care if Hain reincorporates in North Dakota. We just want the protections North Dakota's new law offers: proxy access, reimbursement for certain expenses in proxy contests, annual director elections, majority vote, vote on poison pills, right to call a meeting and say on pay, to name a few. A similar proposal by me (again with help from John Chevedden) will come up soon at Whole Foods where four out of five early institutional investor voters on ProxyDemocracy oppose the measure. My guess is that they were influenced by the RiskMetrics Group and that they will come around in coming years. The Hain meeting was also significant for being one of the first where shareowner proposals were presented by an agent of the Investor Suffrage Movement. Their new program to provide low cost representation at shareowner meetings should provide substantial savings to shareowner activists, since it will save travel and associated expenses. Within a few years expect to see ISM agents at many annual meetings. Japan's Example Will America experience a “lost decade” of economic stagnation like Japan in the 1990s? Will Obama’s strategy of “grow now, ask questions later” to jump-start consumption lead to a sustained uptick or a bigger bubble later? Corporate Governance in the 21st Century: Japan’s Gradual Transformation by Nottage, Wolff and Anderson doesn’t give direct answers, but it provides clues. Christopher Pokarier argues that Japan is open to being closed. One wonders if Americans will follow the Japanese example and keep savings in cash, rather than mutual funds and stocks. In the 3rd quarter of 2007, capital investments were 11% of Japanese household assets vs. 31% in the US. Cash/savings accounted for 50% in Japan, 13% in the US. Class divisions are hardening and intergenerational transmission of status is increasing. In the 1980s Japan’s corporate governance system seemed a creditable alternative to the Anglo-American model. Its emphasis on employee welfare, keiretsu interlocks, and bank monitoring provided evidence that independent outside boards weren’t necessarily better… until Japan slumped into a long recession. Massive reforms, many based on shareowner primacy, appear to have moved Japan in the direction of the US. However, the authors represented in this reader see the changes as a more gradual transformation that endures as a unique variety of capitalism. “Everything is changing gradually and in ambiguous directions.” One example provided is “flexicurity,” a balance between flexibility of working practices (terminate at will) and security of tenure. Wolff concludes lifelong employment was never a Confucian-inspired preference but a tool to ensure the continuity of core employees to meet business needs. Wolff finds the influence of employee stakeholders has been exaggerated and what lifelong employment existed wasn’t progressive but was rooted in inequality and inequality is increasing. Puchniak’s case study of Japanese banks lending trillions of yen to “zombie” firms at below market rates finds that, contrary to shrinking as the US savings and loan industry did after their period of “creative destruction,” bank influence increased. Banks replaced management and restructured underperforming companies. Primary reliance on banks for financing went from 28% of largest listed companies to 47%. Matsui’s chapter on closely-held companies or SMEs should find a wide audience in countries where family companies continue to play a large role. He highlights important reforms to company law and judicial decisions aimed at protecting minority shareowners, while maintaining flexibility. Monks and Minow No, they're not together for a new book (such as Corporate Governance Nell Minow will participate in an Oxford-style debate on Intelligence Squared, National Public Radio, on March 17. One motion, one moderator, three panelists for the motion and three against. Topic: Blame Washington More Than Wall Street For the Financial Crisis. Again, you can get it delivered or play it later. Sustainability Has Economic Value Too Invest in your employees at home and the working conditions in your supply chain; support the community that houses you; minimize your environmental impact. It turns out that banks with such sustainable values, those leading to a high “ethics quotient” by the Ethisphere Institute aren't the ones now seeking a bailout. “We had very poor scores for Wachovia, Merrill Lynch, Morgan Stanley, Citigroup,” said Alex Brigham, executive director of the institute. Also low on the list were Bank of New York, Wells Fargo, Countrywide and UBS. “Then all of a sudden when this meltdown came through, it was like this sinners list. These groups with all the low scores were asking for money.” (The Oxymoron of ‘Business Ethics’ Proves Its Worth, Miller-McCune, 3/3/09 and What Went Wrong Ethically in the Economic Collapse, Ethisphere) Pension Guide to Engagement Pension funds have a responsibility to act in the interests of members and are in a critically important position to influence the records of the firms they invest in, on issues such as fair employment, good governance and environmental sustainability: all of which can have an effect on returns. The UK's Trades Union Congress (TUC) has issued a new publication, Engaged Investment, as a handy guide for trustees. I've given it a look and found it also to be quite suitable for US pensions as well. Engagement includes a number of steps including meeting with company management, writing to companies, working with international best practice groups, and voting shares. Engagement can be direct: by pension funds themselves, their fund managers or other service providers. It can also be indirect, such as through collaborations by groups of investors with a focus on particular issues. It is a strategy that can be used by active or passive investors - indeed, engagement is the main means of influence available to those who follow a passive, indexed approach to investment. A 2008 NAPF survey found that a large proportion of the pension funds surveyed had brought about changes through engagement, with 79% seeing changes to company remuneration policy and 68% driving changes to social and environmental policies. A major UN study found that sound integration of social, environmental and governance issues does not compromise investment performance, and in many cases can improve it. Thanks to PIRC Alerts for informing me about the guide. Rights of Public Shareholders Lawrence E. Mitchell just published a very thoughtful paper, The Legitimate Rights of Public Shareholders. He argues that shareholders don't contribute capital to finance industrial production but are, instead, net consumers. Since their investment incentives "significantly distort the behavior of corporate managers," leading CEOs to value stock price at the expense of long-term business health, shareowner rights should be eliminated, instead of expanded or enhanced. The article reminds me a of Marjorie Kelly's The Divine Right of Capital, which argued that instead of maximizing the return to shareholders, corporations should maximize total return ...a concept I have been advocating at CorpGov.Net since 1995. Total return implies the long term efficient use of all resources, both natural and human. I agree with both Mitchell and Kelly that, generally, stockowners aren't providing capital to a company. We are buying shares from another stockowner, gambling the price will rise. We aren't really investing, in the traditional sense. We're buying the right to extract wealth in the future. I liked Kelly's argument that efficiency is best served when gains go to those who create wealth. That puts an emphasis on brain power and knowledge workers. Of course, the revelation that shareholders don't contribute much isn't new. Back in the 1960s Louis Kelso asserted that 99.5% of corporate capital came through internal earnings and debt. This insight led him to advocate employee stock ownership plans (ESOPs). Norm Kurland took up the cause with a call for a Capital Homestead Act. Kelly endorsed a similar idea and a renewed look at charters and other stakeholder reforms. Making every citizen a shareowner, especially in a broad-based basket of stocks, has appeal. Everyone would benefit from the wealth corporations develop. Yet, if ownership were universal, there would be little incentive for owners to externalize costs onto society. Mitchell is less imaginative in this paper. He's not sure if the problems can be solved by electing directors for five-year terms, letting creditors also vote, or by eliminating shareowner votes on all but except directors. This contribution is worthy, not in recommendations, which he says are beyond its scope, but rather in documenting a dramatic increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and, more generally, the shift from "achieving gains from production to using the corporate machinery to manipulate stock price." Yes, the shift from dividends to capital gains has distorted incentives in a way that "encourages managers to harm the long-term health of their corporations' businesses in order to satisfy current shareholder demands." Yes, many forces have moved investors to think of themselves as simple gamblers based on speculative future value, rather simply extracting dividends from actual earnings. Yes, interested parties pushed more churning because it meant more commissions and fees. However, I don't think it follows that we should now begin to rely more heavily on the market for corporate control, especially one where shareowners are given less power. As an article in the FT points out, in the US overall debt reached an all-time peak of just under 350% of GDP, 85% of it private, up from 160% in 1980. (Seeds of its own destruction, 3/9/09) Like global climate change, we need to develop more sustainable models, both for corporations and for a salubrious environment. Doing away with shareowner proposals under Rule 14a-8 won't make companies more responsible. Shareowners raising issues through such resolutions serve as a better proxy for the public than reinforced insulation of CEOs and boards. After all, if the market had listened to ICCR's warnings over many years and 120 resolutions on subprime lending and securitization, we probably wouldn't be in the current financial mess. The fact that only 5% of retail shareowners are now voting under e-proxy is a sign that proxy voting must be made more meaningful, not less meaningful. We should be looking at how to address short-termism and conflicts of interest that lead to gaming of numbers and the entire system. Perhaps long-term shareowners should have more voting rights. Maybe if more employees were shareowners we'd have a few employees on boards who are more likely to take a longer term perspective than day trading investors. Additional fiduciary duties on boards for the welfare of employees, the economy in general or for a salubrious environment might add a bit of stability and long-term thinking. Why not look at the increase in off-balance sheet debt, the rise of stock buybacks, the fall in dividends and retained earnings and other shifts to manipulate stock price and address them directly? Mitchell had a better idea in The Speculation Economy: How Finance Triumphed Over Industry. There, he proposed the terms of capital gains taxes be tied to industry. For the auto industry that might be a tax on 90% of gains if sold in the first month, tapering to tax-free after seven years. "Perhaps the right time period is two years in the software industry, or four years in computer hardware." At least that solution actually attempted to address fundamental problems. Disenfranchising shareowners does not. News Roundup I'm too busy following up on the Corporate Governance Roundup 2009 to post recent corpgov related news. However, I recommend checking out Stanford Law School's Securities Class Action Clearninghouse, the RR Donnelley Securities Newsletter with content provided by TheCorporateCounsel.net., the Harvard Law School Corporate Governance Forum, the IEHN liveblog of the FASB FAS 5 roundtable, and Thomson Reuters launches 'YouTube' for Wall Street. Directors Forum 2009 Directors Forum 2009 (January 25-27, 2009 in San Diego) was such a huge and important event, I couldn't fit my post on the normal news page. If you are interested in a few highlights of what directors, managers, investors, academics, and advisors learned, click here. Even if you attended the event, you'll want to read my post and its added hyperlinks to relevant material. Podcast on Delaware's Proposed Legislation Broc Romanek, of TheCorporateCounsel.net posted a podcast with John Grossbauer of Potter Anderson & Corroon on proposed amendments to the Delaware General Corporation Law that allow companies to provide for proxy access, reimbursement of stockholder proxy expenses, and provide separate record dates for determining stockholders entitled to notice of and to vote at stockholder meetings. See also Potter Anderson & Corroon's detailed written discussion, an alert from Schulte Roth & Zabel LLP, Pro-Shareholder Amendments to Delaware General Corporation Law Proposed, and warning from J. Robert Brown that the proposal will allow companies to override what is likely to be an upcoming federal right, since companies can exclude any proposal that violates state law. See Rule 14a-8(i)(1). Say on Pay Clearinghouse Cross Border has created a Say-on-pay 2009 Forum for governance professionals provided by Corporate Secretary with the support of the Shareholder Forum to serve as "the definitive source of information on say on pay legislation and proposals." The clearinghouse will include examples of everything from proxy language from already compliant companies to the opinion of leading shareholder groups. In order to provide the full spectrum of views, they are seeking comment from corporate directors, general counsel, corporate secretaries and other as well as investors who will be voting on resolutions, and those professionals who advise them. First Code of Conduct for Proxy Advisors The Millstein Center for Corporate Governance and Performance at the Yale School of Management has proposed a code of conduct and other improvements to proxy voting systems and services in Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. Practices highlighted in the code include a ban on a vote advisor performing consulting work for any company on which it provides voting recommendations or ratings. It also calls on the SEC to empanel an independent review to modernize the proxy voting system. Out of the Archives Ten years ago at corpgov.net, we reported that CalPERS, the Rose Foundation, the Steelworkers, New York State Common Retirement Fund, and the New York City Employees' Retirement System were backing two independent directors for the board of Maxxam Inc. I also reported on an outsized retirement package for the CEO of Caterpillar, the SEC looking at how to ban "pay to play" at public pension funds, and I was recommending Bob Tricker's "Pocket Director" book... still a great little read full of most frequently used terms. Five years ago, I reported that about 1/2 of foundation's were just blindly voting their proxies with management. Only 1 in 20 actually bothered to instruct money managers to follow their priorities. Disclosure of political contributions was emerging as a hot topic, with about over 40 resolutions submitted by a wide range of investors. The SEC was holding roundtables on proxy access and Nell Minow said, “The core issue for the next five years will be access to the proxy.” Assemblywoman Judy Chu proposed an access bill in California that didn't require triggers, nor did it impose a one year delay. Five years later, we're still struggling to get access but prospects look better. Back to the top
News from 2009: February, January, News from 2008: December, November, October, September, August, July, June, May, April, March, February, January There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are still current... going back to 1995. Thankfully, we have made progress on many issues and 2009 should yield a victory for proxy access. Equal access? The SEC's recent rulemakings, S7-17-07 Shareholder Proposals Relating to the Election of Directors (comments) and S7-16-07 Shareholder Proposals (comments) offered conflicting solutions to what was a nonexistant problem after the decision in AFSCME vs AIG. Unfortunately, they opted for no access and choice-free elections. The SEC's prior rulemaking, S7-19-03 (comments, Editor's: 1, 2 & 3) would have been a weak first step. Compare the petition Les Greenberg and I filed to allow shareholder proposals to elect directors: Petition File 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?, Inside Track interview, ad. Evolution at Solicitation of Public Views Regarding Possible Changes to the Proxy Rules a nd Shareholder Access to the Proxy. Hold on until 2009. We'll be back! Back to the top
Contact: James McRitchie, Editor (916) 869-2402. All material on the Corporate Governance site is copyright © since 1995 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.
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