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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 at this premiere event, click here. Even if you attended the event, you'll want to read my post and its added hyperlinks to other relevant material.

January 2009

California Public Pensions Under Attack... Again

The California Secretary of State's office recently released notice of a new initiative entering circulation, The McCauley Public Employee Pension Reform Act would allow the renegotiation of public employee pension contracts, including those already vested.

As David M. Greenwald points out in New Initiative Retroactively Threatens Public Employee Pensions (California Progress Report), "Under this scenario, faced with possible cuts for existing workers, negotiators could instead negotiate a contract that protects their current members but completely erases the retirement benefits for those people over the age of 75."

Such a change would not only invalidate past contracts, it would make future contracts meaningless. The value of any negotiated benefits would fall dramatically, since their value could be changed at any time. Employees covered by CalPERS have been putting in about half of the contributions that sustain the system. The other half comes from employers. With no guarantee employees would even get their own contributions back, it is likely they would opt out and our current pension systems would be destroyed.

As one commentator noted, "Mr McCauley's dark vision, for California's retirees, is clear. In the movie, Soylent Green, the disillusioned elderly, could check into suicide centers called "Home" and self administer a poison to, slowly, die and become one less statistic in an overburdened, surplus population. From there, they were processed into a foodstuff known as Soylent Green for consumption by the existing population." (Paul McCauley and Elder Abuse)

Who's behind the current attack? Paul McCauley, CPA of Santa Monica is the petitioner. I don't know who is behind him but plenty of people would benefit from the demise of California public pensions. Past attacks have come from Keith Richman, the U.S. Chamber of Commerce, the California Republican Party, Governor Arnold Schwarzenegger, and the Howard Jarvis Taxpayers Association, among others.

It costs 0.37% to administer the CalPERS defined benefit (DB) plan, but will probably cost more than 1.5% per year as a defined contribution (DC) plan, with no death/disability benefits or inflation protection. If California funds have assets of approximately $500 billion (CalPERS and CalSTRS alone have $300 billion), the yield to money managers will be an extra $5.65 billion every year while earning $10.2 billion less for public employee retirements every year.

Additionally, pension funds are the primary check on the power and greed of corporate CEOs. CalPERS has been a leader in the effort to bring accountability to corporate boardrooms.

I find it interesting that all of the CEOs in the S&P ExecuComp database have defined benefit plans. Of course, qualified pension plans (exempt from taxation) are limited to about $200,000 a year and the average S&P 500 CEO earns much much more. Supplemental executive retirement plans, known as SERPs, are an inefficient way to compensate CEOs but they come with one great benefit - camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm's SEC filings.” (Lucian Bebchuk and Jesse Fried, Pay Without Performance) While CEOs want to keep their owned defined benefit plans, they want to outlaw them for public employees.

For additional information, see Myths and Facts about Privatizing Public Employee Retirement in California and Making Corporate Governance Decisions That Work for Whom? presented by James McRitchie at the 6th International Conference on Corporate Governance 2005.

Shameful

Referencing the NYTimes article, Obama Calls Wall Street Bonuses ‘Shameful,’ Walden Asset Management's Timothy Smith emailed the following comment to associates:

As this story demonstrates so well the debate about executive pay has moved up several notches. Clearly it is an issue that concerns average citizens all the way to the President and Treasury Secretary. And the business community (not just financial firms) is under scrutiny as never before.

Many investors believe that establishing an Advisory Vote is one reasonable option providing a check and balance to executive pay. Increasingly, business leaders recognize that "Say on Pay" is a moderate approach compared to the more draconian curbs on pay that are being discussed in Congress.

Yet these same companies, in the main, resist adopting the Advisory Vote as a policy even thought they will increasingly be characterized as resisting urgently needed reforms to address exec comp. One would think that enlightened self interest would dictate that companies would rush to adopt this change in governance to show they understand the need for changes in executive pay thus protecting their public image.

A new chapter in the debate has opened!

I must admit, it is nice finally having a President who appears to side with the people. Read what others are saying at Bonuses for Bad Performance.

Notice and Access

After the steep drop-off in retail voting at companies that chose to deliver proxy materials over the internet, Broadridge Financial Solutions and other key players went back to the drawing board to see how they could better communicate the shift to e-proxy. The new template increases the font size and clarifies the wording.

"A goal was to make the envelope more appealing, so that greater numbers of shareowners look inside," sums up Chuck Callan, senior vice president for regulatory affairs at Broadridge. "To this end, the messaging on the outside of the envelope highlights the importance of voting. It also calls out the positive environmental benefits associated with the notice." (Broadridge-led team simplifies e-proxy notice, IR Magazine, 1/27/09)

Broadridge will soon introduce a shareholder education program linked to proxy voting pages at ProxyVote.com to further explain the shift to e-proxy and has promised to let me know when it is up. When it is, I'll let readers know. They also appear to be working on something like the system developed by Andy Eggers at nonprofit ProxyDemocracy.org to announce votes of institutional investors in advance. The more that can be done to encourage institutional investors to announce in advance, the better.

As Broadridge has announced, as of the end of June 2008, only 5.5% of retail shareowners were voting under eproxy. Yes, companies saved $143 million but we need to find better methods of getting out the vote. Imagine if only 5.5% of eligible citizens voted in last November's election. Maybe when we have a say on pay, proxy access, an end to broker voting, split chair/CEO functions, and majority vote requirements for the election of all directors annually, shareowners will feel empowered to vote. Right now, the process still looks too much like the old Soviet Union, with one slate of candidates.

Stepping up enforcement efforts at the SEC is also an important element in restoring investment confidence but they will never have enough employees to do the job. Investors need empowered so that voting has meaning as a mechanism to hold directors and management accountable.

Office for Innovation in CSR

More than 50 US and overseas leaders in the fields of corporate governance, socially responsible investing, international relief, development, human rights, environmental stewardship and faith based investing, are calling on the Obama Administration “to create an Office for Innovation in Corporate Social Responsibility (CSR) to enhance and coordinate CSR activities across the government, at home and abroad, and to pursue policies and initiatives to strengthen the CSR commitments of the private sector.”

Major signers of the letter include Oxfam America, Ceres, ICCR (Interfaith Center on Corporate Responsibility), Green America, and mutual fund companies PAX, Domini and Calvert Group. Non-U.S. signers included the European Sustainable Investment Forum (Eurosif) and the Canadian Social Investment Organization. Corpgov.net publisher, James McRitchie, was among many others who signed the letter.

The joint letter notes: “A dynamic Office for Innovation in CSR will help ensure that the federal government not only leads and assists the business sector to integrate best practices in governance, transparency and management of environmental and social issues, but also that it incorporates this focus on sustainability throughout its own agencies. We suggest this office be based in the Domestic Policy Council and work closely with the National Economic Council and the National Security Council to ensure appropriate interagency coordination… The need for such a role was spelled out in a 2005 Government Accountability Office report that found that 12 U.S. agencies, with over 500 federal programs, policies and activities that "range from the least government involvement—endorsing companies’ voluntary efforts above and beyond compliance with laws and regulations—to the most government involvement through mandating behavior consistent with CSR."

The Office for Innovation in CSR was one of several recommendations made by the Social Investment Forum made on January 15, 2008 (http://www.socialinvest.org/documents/ObamaAdministrationFINAL1.14.pdf.) in urging President-elect Obama to move swiftly on several fronts to restore shareholder rights and to advance corporate responsibility in relation to CEO pay, global warming, the current financial crisis and other matters.

Measurement Changes Recommended

United for a Fair Economy is recommending the US Census Bureau change its measurement of poverty in time for the 2010 census. The current method underestimates the numbers of the most marginalized. These gaps give policymakers an inaccurate view of the scope of the problems of poverty. The National Bureau of Economic Research (NBER) should integrate into its indicators of recession measures for wealth inequality, asset accumulation, income inequality, employer-based benefits versus employee-based benefits, and the various types of unemployment.

Our nation’s economic policies have enabled the top 10% to accumulate 68% of the wealth, while sheltering the wealthy from sharing the nation’s risks. State of the Dream 2009: The Silent Depression explains the mechanisms that helped create the racialized economic depression, explores how this crisis affects individuals and communities of color, and proposes comprehensive policy solutions to this crisis.

"Say on Pay" Momentum

Last year, before the economy tanked, it wasn't clear if shareowner resolutions to provide an advisory vote would gain momentum like the majority vote movement did. Proposals got a very respectable 40%, about the same as the year before. Now, the gathering momentum is clear. The question appears to be, will companies go willingly or kicking and screaming?

Lynn Turner, director of research at Glass, Lewis, recently congratulated Intel management and its board for their decision to allow say on pay issued a statement, which included the following:

As a former senior business executive who had to grapple with compensation issues, and a trustee of two investment funds, I believe this decision by people at Intel is the correct one. I think this reflects well on the management and boards at these businesses. I have always believed it is best when business leaders step up to the plate and take actions such as HP, Occidental, Intel, Aflac, Verizon and others have, before government regulation is made necessary. However, when business leadership fails to adequately address a serious problem, as executive compensation and performance have without question become, then regulation is made necessary. It is now time to see if the management of other businesses follow the leadership that has been established, or if legislation and regulation will be necessary. The time for that determination is upon us.

In other words, maybe if say on pay gets widely adopted like the new requirement to elect directors by majority vote, we won't need legislation to set in stone provisions that might better be left flexible. That may be preferable, but unlikely. Both President Obama and new SEC head Mary Schapiro support say on pay as a legal requirement. As reported by SocialFunds.com, Ingersoll-Rand has also agreed to a shareholder advisory vote relating to executive compensation in 2009. There is a shift in the winds with more than 100 resolutions going forward this year and 16 US companies now signed on to allow a vote, according to the RiskMetrics Group.

Even more important going forward may be additional proposals around pay, such as that introduced by AFSCME that seek to require departing executives to retain their equity holdings for at least two years after leaving the firm. CEOs like Angelo Mozilo of Countrywide walked away with more than $100 million, yet later faced SEC investigation. (Intel Agrees to Shareowner Vote on Executive Compensation, 1/29/09)

What amazes me is the continued rear guard activity of groups like the Chamber. "We don't think shareholders should make those decisions," said Bruce Josten, executive vice president for government affairs for the U.S. Chamber of Commerce. "If you look at the people who are filing most of those proxies, it's a group of unions who have run corporate campaigns against the very same companies (and) who in our view have a more political agenda than concern about the bottom line of the company." (Corporate excesses could give shareholders say in execs' pay, McClatchy, 1/28/09) Don't they know to quit before they lose any scrap of credibility?

Who do they think the public is going to listen to, union bashing from the Chamber or the cries of excess from Maureen Dowd concerning Thain's office renovations and calls for their heads? "Big-ticket items included curtains for $28,000, a pair of chairs for $87,000, fabric for a 'Roman Shade' for $11,000, Regency chairs for $24,000, six wall sconces for $2,700, a $13,000 chandelier in the private dining room and six dining chairs for $37,000, a 'custom coffee table' for $16,000, an antique commode 'on legs' for $35,000, and a $1,400 'parchment waste can.'" "Now that we’re nationalizing, couldn’t we fire any obtuse bankers and auto executives who cling to perks and bonuses even as the economy is following John Thain down his antique commode?" (Wall Street’s Socialist Jet-Setters, NYTimes, 1/27/09)

The message doesn't seem to be getting through to many execs and boards. "Despite crippling losses, multibillion-dollar bailouts and the passing of some of the most prominent names in the business, employees at financial companies in New York, the now-diminished world capital of capital, collected an estimated $18.4 billion in bonuses for the year." "Outside the financial industry, many corporate executives received fatter bonuses in 2008, even as the economy lost 2.6 million jobs. According to data from Equilar, a compensation research firm, the average performance-based bonuses for top executives, other than the chief executive, at 132 companies with revenues of more than $1 billion increased by 14 percent, to $265,594, in the 2008 fiscal year." (What Red Ink? Wall Street Paid Hefty Bonuses, NYTimes, 1/28/09)

Investors and the public are outraged. I'm not sure how many heads will roll but there is certainly a widespread mood in favor of increased transparency, shareowner power, accountability and putting wrong-doers in jail. With new Treasury Secretary Timothy Geithner at his side, President Obama is widely reported saying said the payouts were "the height of irresponsibility. It is shameful."

Regarding executive pay, what we should be doing for the longer term is letting research guide practice. For example, Stephen F. O’Byrne and S. David Young conclude that "a better analysis of executive pay starts with the premise that executives, like investors, are motivated by expected changes in wealth, not by changes in annual pay." They find that percent of pay at risk is not a good measure of incentive strength; a fixed competitive position target is not a sensible retention objective, since it "creates a strong incentive for value-destroying growth that threatens to neutralize the incentive provided by management’s stock and option holdings; and "a competitive position target is not a complete measure of shareholder cost. The conventional approach measures the cost, but not the benefit, of incentive compensation." (What Investors Need to Know about Executive Pay, 1/19/09)

Another paper by this team finds that "on average, a 10% excess shareholder return is associated with a relative pay premium of 5%. However, we find very little pay for performance when we look at the sensitivity of current pay to prior year performance. On average, a 10% excess shareholder return in the prior year is associated with a current year relative pay premium of 0.2%... The fact that current year pay has almost no sensitivity to prior year performance is a sign that directors have no memory and don't use their their discretion to tie cumulative pay to cumulative performance... Measures need to take account of the delayed productivity of capital so they don’t discourage good growth and the incentive plan design needs a formula to provide relief for negative industry conditions beyond management’s control. If we want sustainable growth, pay needs to be based over multiple years." (Capital Efficiency Measures: Why They’re Under-utilized in Incentive Plans and How They Can Be Improved)

See also "Why Executive Compensation is Failing (Harvard Business Review, 6/2006), where the authors discuss the fact that "the present value of future compensation, which constitutes 75% of executive, shows very little sensitivity to company value." Directors and shareowners need to develop mechanisms that prevent CEOs from cashing out share-based pay and reducing their sensitivity to wealth creation at the firm.

The public may become an irrational mob, when it comes to executive pay. Shareowners, on the other hand, are more likely to be persuaded by pay practices tied to the best research available.

Things to Come

Barbara Black, Securities Law Prof Blog, gleaned through some of Mary Schapiro's testimony about her vision for the SEC. Aside from the statements below, I understand she also favors eliminating the current broker votes that currently get voted in favor of management when retail shareowners fail to vote:

• Access to the proxy has been debated for many years, and I believe it is time for a thoughtful approach to proxy access for significant, long term shareholders.
• Like you and millions of Americans, executive compensation has been a concern of mine for some time now, and I believe that it’s an appropriate measure to give shareholders an advisory vote on these matters.

We didn't get proxy access the last two times because the Business Roundtable, "an association of chief executive officers of leading U.S. companies with $4.5 trillion in annual revenues," was able to convince the Bush Administration's SEC that directors would be hijacked by special interest groups such as unions, leading to lower profits and job losses.

Jeff Mahoney, general counsel for the Council of Institutional Investors, says it is absurd to worry that the owners of a company might grab control of it. You can't hijack something you already own. As David Reilly, of Bloomberg News notes, "The sad part is that companies were hijacked long ago by the ultimate special-interest group — management. It will take time for investors to counter the complete control wielded by once- imperial CEOs and their minions. The government now needs to give them the tools to do so." (Investors need more control over corporations, 1/25/09)

Too little discussed, is the need to include a provision that allows groups of individual investors to also take such action. At many small companies, with bad corporate governance practices, there are no major blocks owned by institutional investors. The UK addresses this by allowing any group of 100 shareowners to have proxy access. The SEC should do the same.

Carl Ichan says, "Congress needs to pass legislation giving shareholders enhanced rights to elect new boards, submit resolutions for stockholder votes, and have far more input on executive compensation and other issues." If they don't want to get that specific, they could "give shareholders the right to vote to move a company's legal jurisdiction to a more shareholder-friendly state such as North Dakota." (The Economy Needs Corporate Governance Reform, WSJ, 1/23/09)

John Richardson, of JMR Portfolio Intelligence and Global Investment Watch, urges the Obama Administration to rescind or clarify the Department of Labor’s Interpretative Bulletin Relating to the Exercise of Shareholder Rights, which included the following: "Plan fiduciaries risk violating the exclusive purpose rule [of ERISA] when they exercise their fiduciary authority in an attempt to further legislative, regulatory or public policy issues through the proxy process." (Can We Vote Yet?)

In a speech at the Investment Company Institute’s Board of Governor’s Winter Meeting, SEC Commissioner Luis A. Aguilar, proposes that SEC staff undertake a study of the growth of institutional ownership -- the consequences for regulation and the capital markets, specifically the decline of stock ownership by individual investors. "Should our rules take into account whether they may create incentives for retail investors to invest through institutions rather than directly?" He also calls for "formation of a federal advisory committee to make recommendations for improving retail investor participation in Commission business and for improving the usefulness to retail investors of Commission rules."

Anne Simpson to Head CorpGov at CalPERS

The appointment of Anne Simpson as Senior Portfolio Manager for Corporate Governance, rounds out what I believe is an excellent new team at CalPERS. Simpson served most recently as the Executive Director of the International Corporate Governance Network ICGN), which represents investors responsible for $15 trillion in global assets.

From the CalPERS press release: "In Anne Simpson, we are getting one of the world’s most influential investor activists,” said George Diehr, Chair of the CalPERS Investment Committee. “She is widely recognized in the global corporate governance community, which knows her for her many appearances before political, policy and regulatory bodies.”

As first Executive Director of ICGN, Simpson doubled its size and stepped up its role in policy advocacy and best practice development before such forums as the International Accounting Standards Board, the U.S. Securities and Exchange Commission, the U.S. Senate Banking Committee, the United Kingdom’s Financial Services Authority and the Chinese Securities Regulatory Commission.

I'm at the Corporate Directors Forum 2009 in San Diego so have no time to post at this point but refer readers to a 10 year old review of a book by Jonathan Charkham and Anne Simpson. She was cutting edge then and continues to be so. CalPERS is shaping up with a new crop of top leaders, Simpson is high among them.

Embattled CEOs

Marcel Kahan posted a recent paper, co-authored with Edward Rock, on the Harvard Law School Corporate Governance Blog with the above title. It is an excellent overview of how the center of power in US corporate governance is shifting. Interestingly, Kahn's post on the Blog appears to go a little further in its conclusion than the jointly written paper. In the paper, the authors conclude:

We cannot claim, and do not know, whether the balance has shifted too far, whether under current conditions the CEO is not powerful enough. On the other hand, those arguing to strip the CEO of even more power also cannot show that the CEO of today is too powerful.

In other words, they claim to be agnostic. However, on the Blog, Kahn concludes:

We believe the change in this change in the governance regime represent(s) a convergence of the U.S. to other Anglo-American countries (in which CEOs have long held a weaker role) and that it calls into question the case for legal change that further increases shareholders’ voting right.

The very subtle difference leans toward the status quo and going no further with shareowner empowerment, for example by granting proxy access. I might have suspected that turn from the beginning of the paper with, "The intuition that drives this paper is nicely captured in Milo Winter’s famous 1912 illustration of Gulliver tied down by the Lilliputians." Gulliver is clearly the CEO. I'm not sure if the Lilliputians are directors, shareowners or something more abstract. I see the CEO more as first among equals, not larger than life. The recent reduction in power makes CEOs less like dictators and more like prime ministers.

One factor left out of the influences resulting in the shift of power were the SEC's rulemakings that require mutual funds and investment advisers to disclose their proxy voting policies and votes. Having to disclose how their votes meet their fiduciary obligation to investors may actually be more important than the more widely discussed development of eliminating broker votes, especially given the rise of funds and decline of retail investors, which the authors document so well.

I have a couple of other minor quibbles. Kahan and Rock note that "even though the formal powers of the board have not changed, boards have become much more receptive to shareholders... This obviously reduces the need for removing board veto power over governance changes..." While it may reduce the need to shift more power to shareowners, it doesn't demonstrate the need has been fully met, as the authors seem to hint.

Another train of thought that seems to stretch in its conclusion is their argument that "CEOs who have lost power may find the possibility of great wealth offered by private equity relatively more attractive." Yet, not more than a paragraph before they state that the CEO who goes to work for a private equity firm "now has a boss – the management of the private equity firm – which has the ability and the incentives to monitor him and to fire him if they are dissatisfied. Whatever financial rewards the CEO may obtain in his new position, one thing is clear: the power of a CEO of a company owned by a private equity fund is much less than the power of a CEO of a comparable company that is publicly traded."

Obviously, CEOs lose more power by switching. Additionally, it is not clear that in the long-run they make more money under a private equity structure. How much does Warren Buffet pay his managers? Contrary to the hints, they provide no support for the notion that CEO pay and power has been reduced to the point that recruitment will be much more difficult.

They appear give one last plug for maintaining the status quo balance of power, "One of the great virtues of the corporate form is centralized management." Yet, this shift in power, even if it increases, does not decentralized management -- although I'm not sure that would be bad. The real questions to be argued are those concerned around the pluses and minuses of more democratic forms of organizing our investments and our work. Which forms are more likely to lead to increased productivity and a more salubrious environment? The answers will be found in more democratic forms.

Satyam Fraud Can Raise Bar on Corporate Governance -- A guest commentary from the World Council for Corporate Governance

“Satyam fraud is symptomatic of the Economy of shock and surprise that we live in. These frauds have been integral part of corporate history.  The disclosures show that our radars have become stronger and society’s tolerance of corporate misdemeanours has reached its limits. Meltdown is a punishment inflicted by investors on greedy hedge fund managers and private equity manipulators. The heads of five top investment banks who were active participants in the Wall Street Ponzi scheme called credit default swaps lost $2.2 billion of their personal wealth in 2008. The world would never have known about the fraud had a few shareholder activists not been persistent in opposing the unanimously approved resolution of 16 December 2008 acquiring the property company owned by the son of the promoter at an extortionate price.”

This was stated by Dr Madhav Mehra, the President of the World Council for Corporate Governance, UK at the 19th World Congress on Leadership in the Economy of Surprise, Wrenching Change and Contradiction concluded yesterday in Mumbai.

Dr Mehra added, “Satyam gives India opportunity to lead the world by better enforcement of Clause 49 through proper selection, training, evaluation and monitoring of directors. The main problem of the Indian boards is their sameness. Same directors find seats on all the boards. That encourages cosy relationship. We need to encourage dissent, diversity, difference, dialogue and disclosure. To make it happen we don’t need more laws but more training both of directors and investors."

Dr Mehra lamented "the institution of independent directors is a myth world over for two reasons: they depend on CEO for their remuneration. The dependence has only increased with phenomenal rise in their remunerations. It is difficult for people to understand something when their salary depends on not not understanding it. Secondly as per a survey conducted by the WCFCG, the average time spent by independent directors in board meetings in a year is 14 hours. Better training will ensure that independents engage themselves in committee work such as audit committee, risk management committee, nomination committee and remuneration committee." 

"Good news is that Satyam fraud has raised the bar on corporate governance. For the first time corporate governance has become a household world. Markets have punished companies with poor corporate governance. The fraud exposes involvement of big names such as PriceWaterhouseCoopers. This shows inadequacy of even draconian legislations like Sarbanes Oxley Act to curb frauds. The fraud also exposed stock market's worst disease - the insider trading. Respectable financial institutions profited by offloading Satyam shares just before Raju’s confessions. Satyam has done more to raise the corporate consciousness than Sarbanes Oxley Act.  

Insider trading is a worldwide phenomenon and has been reported by many regulators with little enforcement. Linda Chapman Thompsen, Enforcement Director of Securities and Exchange Commission of US, warned last year that insider trading in Wall Street had become worse than during Ivan Boesky's time. “The tippers and tippees have been in senior positions of trust and confidence." Warnings made little difference because western governments themselves play hostage to the big financiers and are scared of regulating them lest they move their assets to lightly regulated territories. Wall Street has seen worst destruction of shareholder values since the depression of 1929.

India's intense reaction to Satyam crisis may be a defining moment to curb this corporate greed,” added Dr Mehra. Earlier Mr Ola Ullsten former prime minister of Sweden and chairman of the World Council for Corporate Governance, in his opening remarks stated “Our industrial growth has been a zero sum game. We have destroyed much more than we have added. It is time we made a 180 degree shift in our growth model and use the market meltdown as an opportunity for clean and green initiatives.  Renewable energy offers huge opportunity for generating employment, boosting the capital market and regenerating the planet.”

Publisher's note of related interest: GMI’s March 2008 release, Satyam had a global Financial Disclosure and Internal Controls rating of 6.0, whereas its main rivals, Infosys and Wipro, had financial disclosure ratings of 9.0 and 8.0, respectively. While Satyam reported that its audit committee did not contain a single financial expert, Wipro’s audit committee included a banking expert, and Infosys’s audit committee included the former CEO of accounting giant KPMG’s Indian operations. Of these three companies, Satyam also had the lowest level of board independence. While Wipro’s board included only one non-independent director, Satyam’s included the company’s founder, his brother, a company executive, and a non-independent director who also worked as a consultant to the company.

On December 16, 2008 when Satyam’s founder and chairman, B. Ramalinga Raju proposed that the company purchase two unrelated firms that were partially owned by his family, Satyam’s board did not hesitate to approve the deal. Shareholders revolted, and the in the aftermath of the revolt, Mr. Raju admitted that he had been hiding a billion dollar fraud in the company’s books. Under the spotlight of investor and investigator inquiries, Mr. Raju disclosed that billions of rupees worth of reported cash stockpiles and interest earnings were entirely fictitious. In his confession, Mr. Raju explained covering up the fraud had been like “riding a tiger, not knowing how to get off without being eaten.” Satyam, whose name means “truth” in ancient Sanskrit, saw its share prices fall by saw its share prices fall by 88% between December 16, 2008 and January 21, 2009. Indian authorities have arrested Mr. Raju, along with his brother and the company’s CFO.

Satyam’s collapse should serve as a reminder that 21st century IT firms need solid frameworks of
internal controls and corporate governance. Since these firms often have few tangible assets to
fall back on, investors have heightened incentive to double-check for solid accounting procedures, transparency and accountability. (From GMI’s informative newsletter, In Focus)

Massive Push for "Say on Pay"

A diverse network of institutional and individual investors announced filing of shareholder resolutions at over 100 U.S. corporations as part of 2009 proxy season efforts to press companies to give shareowners an annual advisory vote on executive compensation packages.

This unique investor network started in 2007 - comprised of public pension funds, labor funds, asset managers, individual investors, foundations and religious investors, who are members of the Interfaith Center on Corporate Responsibility (ICCR) - is organized by the AFSCME Employees Pension Plan and Walden Asset Management.

The investor proponents are seeking a management sponsored non-binding advisory vote on executive compensation presented in the annual proxy statement. The resolution was submitted at a wide range of companies, including but not limited to those where pay has been excessive or where there has been a perceived misalignment between pay and performance over the past three to five years.

“The greed that sent our economy off the cliff has got to stop,” said AFSCME President Gerald W. McEntee, whose 1.6 million members participate in public pension funds with combined assets worth more than $1 trillion.  “Too many CEOs are being rewarded for taking risks that result in massive losses.  That’s why shareowners must have a say on executive pay packages.”  

“We’re pleased that a number of companies in the United States already have responded and their Boards have agreed to institute an Advisory Vote on executive pay in 2009.  We expect more companies to step forward this winter and declare their support such as Hewlett-Packard did last week,” said Timothy Smith, Senior Vice President at Walden Asset Management.  “Having an advisory vote establishes a solid foundation for a useful dialogue with shareowners. In the year 2009 we will ‘call the question’ on the Advisory Vote as approximately 100 companies face resolutions requesting the adoption of this policy.” 

“The issue of executive compensation is regularly on the front pages of newspapers during our severe financial and economic crisis.  Citizens and investors alike are focused on the executive compensation issue as never before, creating a groundswell for accountability and reform. While there are many specific issues under the executive compensation umbrella, from clawbacks to the time required before executives could cash in options, the Advisory Vote captures the essence of accountability to investors on executive compensation” Smith stated.

The 2009 set of resolutions follows an active 2008 engagement season, where resolutions asking for an Advisory Vote went to a vote at over 80 companies and averaging 42% votes, including 11 companies which received majority votes.

In 2007 a similar resolution was filed at more than 50 companies which also averaged approximately 42% support including eight companies where the proposal received over 50% of the vote.

“This proposal has generated unprecedented shareholder support. Shareholders expect compensation committees to establish appropriate measures that tie executive pay to company performance,” said Connecticut Treasurer Denise L. Nappier. “Say on Pay is a way for shareholders to signal to the board whether the company has given appropriate incentives to executives by linking pay with performance which in turn indicates how effective the board is in representing shareholder interests.  It is an essential tool in fostering open and direct communications between shareholders and the board on executive compensation, and it paves the way for dialogue on other important governance issues” Nappier stated. 

2009 filings at major companies include Apple, Bank of New York Mellon, American Express, Coca-Cola, AIG, Capital One, Hewlett-Packard, Intel, Wells Fargo, AT&T, Exxon Mobil, Raytheon, General Electric, Goldman Sachs, Home Depot, IBM, Merck, UnitedHealth, Time Warner, Citigroup, ConocoPhillips, CVS Caremark, Morgan Stanley, Valero Energy, YUM! Brands, Occidental Petroleum, Wal-Mart, Rite-Aid, KB Homes, Ryland Group and Charming Shoppes.

Proponents of the resolution range from TIAA-CREF to individual investors, such as John Chevedden and William Steiner.  Voting support for the resolution is uniformly strong whether the proponent is an individual with $10,000 worth of stock or $10 million.  Resolution language, filers and list of companies where filings were made. Congress is also expected to address this issue and vote once again in favor of instituting an Advisory Vote.  A bill to require an advisory vote was already passed in the House of Representatives, and if the Senate votes and passes the bill, it would become a legal requirement.

In 2009 companies that will implement the advisory vote include Verizon, Aflac, Blockbuster, Motorola, MBIA and Ingersoll Rand among others.  Other companies have informed proponents that they are putting a management-sponsored Advisory Vote on their proxy in 2009 and 2010. HP announced their Board had adopted an Advisory Vote policy and was supporting legislation to require all companies provide for an annual Advisory Vote. This announcement came after discussions with proponents F&C, Walden Asset Management, and individual investor William Steiner who had filed a “ Say on Pay” resolution and as a result the resolution was withdrawn and the company commended for its leadership.

Big TARP Banks Ask SEC to Block Bylaw on US Economic Security -- A guest commentary by Sanford Lewis

"And those of us who manage the public's dollars will be held to account, to spend wisely, reform bad habits, and do our business in the light of day, because only then can we restore the vital trust between a people and their government... [t]his crisis has reminded us that without a watchful eye, the market can spin out of control. " - President Barack Obama, Inaugural Address

The new era of accountability and responsibility heralded by the inauguration of our new leader flags outstanding questions about the ongoing bank bailouts. An enormous amount of taxpayer money is currently being managed by private companies. The two companies that received the most money from the Troubled Assets Relief Program (TARP) are Bank of America and Citigroup. Together they have received nearly $100 billion in taxpayer assistance. With so few strings attached by the outgoing Bush administration, the responsibility for holding those who are managing these public funds accountable seems to have fallen by default upon the board of directors of those companies or their shareholders.

One effort to bring some accountability has been initiated by shareholder John Harrington of Harrington Investments. He has filed shareholder resolutions at both companies that would amend the corporate bylaws to establish a board level committee on US economic security. The role of such a committee would be to identify whether the company's policies adequately support US economic interests, especially in light of the receipt of these billions of dollars in taxpayer funds.

Having received the funds with so few strings attached, the companies apparently do not want to start accounting for the return on American taxpayers' investment now. So the companies have filed massive No Action letter request with the Securities and Exchange Commission, asking the SEC to allow these companies to exclude the bylaw amendments from their 2009 proxy statements. (Company requests: Citigroup letter; Bank of America letter) As counsel to Harrington Investments I filed rebuttals to these letters on Monday of this week. (Proponent replies: Citigroup letter; Bank of America letter)

The companies make some remarkable assertions in their attempt to block these bylaw amendments from appearing on the corporate proxy. For instance, Bank of America, attempting to cast the resolution as "ordinary business" asserts audaciously that "a review of the corporation's policies to determine their impact in the US Economic Security do not raise any significant policy issues to be contemplated by 14a-8(7)." While shareholders normally have the capacity to raise major policy issues with the Board of Directors through the shareholder resolution process, the company is essentially asserting that it is none of the shareholders' business or interest whether the company's expenditures of the TARP funds benefit the US economy. This is a remarkable assertion, given the impact of the company's decision-making regarding the well-being of the US economy, whether it be the extent of mortgage foreclosures in the US, the impact on wages of US workers and other questions of investment in the US economy.

Both companies also assert in essence that Delaware law prohibits shareholders from amending the bylaws of the corporation to create a committee on a specific topic, because to do so would limiting the discretion of the Board of Directors to decide whether or not that is an appropriate topic for the board to address. This is an amazing and unprecedented suggestion for a limitation on the shareholders' franchise. Neither company could cite any legal precedents that would bind the courts to find in favor of the companies on this point. As we argued in our letter, this is clearly an unsettled question of Delaware law, and as such, the companies have not met the burden of proof that would be needed for exclusion of the resolutions from the proxy statements.

Bank of America attempts to take the plain language of the resolution and imposes an aura of vagueness as another grounds for excluding the bylaw amendment. This stuff almost looks like it was written with tongue planted firmly in cheek but somehow it winds up in their opposition letter:

• The Proposal does not define "economy of the US." Does economy refer to an economic measure, such a gross domestic product or inflation? Should the Corporation be analyzing the Proposal in terms of macro or micro-economic indicators? Should regional or global economies be factored into the analysis? Do the stock markets or the Corporation's stock price factor into the economic analysis? Should the Corporation's policies impact" the long term health of the economy of Corporation focus on the trade deficit or measures that may balance the federal budget? The proposal leaves numerous unanswered questions for the proposed Board Committee, the Corporation and its stockholders.
• The Proposal's definition of "US Economic Security" also requires the proposed Board Committee to consider the "economic well-being of US citizens, as reflected in indicators such as levels of employment, wages, consumer installment debt and home ownership." While the proposed Board Committee can review these macro-economic items, it is unclear what the actions they are expected to take to shape corporate policy to support these economic indicators.

The question of the "vague and indefinite" exclusion is whether the shareholders would have enough of an idea about what they are voting on to make an informed choice to vote for or against the resolution. The resolution is quite clear that shareholders would know that they would be creating a committee on US economic security to examine policy issues relative to the impact of the company on the US economy; that the chairman of the board would appoint the members; and that the committee would have a fair amount of flexibility in defining the scope of its activities, but would also have some guidance in terms of the set of suggested issues to consider the possible inclusion. We argue that this is ample guidance for shareholders to know whether they want to vote in favor of the bylaw or not.

Here's hoping that the Securities and Exchange Commission staff, under its new leadership, recognizes the importance of this new day in America, and will support the shareholders' role in bringing accountability to US Economic Security for those in the private sector who are now "managing public funds." (see Sanford Lewis' Corporate Disclosure Alert for this and other informative posts)

Publisher's note of related interest: Merrill Lynch took the unusual step of accelerating bonus payments by a month last year, doling out billions of dollars to employees just three days before the closing of its sale to Bank of America. (Merrill paid bonuses as losses mounted ahead of sale to BofA, FT.com, 1/22/09; Thain shown the door at BofA, Investment News, 1/22/09)

A shareowner proposal submitted by the International Brotherhood of Teamsters sought to limit executive compensation at SunTrust (and at about 25 other financial firms that are TARP recipients as well) more strictly by requiring that SunTrust enact a minimum five-year vesting period on all options, a prohibition on vesting acceleration, and a requirement that all executives hold at least 75% of all shares gained as compensation for the duration of their careers. The Corporation Finance Division of the SEC concurred with SunTrust's argument that the proposal was excludable, issuing the opinion that while the intent of the proposal is that the executive compensation reforms urged in it remain in effect so long as the company participates in TARP, the proposal appears to impose no limitation on the duration of the specified reforms and is therefore "vague and indefinite." (Teamsters Proposal to Limit SunTrust Executive Pay excluded by SEC, SocialFunds.com, 1/22/09)

DB vs. DC

The Appointment of Dear at CalPERS (see below) got me thinking again about the likelihood of renewed attacks on defined benefit public pension funds. Although the demand to convert to defined contribution plans is generally higher under Republican administrations and those seem to be on the wane, the downturn in the economy and government revenues could lead to calls to convert DB plans like CalPERS to DC plans.

In 2005, I did a back of the envelope calculation as part of a paper presented to a corporate governance conference in London. "It costs 0.37% to administer the CalPERS defined benefit (DB) plan, but will probably cost more than 1.5% per year as a defined contribution (DC) plan, with no death/disability benefits or inflation protection. If California funds have assets of approximately $500 billion (CalPERS and CalSTRS alone have $300 billion), the yield to money managers will be an extra $5.65 billion every year while earning $10.2 billion less for public employee retirements every year."

A Better Bang for the Buck: The Economic Efficiencies of Defined Benefit Pension Plans by Beth Almeida and William B. Fornia, FSA for the National Institute on Retirement Security takes a more methodical approach and finds that "DB plans are far more cost-effective than DC plans. We find that to achieve roughly the same target retirement benefit that will replace 53% of final salary, the DB plan will require contributions equal to 12.5% of payroll, whereas the DC plan will require contributions to be almost twice as high – 22.9% of payroll." "Specifically, our analysis indicates that the cost to deliver the same level of retirement income to a group of employees is 46% lower in a DB plan than it is in a DC plan."

CalPERS Appoints Joseph A. Dear

CalPERS announced the appointment of Joseph A . Dear, currently Executive Director of the Washington State Investment Board (WSIB) and Chairman of the Council of Institutional Investors, to the position of Chief Investment Officer, starting March 1st. Dear has held his post as Executive Director of WSIB since 2002 and is a veteran public administrator. (CalPERS Press Release, 1/21/09) He was signatory to a recent letter on financial markets reform calling for the following:

1. Majority Voting for Directors: Directors in uncontested elections should be elected by a majority of the votes cast.
2. Shareowner Access to the Proxy: A long-term investor or group of long-term investors should have access to management proxy materials to nominate directors.
3. Broker Voting Restrictions: Broker non-votes and abstentions should be counted only for purposes of a quorum.
4. Independent Board Chair: The board should be chaired by an independent director.
5. Independent Compensation Advisers: Compensation advisers and their firms should be independent of the client company, its executives and directors, and should report solely to the compensation committee.
6. Advisory Shareowner Vote on Executive Pay: All companies should provide annually for advisory shareowner votes on the compensation of senior executives.
7. Stronger Clawback Provisions: At a minimum, senior executives should be required to return unearned bonus and incentive payments that were awarded due to fraudulent activity or incorrectly stated financial results.
8. Severance Pay Limitations: Executives should not be entitled to severance payments in the event of termination for poor performance.

At a recent appearance, he has emphasized the need for building a risk-management plan and that a pension plan's fiduciary duty is only to its participants, not to political concerns. (Ahead of the Curve) Last year he called on the U.S. Senate to enact strong federal legislation to curb the pollution causing global warming. In 2007, Dear joined with many of us urging SEC Chairman Christopher Cox to continue to operate under the AIG decision with, respect to proxy access, until proxy access rules could be adopted by a full Commission. (letter) I also like Dear's idea of a research advisory council contained in WSIB's Strategic Plan. I hope he brings that idea and many others to CalPERS.

One note of interest, Dear seems to be lacking in what one might most expect in an investment officer -- investment experience. He has lots of experience in government and in government relations but, from what I can determine, he wouldn't be able to qualify as an investment officer in any of the civil service categories CalPERS uses. That got me thinking that maybe CalPERS will be heading away from hedge funds and other riskier investments -- perhaps moving more toward indexing.

Yet, in reading Washington State’s Doubling Down (Steve Brull, Institutional Investor, 2/18/08), this is the opposite of what WSIB did, "slicing its passively managed public equities from 46 percent of assets to 37 percent and paring fixed-income holdings from 25 percent to 20 percent." That's well past the target of less than 10% that most public funds use and Dear’s "educational efforts" may have been key to that decision.

Brull notes that when Dear became executive director in late 2002, he focused anew on internal governance. "There were huge communication problems between the staff and the board," said Dear in his interview with Brull. “Inside the organization, people were so siloed that it was hard to have cooperation." Perhaps he was hired at CalPERS, in part, to help Anne Stausboll do the same. He's had twenty years of management experience. Perhaps they are looking to his experience more in working with investment officers than in being one himself. After all, Stausboll's educational background is in English and law. Yet, she recently served as the Interim Chief Investment Officer. Perhaps he's being hired for his experience in government relations, as the System is expected to come under attack from the public and the legislature due to declining funds and the need for additional contributions due to the broader financial meltdown. Perhaps, perhaps... maybe only time will tell.

During his interview with Brull, Dear also said "When you think about the attributes of public pension funds, the major advantage is the ability to take a really long view, which leads you to private equity, real estate, real assets and other forms where we can take advantage of that long horizon." It would be nice if the next CIO at CalPERS actually stuck around for more than two or three years. CalPERS touts itself as the ultimate long-term investor but it seems to have become a stopover to further, more lucrative, opportunities. Dear will be paid between $408,000 and $612,000 a year, plus a bonus of up to 75% of salary based on performance. How much more does anyone need? Apparently, it wasn't enough for his predecessors. CalPERS members and taxpayers might want to consider a "say on pay" vote if it goes any higher.

InvestorRationships

There's a new edition of InvestorRelationships.com out. This is a great publication and the editors are maintaining this publication as complimentary thru ’09 as a “Thank You” to their loyal members in a down economy.

One interesting article cites a recent survey among 1,000 retail investors commissioned by the SEC4, fully 57% of investors said they rarely (28%), very rarely (13%) or never (16%) read annual reports when they receive them. For proxy statements, the results were somewhat better, with 44% saying they rarely (21%), very rarely (10%) or never (13%) read proxy statements. Dominic Jones offers advice on how to improve annual online reports and proxy statements. Sign-up for access.

Other articles include:

• The Birth of “Video Annual Reports:” A Substitute for the Written Word?
• Disclosure of Committee Membership When Members Have Changed
• A Practical Approach to Updating Committee Charters

Out of the Dark

Perhaps appropriate as my first post after the Obama inauguration is one on the importance of sunshine to the health of markets and the economy. Firms Gone Dark, by Jesse Fried, will be published shortly in the University of Chicago Law Review.

Securities laws permit a firms to exit the mandatory disclosure system if they have no more than three hundred “holders of record.” Unfortunately, "holders of record” isn't defined to as the real (or “beneficial”) owners. Most shares in publicly traded firms are held by banks and brokerage houses, not by the beneficial owners themselves. Therefore, a reporting company with fewer than three hundred “holders of record” can have thousands of beneficial shareholders. Hundreds of publicly traded firms have taken advantage of this loophole to exit mandatory disclosure.

"Only a small fraction of firms that go dark provide any financial information publicly to their hundreds or thousands of public investors,"writes Fried. The SEC is currently considering a proposal by the SEC’s Advisory Committee on Smaller Public Companies to prohibit firms with three hundred or more beneficial shareholders from exiting mandatory disclosure. Fried counters that public investor approval of a majority of the public shares voted should be obtained before "insiders can turn off the lights." Such an approach " should eliminate value-decreasing exits from the mandatory system by publicly traded firms while preserving these firms’ ability to engage in value-increasing exits." He welcomes comments on his draft.

Blog Watch

Calpensions.com is a new project of Ed Mendel, a reporter who covered the Capitol in Sacramento for nearly three decades. In this new effort, he's going to try to cover not only CalPERS and CalSTRS, but 80 smaller public employee pensions funds in California... a monumental task. In one of his first posts Mendel recounts how the funds got involved in corporate governance, in founding the Council of Institutional Investors, and that they are now being solicited for their views on market reforms by the camp of President-elect Obama. We look forward to Mendel's coverage of these vital funds.

VoterMedia.org, "media for voters, funded by voters" and has successfully implemented voter funded media projects at several universities and one municipality with funds from Mark Latham. Now, the student society of the University of British Columbia has agreed to fund a Voter-Funded Media Competition with awards totaling $8,000. Today, student governments. Tomorrow, a Global Voter Media Platform on the internet where competitions can be set up for "each voting community in the world," including corporations.

The Investor Suffrage Movement, which is working toward a global proxy exchange, sent out an initial "Field Guides" to its agents, outlining future work around contributing proxies, drafting and presenting shareowner proposals.

Proxy Democracy announced that Trillium Asset Management has begun publishing its intended votes in advance of shareholder meetings and sharing those votes on ProxyDemocracy.org. Jonas Kron of Trillium said the following:

Joining in this effort is consistent with our mission to explore and develop all possible means of social progress offered by the capital markets, and educate other concerned investors in their use; and to support organizations working to build a just society and a better world.

I'm sure Trillium will soon be followed by others. "This brings our list of 'advance disclosers' to seven, and we’re working to get more. As Jonas’s announcement makes clear, it’s a win-win situation — the disclosers have an opportunity to serve their customers and advance their own governance initiatives, while ProxyDemocracy users get access to considered judgments in time to vote their own shares intelligently, said Andy Eggers.

Sea Change Radio, formerly Corporate Watchdog Radio, carries an interview with Nick Robins of HSBC and Cary Krosinsky of Trucost about their book, Sustainable Investing. They also speak with Tim Smith of Walden Asset Management about shareowner activism and hear the excerpts from the keynote of John Ruggie, the UN Special Representative on Business and Human Rights.

The New New on M&A

It was another great early morning meeting of the SVNACD on January 12th. Sixty to seventy people showed up to network and learn the latest best practices for corporate boards... this time on the subject of mergers and acquisitions.

In these turbulent times more and more companies are looking for a means of survival. Others are looking for bargains. How do directors ensure the best outcome when selling themselves, selling a division or when buying the competition? How do they ensure they have met their fiduciary duties? These were a few of the questions addressed.

Priya Cherian Huskins, of Woodruff Sawyer, moderated a panel consisting of (from left to right) Gidon Caine, Securities Litigation, Jones Day; Dawn Smith, Corporate Finance, Morrison and Foerster; and Emily Chapple, Mergers and Acquisitions Manager, Woodruff-Sawyer.

Panelists seemed to believe there are recent signs of movement in the M&A market. Companies with cash are coming into the market. Buyers have the edge, since the biggest challenge is financing. More companies are using "earn out" mechanisms, where base payments are made up front but further payments are based on target revenue projections being met. In such cases, it is vitally important to ensure the infrastructure is there to produce and that convents are broken if the product is shut down. The money for earn outs is not typically set aside up-front but depends in future revenue. Under FASB, earn outs are recorded at fair value at acquisition. Fixed year distribution world be one way to get around earlier reporting.

Ms. Smith doesn't see the market improving much until September, starting with hostile takeovers, those trying to find a way to private and those that need to find a partner to survive. Ms. Chapple discussed a tool rarely seen in the Valley, use of insurance to warrant representations... discussing its applicability to small family companies, venture capital, trade to trade, and in minimizing escrow. It sounds like a great bridging tool where parties have differing opinions. If I got it right, the cost generally runs 1.5-4% of the deal but that can insure several years. The policy is triggered when there is a demand for restitution based on a breach of one of the warranties given by the seller.

Mr. Cain's presentation centered on last year's court decision in Ryan v. Lyondell Chemical, in which the finding was not one involving a breach of duty, but a determination that the directors’ failed to act in “good faith,” based on a violated their duty of loyalty. The Court based its decision on five facts:

1. The directors knew that the company was "in play" (although noting that the filing of a Schedule 13D will not always trigger Revlon duties.)
   
2. The directors did little or nothing to develop a strategy pursuant to Revlon to maximize shareholder value in connection with the possible sale of the company.
3. Prior to signing the deal, the directors did little or nothing to confirm if a better deal could be obtained.
4. The directors did little or nothing to negotiate the offer they did receive.
5. The directors, did little or nothing post-signing to verify that the offer accepted was the "best" deal reasonably available.

Although the board had a general knowledge of the value of their company, they made no apparent effort to arm themselves with specific knowledge of that value at the time of a 13D filing, which effectively put the company in play. Even though the directors trumpeted getting a "blowout" premium, they did little or nothing to document it. Cain emphasized the need for an auction, or more likely a "go shop" agreement. Other questions center around when a company comes into play.

In the wrap-up, Ms. Smith emphasized documenting the process, staying true, due diligence, monitoring your shareowner base and keeping up your D&O policy (especially the renewal date, which you don't want coming up in the middle of a deal). Ms. Chapple emphasized the need to take advantage of the insurance market when there is a mismatch in expectations. Start the process early. Mr. Cain emphasized that one size doesn't fit all. Make the board's review process part of the documented dialogue specific to your situation. (permalink) (SVNACD podcast)

Mediant Challenges Broadridge

Mediant Communications, provider of proxy services to brokers and corporations, is lowering fees paid by its clients for the distribution of proxy materials by as much as 25%. The announcement comes two months after Mediant launched its proxy service for brokers in partnership with Legent Clearing, an independent clearing broker, breaking into a market long dominated by Broadridge Financial Solutions.

A schedule of fees that brokers may charge corporations for distributing proxy materials to beneficial account holders is published by the New York Stock Exchange (NYSE). Now Mediant will offer a competitive, lower fee schedule for those corporations that use its issuer services.

"The NYSE fees are a ceiling and not a requirement," says Arthur Rosenzweig, President of Mediant. "We believe competition will lower these fees and we are the first competitor to do so." While the proxy fees for registered shares are competitive the fees for beneficial shares, those of most retail shareowners, have been regulated and monopolistic. Mediant's new proxy fee schedule will be implemented immediately for several hundred corporations who already use Mediant's Issuer Services to pay for distribution of those proxy materials to retail shareowners.

"The proxy industry is not a natural monopoly and the fees do not have to be regulated," says Rosenzweig. "Instead proxy fees should be negotiated between corporations and the brokers or their intermediaries. Web-based technology has lowered processing costs, and corporations can share the benefit in terms of lower fees."

Goodman's No-Action Attempt, Round Two

Risk Metrics Group provides balanced coverage of an attempt by Amy Goodman, of Gibson Dunn & Crutcher to exclude a resolution for her client, Bristol-Myers. (Exclusion Requests Raise Concern Among Activists, Risk & Governance Blog, 1/13/09) Goodman argues that Kenneth Steiner, Nick Rossi, Mark Filberto, and others who deputize John Chevedden to negotiate with the company and others are merely “nominal proponents” that Chevedden uses as his “alter egos” to evade the one-proposal-per-meeting limit and to violate the Rule 14a-8(b) ownership requirements by filing proposals at firms where he doesn't own shares.

Several shareowners, including Corpogov.Net Publisher, James McRitchie, argued that a no-action letter would inhibit cooperation, not just with Chevedden but between larger groups of shareowners. (see my earlier post, Nominal Proponent Charge Risks Cooperation on Resolutions) Goodman argues the exclusion requests are directed at tactics unique to Chevedden. Goodman argues that unions and religious organizations typically submit their proposals directly, on their "own letterhead." Then they appoint another person to act on their behalf.

I submitted a very brief e-mail focused on letterhead as irrelevant. Letterhead is a non issue for most individual investors.  A no-action letter issued on this case would certainly inhibit cooperation among investors.  Investors, institutional or individual, should be able to appoint an agent to work on our behalf at any point in the process, not after meeting some artificial barrier erected by Ms. Goodman.

Timothy Smith, a senior vice president at Walden was much more eloquent, arguing that "Deputizing an agent to act in your behalf is certainly not a sign of bad faith by an investor..." "To jump from a lack of record of dialogue to claiming the filing proponent demonstrates a 'complete absence of any involvement' grossly over reaches...." "Ms. Goodman has created a fantasy scenario without providing hard and distinct proof that would allow the SEC to apply a facts and circumstances test." (Smith, 1/9/2009)

Goodman's case hinges on second-guessing the motives of proponents and would set a dangerous precedent if granted. Shareowner activists should extend thanks to Walden's Timothy Smith and First Affirmative's George Gay for their role in defending important rights associated with the submission of resolutions... especially those of individual investors and their ability to cooperate.

PIRC Makes Voting Advice Public

No, it isn't quite as good as it sounds but it is still quite a big step in the right direction. PIRC, the UKs' "leading independent research and advisory consultancy" on proxy and corporate governance issues, is making its shareholder voting recommendations publicly available "in an effort to boost transparency and accountability."

Unfortunately, for us, they won't be available before company meetings but the day after, with the previous six months’ company meeting available at any time. The disclosure covers all of PIRC’s index products and 1,000 companies from around the world. PIRC believes they are "the first and only corporate governance advisory service to have taken this ground-breaking step."

I guess if they announced their advice way in advance they'd be putting themselves out of business. Until we can change they way proxy advisors are paid, this is the most we can hope for. Votes are posted at pirc.co.uk/pvd.html. I assume the dots are lined up in the order of numbers on the proxy. Hover over a dot and your screen should tell you PIRC's recommended vote.

SEC Focus

Footnoted.org questions the SEC's priorities. When the Dow dropping 1,500 points over three days and the S&P 500 declining nearly 15%, the SEC was asking Orbitz to explain why ordinary folks can seemingly book hotel rooms in Cuba, Iran and Syria -- all countries on the State Department list for being state sponsors of terrorism. (How the SEC is keeping us safe from booking hotel rooms… 1/13/09)

Pensions to Vegas

Is it just me, or do you also find it ironic that the National Institute of Pension Administrators is holding its 2009 NIPA Annual Forum & Expo in Las Vegas? Sure, I know, these events are planned years in advance, the rooms are cheap, and its not as if those attending have to gamble. Still, there is that perception thing.

"Plan today to attend the 2009 NIPA Annual Forum & Expo, April 26-29, 2009 at the Planet Hollywood Resort & Casino, Las Vegas, Nevada, where you will gain enriching education to provide enhanced support to your organization and discover cutting-edge solutions to help strengthen and expand your business." Registration will be opening soon. Stay tuned to www.nipa.org

Anti-corruption in Europe

Ethical Corporation will launch a conference titled The Future of Anti-corruption Law & Enforcement in Europe (27 – 28 May, 2009). The conference is set to take a practical look at how companies can effectively adapt to changing international and national legislation. This is a valuable opportunity to learn about new regulatory and compliance risks and to discover exactly how to manage them.

Counseling the Board

The New York City Bar Center for CLE will present Counseling the Board of Directors During the New Age of Activist Shareholders" Tuesday, February 3, 2009 from 8:30 a.m. - 12:45 p.m.

A panel of experts will discuss various issues and legal considerations that should be considered when counseling the Board of Directors of a public corporation, with particular attention given to how a Board should respond to demands for changes made by activist shareholders. Panel discussions will provide an overview of the goals of activist investing and the tools employed by activists to accomplish them, as well as the latest strategies and defensive mechanisms used by public corporations in their interactions with activist investors.

Corporate Rescue Law

With the growing number of bankruptcies in industries ranging from financial, manufacturing, to retail, what could be timelier than Corporate Rescue Law - an Anglo-American Perspective? Gerard McCormak's review of practices in the two countries concludes there is more convergence than is generally recognized. The US is moving in a UK direction with regard to disposal of profitable components, rather than carrying on through the bankrupt corporate entity.

Both shareowners and creditors generally come out ahead when debt is restructured privately, rather than through Chapter 11. Such private restructuring is more likely to succeed when commercial banks or other sophisticated investors are involved and is facilitated when debt is concentrated, as through trading by vulture funds who are advantaged by private settlement, rather than going to court, which tends to be a more costly and time-consuming process.

McCormak provides an overview of recent law and legal thought, explaining the fundamental features in both the US and UK, entry routes to changes in corporate control, moratoriums on creditor enforcement actions, mechanisms to address financing difficulties, the role of employees, and restructuring plans themselves.

The US debtor has more rights to formulate a reorganization plan, has more prescriptive rights with regard to dividing creditors into classes, has cram down capability in exceptional circumstances to force acceptance by creditors, and has traditionally focused on getting the corporate vehicle in working order.

However, McCormak finds that a growing number of bankruptcies, at least among larger companies, have been essentially pre-packaged deals involving going-concern sales of company components blessed by the court to ensure conduct that brings the highest price. In contrast, the UK approach largely leaves matters to creditors, respecting the values of “simplicity and economic self-determination.”

Economics Of Corporate Governance and Mergers

This is a wide-ranging reader, with theory and empirical studies, domestic and international well represented. For example, one paper casts doubt on the frequent assertion that common law countries have better shareowner protection than civil law countries. Another examines the role of directors and the question of emphasis (monitoring vs. participants in management). Central to corporate governance are issues of mergers and acquisitions. If internal governance mechanisms are ineffective, which I have argued for decades, hostile takeovers can act as the avenue of last resort to discipline managers, although this all too often comes at the expense of acquiring shareowners.

Stephen Martin looks at five waves of mergers and finds irrational exuberance often plays a crucial role, concluding that although reasons for such waves may vary, results do not generally benefit shareowners. Another paper by Mike Scherer provides evidence that mergers do not generally increase productivity, despite glowing predictions by management. As the editors note, the findings of accounting data contrast sharply with those of the finance literature, short-term stock market event studies. Rises in merger activity are likely attributable to empire building by managers.

Examining Japanese mergers, Hiroyuki Odagiri finds mergers generally hurt relative profitability. A UK study finds that acquisitions, after implementation of the Cadbury Code, experience better long-run returns but the driver remains CEO ownership. Gerhard Clemenz creates a theoretical model to study the impact of vertical mergers between producers and retailers, finding that integrated firms should be better able to monopolize markets and drive up retail prices. A study of 13 indicators on competition for 29 countries finds economic performance best predicted by the degree of competition.

Not all the authors take a shareholder maximization of value view of the firm. Branston, Cowling and Sugden, for example, explore redesign of company laws based on wider membership and creation of more democratic forms. In “Corporate Governance and the Public Interest,” they call for greater participation by the public in strategic decision-making, especially mergers in the financial, IT, and communication sectors. Here, I found convincing arguments that an educated and participatory democracy can only be obtained with a communication revolution, since advertising revenue now allocates coverage and interest.

The editors conclude that “corporate governance systems that better align shareholders' and managers' interests lead to better corporate performance” and “there is an important relationship between corporate governance structures and the quality of firm decision making,” especially with regard to mergers and acquisitions. Since most are suboptimal for both shareowners and society, “the suspicion remains that corporate governance systems and mechanisms are not yet optimal.” Masters of understatement but the volume includes a good collection of important reading and commentary.

CalPERS & CalSTRS Advise Northern California Directors

We're fortunate in Northern California to have the nation's two largest public pension funds based in Sacramento. Staff from those giants frequently participate in events sponsored by the National Association of Corporate Directors (NACD), including those of the local Northern California chapter. About 30-35 attended a salon-like session on "What Shareholders Expect from Directors." Salon-like because it wasn't the typical lecture format you might expect, rather a social gathering of intelligent people where "on-stage" and "audience" blended seamlessly.

Yes, (in photo from left to right) Richard Koppes, moderator; Chris Ailman, Chief Investment officer, CalSTRS; and Eric Baggensen, Senior Investment Officer of Global Equity, CalPERS, did provide expertise and focus. However, "presentations" lasted only a few minutes. Open dialogue ruled what turned out to be an all too brief early morning session. The group was a good mix of veteran corporate managers, directors, investors, and advisors. Older white men predominated (even more so in my two photos), but there was also a good mix of women and minorities and the need for greater diversity on boards became a central thread of discussion.

Like Carl Ichan's recent advice to directors, both Ailman and Baggensen said shareowners expect strong and independent-minded boards. Ailman emphasized that unlike the media, they focus on boards, not CEOs. Pension funds are "sticky capital," in other words permanent owners. They're going to be owners long after the current CEO is gone. "We don't want to run the company." They just want to know the board is doing its job. Asked, how do they know when directors are failing?, the response was they are only likely to know "at extreme inflection points."

When companies are in trouble, that's when the funds are likely to come calling. Meetings with directors are often revealing and they had several interesting stories. The challenge for directors is to communicate proactively. Often, more important than director voting is how directors arrived at their decision. Shareowners want to know the bases were covered.

Discussion was wide-ranging, including the Troubled Asset Relief Program and how some of the principles adopted there could be applied to companies that aren't stressed. Ailman suggested the Federal Reserve and Treasury now operate the world's biggest sovereign wealth fund. Of course, that led to a discussion about the awkwardness of government as voter and how pension funds differ from sovereign wealth funds.

Another topic was stagnation on boards. That brought up the need for diversity I mentioned earlier, the good work of Catalyst research in finding that diversity pays, Stanford, John Chaing, and another raft of interesting anecdotes, such as the role CalPERS may have had in prodding change at the board of Avon. To compare shareowner policies on board diversity, see the Risk Metric Group (RMG) Policy Exchange.

The Jan/Feb 2009 issue of Corporate Board Member includes a good article entitled, "Getting Back on the Diversity Track." A sidebar cites the Catalyst study and another by researchers at Oklahoma State and Loyola. Results can be dramatic. Catalyst found that from 2001-2004, companies with the most women directors averaged 42% more pre tax net income than those with the fewest -- and a 66% higher return on invested capital. Groups to turn to in recruiting women and minorities include: the Executive Leadership Council, Hispanic Association on Corporate Responsibility, Catalyst, InterOrganization Network, Committee of 100, and of course NACD.

RMG is a great resource to review shareowner policies on another topic that quickly rose, term limits. Interesting discussion of that topic at the meeting surrounded evolution of the subject at CalPERS. I've always thought the CalPERS board rejected the idea because it would be hypocritical to apply such a policy to corporate board if they didn't also apply to themselves... and they didn't want that. As the board turns over, this may be a good topic to revisit. That's when it is often discussed in earnest at corporate boards as well. An astute member of the audience mentioned that in the UK directors no longer can be counted as "independent" after a certain period of time. (for another discussion, see Director term limits come up for review, Directors & Boards, Spring 2008)

Of course, I can't report the really juicy interchanges. For that you'll have to attend yourself. The next meeting of the Northern California NACD chapter will be held on February 10, 2009, at 5:30pm in San Francisco. The topic is “Corporate Finance Oversight: Understanding Risks Inherent in Financial Instruments.” That might be popular, eh? (permalink to this article)

Raju's Confession, Plus Guest Commentary from Seth R. Freeman

B. Ramalinga Raju, chairman of the scandal-plagued Indian outsourcing specialist Satyam Computer Services, has resigned, confessing that he had conspired to cook the firm’s books for several years. ''This is a firm-level issue and won’t affect the entire IT sector,'' said Ganesh Natarajan, chairman of the software industry association Nasscom. “But it does mean that corporate governance standards overall need to be relooked at with a microscope.'' (Satyam Revelation Rocks Indian Markets, Forbes, 1/7/09)

Readers might be interested in what I understand is the letter submitted by Raju. "Apparently his accounting skills learned during his Harvard MBA program were at a more advanced level than his auditors from PWC," jokes Seth R. Freeman, CEO & Chief Investment Officer, EM Capital Management LLC. Although, he adds, "Personally and professionally, I can’t think of an asset class more easily tested and confirmed than cash."

EM Capital Management has a solid background in emerging markets corporate governance. Below is Freeman's analysis of Raju's confession compared to the company’s audited results, provided as a guest commentary:

This is the same company that recently attempted to acquire the Chairman’s sons’ real estate company ostensibly using all of the company’s non-existent $1.5 billion cash on-hand.  The board, including independent directors, one of whom is a Harvard Business School professor, unanimously approved this and the stock crashed by 50% caused by foreign investors voting with their feed.  That action was rescinded.
 
Within 10 days and no other options, the Chairman was forced to make his confession of fraud.
 
I think there are at least two lessons:

1. Assurance departments of large global accounting firms may not always be independent when their client is huge and important.
2. There is always a danger that outward appearances of strong Corporate Governance and other ESG practices may be used as a cover for less principled corporate and agency activity.

Satyam Computers announced a major fraud perpetuated by the founder and promoters of the company.  We have taken a look at the Financials and Mr. Raju’s letter to the Board of Satyam.  These are the main items which diverge from the reported statements and financials (All items converted into USD using FX Rate of 50 for INR) (Shares Outstanding : 673,884,000): 

1. $1B inflated in cash and bank balances (Earlier the company reported $1.08B) – Real cash balances more like $72mm
2. $75mm in falsified accrued interest
3. $246mm in understated liabilities arising from external fund arrangements (promoter share pledges etc.)
4. $98mm in overstated receivable from debtors
5. $117.6mm in overstated revenues for Q2 2008
6. 21% overstatement of operating margins for Q2 2008

All these items were issues on Satyam’s standalone financials and there were no reported discrepancies in the subsidiaries according to Mr. Raju:

• Based on the above, the cash on books is 10.7c/share
• Based on real operating margins of $12.2mm for Q2 2008, the company earned $0.0181c/share
• So far the real reported revenues post the adjustments seem to be $1.675B
• Real reported income post adjustments are around $50mm
• Based on these items using a 3x forward PE (sector ranges from 4-7x, everyone will discount say against peers given what’s happened) the market cap of Satyam should be around $150mm.
• Based on that the valuation should be about 25c/share
• At 25c/share the breakup value and the buyout value of the subsidiaries may make sense to be a buyer.
• At the above levels a PE buyer maybe interested in taking the company private in the absence of any large promoters being involved. 

See also 1/7/09 coverage by the Financial Times ($1bn fraud at India IT group; Timeline: The Satyam scandal)

Ichan on Ichan and Directors

In an interesting preemptive strike, Carl Ichan offers up a response to Corporate Board Member magazine's upcoming article, "How to Icahn-proof your board" on his on blog and on The Huffington Post. A few pointers:

• elect strong and independent-minded boards that have the knowledge and courage to demand answers from management they are charged with overseeing.
• the board should regularly and constructively communicate with shareholders and view them as partners, not impediments
• managers and board members should focus on their primary job of maximizing asset values and not feathering their own nests

"Sadly, I fear the magazine will offer another kind of advice: the wrong way to Icahn-proof your board. In recent years, a whole cottage industry of corporate sycophants and panderers has grown up to advise boards on how to obstruct shareholders and fend off legitimate challenges from the true owners of companies – the shareholders."

More in-depth advice for directors is offered by Patrick J. Swanick, CEO of Gila Corporation, in Effective Corporate Governance in Turbulent Times (NACD Directors Monthly, 12/08) Swanick advises:

• Know Your Shareholders
• Ask the Dumb Questions
• Challenge Your Executive Management Team
• Dig Beneath the Surface—Especially in Good Times
• Validate Your Internal Controls
• Insist on Risk Assessments for All Board Decisions
• Allocate Time to Build an Effective Board

Social Investment Forum Job

SIF seeks a Director of Communications and Marketing who is interested in socially responsible investing and corporate social responsibility issues. The ideal candidate will bring creative energy to SIF; is a talented oral and written communicator; is a team player and an independent thinker; and is enthused to be part of a small organization in a growth phase. This is a new position and has many opportunities for leadership, creativity and professional growth. Job description

Investors Against Genocide

Over 80 civil society organizations including human rights, corporate accountability, and religious groups from 25 countries, as well as government officials and CorpGov.net publisher, James McRitchie, submitted an open letter to the United Nations Global Compact (UNGC) in support of a formal complaint against PetroChina, a Global Compact participant. PetroChina, the publicly traded arm of China National Petroleum Corporation (CNPC), is Sudan's largest oil industry partner and has financial links to the regime perpetuating the six-year humanitarian crisis in Darfur which many consider to be genocide.

The complaint provided an extensive case against PetroChina of "Systematic or Egregious Abuses” of the UNGC's founding principles which call for support and respect of human rights and avoid complicity in human rights abuses.  The complaint asks the UNGC to formally apply its established Integrity Measures to address the complaint, and if, after three months, there is no satisfactory resolution of the issues raised, to consider PetroChina’s participation to be detrimental to the reputation and integrity of the Global Compact and remove the company from the list of participants.

PetroChina signed on as a participant in the UNGC but has utterly failed to "support and respect the protection of internationally proclaimed human rights," as required.

See also, PetroChina, the UN and Blood Money by Susan Morgan, Director of Communications, Investors Against Genocide on The Huffington Post, 1/7/08. Here's a few bits, but read the original:

• Labeled genocide by the US Congress in 2004, this massive humanitarian crisis has resulted in the deaths of over 300,000 people, the displacement of at least 2.7 million and the rapes of countless women and young girls.
• She quotes John Ruggie, Special UN Representative for business and human rights: "The Global Compact also suggests that businesses establish clear safeguards to ensure that if financial or material support is provided to security forces it is not used to violate human rights."
• The Office of the High Commissioner for Human Rights has written, "A company is complicit in human rights abuses if it authorizes, tolerates, or knowingly ignores human rights abuses committed by an entity associated with it."
• Companies today should not stand idly by while their money funds genocide. While ethical business practices may mean different things to different companies, one hopes that all can agree to draw the line at funding genocide.

Romanek on Schapiro

Broc Romanek posts on Incoming SEC Chair Schapiro: A Rebuttal (TheCorporateCounsel.net Blog, 1/7/09) I find his analysis reassuring. Also, don't forget to renew your subscription to TheCorporateCounsel.net, one of the best resources on the internet.

Gao Xiqing

Gao Xiqing runs $200 billion of China's $2 trillion in holdings and was interviewed by James Fallows in “Be Nice to the Countries That Lend You Money." (the Atlantic, 12/08) In the 1990s I was invited to speak to a largely Chinese audience in Hong Kong on corporate governance. I remember advising them to not just mimic the US, since our model of corporate governance had lots of problems. However, I also said that if they wanted capital from US markets, their governance standards would have to meet certain minimums. Soon China will be sending that message to the US.

Here's a clue, not only on CEO pay, but the American standard of living. "After we are gone, you cannot just go to the moon to get more money. So, forget it. Let’s change the way of living. [By which he meant: less debt, lower rewards for financial wizardry, more attention to the “real economy,” etc.]"

On pouring more money into Blackstone and Morgan Stanley: "People here hate it. They come out and say, “'Why the hell are you trying to save those people? You are the representative of the poor people eating porridge, and you're saving people eating shark fins!'"

On American supremacy and international relations: "Americans are not sensitive in that regard. I mean, as a whole. The simple truth today is that your economy is built on the global economy. And it's built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money."

Ramblings at the Start of 2009

Much good advice for directors can be found in an article by Martin Lipton, Steven A. Rosenblum and Karessa L. Cain entitled Some Thoughts for Boards of Directors in 2009, recently posted to the Harvard Law School Corporate Governance Blog. The paper outlines key issues for 2009, including risk management (45% of the executives in a recent survey of banks said their boards lacked expertise in managing risk), executive compensation, succession planning, etc. and goes on to cover perennial concerns like the roles and duties of the board, composition and structure, board committees, procedures, and director liability.

While most of the advice is well-grounded, there is an obvious bias against shareowner activists who, according to the authors, have whittled down the "board's traditional function as a bulwark of long-term value," as evidenced by "the dilution of takeover defenses, the adoption of majority voting standards, proposals to enhance shareholder access to company proxy statements and reduce the costs of waging a proxy contest, withhold-the-vote campaigns, micromanagement by means of 'best practices' and other reforms designed to supplant directorial judgment with shareholder perogatives."

They expect the economic crisis to fuel "another frenzy of activism" and point out that two recent studies by "respected academics" have concluded governance ratings are not good predictors of corporate performance. Of course, other studies have found that good governance does correlate to stronger earnings. Common sense reasons that well-governed companies will perform better than poorly governed ones. The authors could be more productive by focusing on which "best practices" are predictive and which are not.

GovernanceMetrics International, is one of those governance rating companies trying to establish correlations and refine their own measures. Last November, UBS Investment Bank purchased a minority stake in the firm. Corporate Governance and Capital Markets, by Julie Hudson, Head of SRI and Sustainability, UBS Investment Bank displays in interesting line of investigation and the results are insightful.

She draws on frequently cited article by La Porta, et al., which found a significant relationship between the rule of law and economic performance at the level of individual countries. As the rule of weakens, the cost of capital rises. However, another more interesting finding was that when the rule of law score reached a certain threshold, country scores clustered closely around the regression line but below that the scores were widely scattered. The economic performance of countries becomes much less predictable in the absence of a threshold rule of law.

Hudson then theorizes the same may apply to companies and corporate governance. Using GMI data, she finds "the price of risk tends to rise as corporate governance quality deteriorates." However, the relationship is not statistically significant because "when companies are on average weakly rated for governance... the price of the risk becomes less predictable." In other words, weak governance appears to be correlated with risk and uncertainty.

The latest issue of PIRC alerts carries an editorial-like article with the heading, "Regulation reborn in 2009." Essentially, the UK has focused its corporate governance efforts around the logic that shareowners will act in their own self-interest to monitor companies, "provided they have the tools to do so." It goes on to note the cutback by financial institutions in resources dedicated to analysis of governance issues, raising the question how we can continue to rely on "comply or explain."

PIRC warns, we cannot assume a "voluntarist approach to governance" is inherently superior. The scales must now be "tilted in favour of a regulatory response." Investors should begin 2009 with two thoughts in mind: 1) start using ownership rights much more effectively, and 2) acknowledge where investor engagement does not work effectively or where further rights are required. "Given the radicalism being displayed in economic policy, this is no time for timidity in corporate governance."

One radical idea I've been advocating for years, which doesn't involve additional regulation, is one posed by Mark Latham. The current model of corporate ratings and proxy advice is poor and inefficient. Even giants like ISS/RMG spend only a relatively small amount researching each company because they are paid by relatively few investors at any one company. In Corporate Monitoring:New Shareholder Power Tool, Latham advocated that if all shareowners would benefit from much more research using a system that allows them to vote for proxy advisors to be paid from corporate funds whose advice would go to all owners.

Latham went on to build VoterMedia.org, "media for voters, funded by voters" and has now successfully implemented voter funded media projects at several universities and one municipality. He is now proposing to build a Global Voter Media Platform on the internet where competitions can be set up for "each voting community in the world." No small ambitions for Latham! The idea is to create "a new hybrid media sector, where organizations compete for funds allocated by voters." "Early adopters of this proposal are likely to be smaller democracies like student unions and municipalities, followed eventually be coops, credit unions, associations, labor unions, then corporations and regional governments."

As you can see, corporations are likely to enter the mix somewhere long down the road... after "eventually." Until then, I'll continue to monitor Latham's efforts and support the Investor Suffrage Movement & Proxy Democracy. Both will get more people focused on proxy voting and both rely on Latham's idea of Proxy Voting Brand Competition. As we more forward through 2009, let's reward those who provide us with good information.

Doesn't Seem Right

InvestmentNews.com reports, "The Senate failed to take up a House-passed bill that would have expanded the Securities and Exchange Commission’s enforcement authority. Among other provisions, HR 6513 would have allowed the SEC to bar brokers and the like who violated federal law from entering other sectors of the securities industry. The measure also would have increased the maximum fines slapped on lawbreakers." (SEC enforcement measure dies, 1/6/09)

Florida SBA

The Florida State Board of Administration (SBA) has a new executive director. Ash Williams, who was with SBA from 1991 to 1996, is back during a time of great volatility. "Williams and his staff examined data from all the trading days dating back to 1950. Of those 15,000 sessions, there were only 70 days when the S&P 500 moved up or down 4 percent or more. Thirty of the 70 occurred in October and November, he noted." (Williams brings new experience in return to SBA, Tallahassee Democrat, 12/28/08) Florida SBA is one of the most active US public pension funds. You can find their proxy votes announced in advance on their site and at Proxy Democracy.

Nominal Proponent Charge Risks Cooperation on Resolutions

I would like to bring your attention to a December 24th no-action request from Amy Goodman of Gibson, Dunn & Crutcher LLP, which seeks to omit shareowner proposals titled "Simple Majority Vote" by Kenneth Steiner and "Special Shareowner Meetings" by Nick Rossi. Both were submitted to Bristol-Meyers Squibb and are largely being coordinated by John Chevedden, an active individual shareowner who has helped many on corporate governance reforms. You can find this and other no-action requests at Division of Corporation Finance Incoming No-Action Requests Under Exchange Act Rule 14a-8 on the SEC site or here. I've also uploaded interested party rebuttals from Timothy Smith, Senior Vice President, Walden Asset Management and from George R. Gay, CEO, Fist Affirmative Financial Network.

In brief, Goodman argues the resolutions should be excluded "because Messrs. Steiner and Rossi (collectively, the "Nominal Proponents") are nominal proponents for John Chevedden, whom the Company believes is not a stockholder of the Company... in fact, the proponent of the Proposals and the Nominal Proponents are his alter egos. (my emphasis) It makes me wonder if Goodman believes Bristol-Meyers Squibb is her alter ego, as she works on their behalf to attempt to exclude the resolutions from Steiner and Rossi.

I've got something personally at stake in this battle, since Chevedden and I are working closely together on several resolutions for companies in which I am a shareowner, in much the same manner that he is working with Steiner and Rossi. If these proposals can be excluded, it is likely mine can be as well. I'm not a nominal proponent, I'm just working together with a friend who is much more experienced in submitting proposals and defending no-action requests. Essentially, he is working as my agent in much the same way that Goodman is acting as an agent for Bristol-Meyers Squibb.

As Timothy Smith notes in his letter to the SEC, "There are numerous examples of pension funds, mutual funds, investment managers, foundation, religious investors, unions and individuals working together as proponents... More experienced or knowledgeable proponents may assist first time filers. Information may be exchanged about multiple resolutions going to one company. All of this is done in a spirit of co-operation not a conspiracy to evade the SEC rules. Yet if the SEC agrees with Ms. Goodman’s imaginary concept that Mr. Chevedden has “alter egos” with no personal commitment to the issue being raised with the company, what is to prevent Ms. Goodman from concocting another argument that investors co-operating through the Interfaith Center for Corporate Responsibility (ICCR), Social Investment Forum (SIF), Principles for Responsible Investing (PRI), CERES or an investment manager like Walden are simply “alter egos”."

There is nothing in the SEC's rules, nor should there be, that prohibits shareowners from working with each other or their agents on resolutions. In fact, SEC Rule 14a-8 anticipates such cooperation and specifically states: "A Resolution, if included in the proxy statement, may be presented at the meeting either by the shareholder or by a representative who is deputized to present the proposal on your behalf." I deputized Chevedden. Steiner and Rossi did the same.

If Goodman's unsubstantiated conspiracy theories are accepted by the SEC as a basis for issuing a no-action letter, all investor networks that cooperate in filing resolutions will be at risk.

Please join Timothy Smith and me in writing interested party letters to the Office of Chief Counsel, Division of Corporate Finance, SEC. Send an e-mail to shareholderproposals@sec.gov. According to the SEC: "Remember that your e-mail is not confidential... Correspondence must be in standard e-mail text or ASCII format so the staff can easily read and print the material." Be sure to include your phone number. You can download a copy of my letter here, sent via e-maill and as an attachment.

Update: Gibson responded to Smith's letter on 1/7/09 with reassurances that their request would have no impact on cooperation "frequently seen with labor unions and religious organizations." They argue the importance of sending the initial proposal on an organization's letterhead, before appointing another person to coordinate discussions on their behalf. Letterhead is a nonissue for most individual investors. Investors, institutional or individual, should be able to appoint an agent to work on our behalf at any point in the process.

E-Proxy Mandatory 2009

Starting January 1, 2009, all public companies must comply with the e-proxy requirements, Shareholder Choice Regarding Proxy Materials, Release No. 34-56135 (July 26, 2007).  Companies conducting proxy solicitations will have to post materials under the "notice and access option," "full set delivery option," or a hybrid.

Under "notice and access," a company can mail a simple "Notice of Internet Availability" and can post the proxy materials on their website. Shareowners must either rely on their electronic connections or request hardcopy proxy materials.

Under the full set delivery option, companies can use existing methods to deliver copies of proxy materials in paper or electronic form but must also post a copy to their website.

Companies can use a hybrid approach where notice and access is used for certain shareowners and the full set delivery option for others.  Of the 634 companies that had implemented the notice and access option by May 31, 2008, approximately 10% used some sort of hybrid approach, according to Broadridge Financial Services, Inc.    

Companies are saving substantially on mailing and printing costs but Broadridge reports that voting by retail shareowners dropped from approximately 20.6% to 5.5%, and the number of retail shares voted dropped from 34.3% to 16.7%.   

As I have mentioned previously, this is a good time for retail shareowners to get familiar with Proxy Democracy. Enter in your portfolio now and you will start getting automatic e-mails informing you of how respected institutionals are voting. You'll find it helpful to know how others are voting.

California Public Funds Governance Event

Los Angeles Pension Trustees are sponsoring Governance Round Up for 2009. This an opportunity for pension fund staff/trustees, interest groups and investment managers to present their governance programs for 2009.  These may include corporate shareholder programs, private equity and hedge fund policy positions, ESG initiatives or international governance positions. Several of the largest funds in California are participating.

It looks like a great opportunity to get in front of funds with hundreds of billions of dollars of investments, to network, and/or to learn what's coming. Jack Ehnes, CalSTRS CEO, will be the Emcee. February 23, 2009 9am to 4pm, at the Sheraton Gateway, with a shuttle to LAX.

Back to the top

News from 2008: December, November, October, September, August, July, June, May, April, March, February, January

News from 2007: December, November, October, September, August , July and June

There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are still current... even 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, at the latest. We'll be back!

with the Corporate Governance NETwork