Current News & Commentary. 2009: October, September, August, July, June, May, April, March, February, January. 2008: December, November, October, September. News Archives back to 1995. Corporate governance defined. Disclaimers, Copyright & potential Conflicts of Interest. Book bites.
Support: Social Investment Forum, Investor Suffrage Movement, FundVotes, Proxy Democracy, Shareowners.org, TransparentDemocracy.org, MoxyVote.com, VoterMedia.org, Lemonjuice.biz, our Blank Votes petition. Send comments to the SEC with File 4-583 in the subject line.

November 2009

Google Scholar Offers Legal Search

Legal opinions from U.S. federal and state district, appellate and supreme courts, as well as articles from journals are now available through Google's database. I suspect most will use the Advanced Search page because you can select your jurisdiction and set other parameters.

To understand how an opinion has influenced other decisions, you can explore citing and related cases using the Cited by and Related articles links on search result pages. As you read an opinion, you can follow citations to the opinions to which it refers. You can also see how individual cases have been quoted or discussed in other opinions and in articles from law journals. Browse these by clicking on the "How Cited" link next to the case title.

So, for example, it was very easy to find American Federation v. American International Group, 462 F. 3d 121 - US: Court of Appeals, 2nd Circuit by simple typing in "proxy access." The famous case comes up first. From there we can then link to cited material, such as Resnik v. Swartz, 303 F.3d 147, 151-52 (2d Cir.2002).

Two real limitations: Google Scholar doesn't include statues and regulations. Additionally, there is no indication if the case has been overruled, vacated, etc. Since there is no way to Sherpadize a case and the search tools are not as powerful as those found on Lexis or Westlaw, we don't expect those services to be put out of business. However, Google certainly has developed a useful tool for those of us who don't have access to these expensive subscriptions.

Sacramento NACD

NACD events in Sacramento are relatively rare, since the Northern California chapter more frequently meets in the Bay Area. This December 10, 2009 event should be great, focusing on Principles for Strengthening Governance of U.S. Corporations. Panelists: Recently appointed to the Directorship 100 Hall of Fame, Anne Sheehan, Director of Corporate Governance at CalSTRS and Richard Koppes, of Counsel, Jones Day. They will utilize the NACD Key Agreed Principles as part of their presentation. Moderator: NACD Chapter President Craig Stone. Price: $50 for members $65 for nonmembers. Register!

California Chamber of Commerce Offices
1215 K Street, Suite 1400
Sacramento, CA 95814
Lunch served--12:00 Noon
Adjournment--2:00pm
Networking--11:30am

Handbook of Social Capital

When Tocqueville visited the United States in the 1830s, it was our propensity for civic association that impressed him as the key to making democracy work. "Americans of all ages, all stations in life, and all types of disposition:' he observed, "are forever forming associations. There are not only commercial and industrial associations in which all take part, but others of a thousand different types--religious, moral, serious, futile, very general and very limited, immensely large and very minute.... Nothing, in my view, deserves more attention than the intellectual and moral associations in America." Robert D. Putnam's famous 1995 essay, Bowling Alone, introduced many to the concept of social capital.

Gert Tinggaard Svendsen and Gunnar Lind Haase Svendsen have edited an informative and greatly expanded update. The "Handbook Of Social Capital: The Troika of Sociology, Political Science and Economics" examines how three disciplines work together in developing and shaping networks. Economics primarily focuses on transaction costs. Political science focuses on institutions and sociology focuses on the norms that regulate behavior.

Life is easier in communities with high social capital. Networks of civic engagement foster generalized reciprocity and trust. Communication and coordination amplify the growth of reputations, facilitating collective action. Well worn templates and success lead to future collaboration and broaden our sense of empowerment. I read the essay's mainly thinking of how these concepts might be applied to internet sites, such as the Investor Suffrage Movement, Proxy Democracy.org, Shareowners.org, TransparentDemocracy.org, MoxyVote.com, and VoterMedia.org.

One concept discussed by the editors was that of bridging vs. bonding. Bridging implies open networks across social cleavages, inclusion, and generalized trust. Bonding implies closed, inward looking networks based on particularized trust. Bridging seems more important for organizations attempting to facilitate shareowner action.

According to Elinor Ostrom and T.K. Ahn, "trust is the core link between social capital and collective action. Trust is enhanced when individuals are trustworthy, are networked with one another and are within institutions that reward honest behavior." One interesting study found that reciprocal agents using conditionally cooperative strategies have a higher chance to interact with one another and the surrounding population than agents who defect. "Information regarding a potential transaction partner's trustworthiness is crucial when trustworthy individuals try to initiate cooperation."

Reputation is everything. "Self-governing systems in any arena of social interaction tend to be more efficient and stable not because of any magical effects of grassroots participation itself but because of the social capital in the form of effective working rules those systems are more likely to develop and preserve, the networks that the participants have created and the norms they have adopted." For example in in development projects, even "primitive" irrigation systems developed with the involvement of farmers often outperform those using more modern concrete and steel headworks. Investment by participants makes the difference.

In other words, in project planning we need to focus as much on the incentives of participants as we do on the physical or virtual technical infrastructure. Simply agreeing on a set of rules put in place with by others may get something up and running but doesn't engender participation or long-term success.

Poulsen discusses research on cooperation, such as the "Prisoner's Dilemma." Cooperation often falls over time because reciprocally minded subjects give up contributing if they feel like they are the only ones doing so. Punishing or expelling nonparticipants can generate higher and more stable cooperation but only if group members have information about each other's contributions.

The chapter, "Corruption," by Uslaner found unequal distribution of resources in a society to be at the heart of the problem. Inequality leads to low generalized trust and high in-group trust, which leads to corruption, which leads to more inequality. Corruption thrives on particularized trust, where people only have faith in their own kind or small circle. "The policies that work best to reduce inequality and promote trust - universalistic social welfare policies - also depend upon honest governments to deliver the good and upon a social compact to provide benefits such as universal education and health care to the rich and poor alike."

Rothstein carries the theme forward by noting the services for the poor tend to become "poor services," whereas if all are included, middle and upper classes will demand higher quality. Popular movements of protest and self-help stand in contrast with charities dominated by middle and upper classes. "Needs testing and bureaucratic discretionary power are often more difficult to reconcile with principles of procedural justice, compared with universal public services. Since selective welfare institutions must test each case individually, they are to a greater extent subject to the suspicion of cheating, arbitrariness and discrimination, compared with universal public agencies."

That should give potential readers a rough idea of some key discussions. While the Handbook is geared toward an academic audience, especially those concerned with economic, political and social development, the more general reader will also find important insights in the cross-disciplinary approach.

RMG Proxy Scorecard

Risk Metrics Group reported on the results so far for this year on several types of proposals. A few of the higher scoring resolutions are as follows:

• Advisory vote on compensation 45.6% average favorable.
• Require majority vote to elect directors 58.0%
• Right to call special meeting 50.8%
• End/reduce supermajority vote requirement 69.7%
• Repeal classified board 65.6%

Compared with last year, several resolutions gained ground. The following were up:

• Independent board chairman, favorable voting up 7.6% to 36.9%
• Require majority vote to elect directors, favorable voting up 6% to 58%
• Anti-gross-ups policy, favorable voting up 4.9% to 50.2%
• Right to call special meeting, favorable voting up 4.2% to 50.8%
• Advisory vote on compensation, favorable voting up 4.1% to 45.6%
• End/reduce supermajority vote requirement, favorable voting up 3.8% to 69.7%

New resolutions gaining ground this year were vote on Executive death benefits, Retention period for stock awards, and Establish bonus banks. (2009 Proxy Season Scorecard, Results as of 11/15/09)

Owners too Complacent

Writing before release of the final Walker Report, PIRC called on owners in the UK to end their complacency.

In what other scenario would we imagine that the owner of a property is being responsible if their starting position is that their agent is right and should be supported? This is analogous to an electorate announcing its default support to the incumbent administration... This is not at all to argue that shareholders should start from the position that management is wrong, but rather to be clear that management are agents, and as such cannot be assumed to share the principal’s interests.

Responsible owners give critical feedback to their agents, rather than self- censoring dissent for the sake of an easier relationship or privileged access... Therefore in PIRC’s view those investors who continually pull their punches when it comes to voting, and adopt a default position of support for management, are not being responsible. In fact they are actively doing damage by suppressing feedback that could benefit both companies and their investors. (Getting ownership back to front, PIRC Alert, 11/24/09)

The final report seems to me somewhat disappointing. Whereas the draft draft called for fund managers and other major shareholders to engage “more productively” with companies in which they invest to encourage improvement in long-term performance, or explain why they are not in compliance, the final report called, instead, on disclosure of the business model being used by a fund manager.

After much criticism from industry, they decided they could "not exclude business models that involve greater emphasis on active trading of stocks rather than active engagement on the basis of ownership on a longer-term basis. But there should be clear disclosure of the fund manager's business model, so that the beneficial shareholder is able to make an informed choice when placing a fund management mandate.” (U.K. report pushes for more corporate governance activism, P&I, 11/25/09)

Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration

According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.

Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. ('Genocide-free' measure rejected at American Funds, AP, 11/24/09)

I suspect Broadridge claims they don't have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.)

By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don't actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.

It was supposed to be a temporary measure. Brokers were in a panic because they didn't have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.

That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don't want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can't accurately count ballots because it can't audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting... and they can do it either before or after the fact.

As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven't seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.

A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.

I'm participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.

RiskMetrics Group Policy Updates

As mentioned before, RMG updated their voting policies. Now, Weil, Gotshal & Manges LLP has distilled the essence of the changes.

It is likely that RiskMetrics’ policy updates will result in an increased number of recommendations in 2010 to vote “against” or “withhold” votes from director nominees in uncontested elections. It is also likely that these negative vote recommendations will have a greater impact than in the past because of other significant changes in the director election process – the increase in companies adopting majority voting for the election of directors (which is also the subject of several pending Congressional bills)5 and/or director resignation policies, coupled with the elimination of brokers’ ability to vote in director elections in the absence of customer instructions.

Also of note, RMG typically provides S&P 500 companies with prior warning if it intends to recommend “against” or “withhold” votes for directors. Those not in the S&P 500 aren't so lucky, so it is even more important for them to get familiar with the guidelines and be ready to engage. Start with the Weil Briefing.

MoxyVote.com

MoxyVote.com launched on November 20, 2009 in Beta and has already attracted considerable attention. Philly.com jumped right in with West Chester's Moxy Vote boosts rebel shareholders on opening day. Cari Tuna did something a little more substantial with her Proxy-Voting Advocates Pool Resources on the Web (WSJ/11/23/09).

Of the systems utilizing the internet to increase retail investor participation in proxy voting by providing guidance on proxy issues from institutional investors, advocates or analysts, MoxyVote.com is the only one attempting to do so as a profit-making business, except perhaps FundVotes and CorpGov.net. The others - Investor Suffrage Movement, ProxyDemocracy.org, Shareowners.org, TransparentDemocracy.org, and VoterMedia.org - are all using some sort of non-profit form.

MoxyVote's most direct competition at this point is ProxyDemocracy.org and TransparentDemocracy.org. All three systems provide users with information on how others are voting or advocate voting. ProxyDemocracy.org appears to be far ahead at this point with regard to actually being able to look up an individual company and finding recommendations, since they are collecting votes from some very huge funds like CalSTRS and Florida SBA, which own shares in thousands and thousands of companies.

Those reporting or advocating on MoxyVote and TransparentDemocracy.org tend to be smaller, like Calvert Investors or Investors Against Genocide. However, MoxyVote has the distinct advantage of being able to be tied in with your brokerage accounts and by allowing you to vote your shares right through the site. It is the only site that allows users to receive their proxies, obtain guidance from multiple sources and submit their votes all at one place.

Since proxy season isn't in full swing, I don't have any proxies to vote right now, so couldn't test that function yet. However, when we do, another feature I like is that we will be able to see how many voters used MoxyVote to vote how many shares. That's going to be a powerful tool in building involvement. Yes, you may only be voting 40 shares with the recommendations of Calvert or Change to Win but if you see on the site that 100, 1000, or 10000 others did the same, you begin to see that small votes do add up.

MoxyVote also employs a form of client directed voting (CDV) that allows users to set it and forget it. The CDV system advocated by the Business Roundtable has five choices: always vote for management, always vote against management, abstain, vote in proportion to shareowner vote within my broker, let my broker decide. These feel relatively meaningless to me. MoxyVote allows you to set your voting default to your list of advocates (your trusted "brands"). Right now, I've got mine ranked as follows:

1. Investor Environmental Health Network
2. Center for Political Accountability
3. Change to Win
4. Calvert Investments
5. Boston Common Asset Management

Therefore, I could set up my account so that four days before the meeting, my stock is voted as recommended by IEHN. If IEHN has no recommendation by then, it is voted per the recommendation of CPA. If CPA has nothing, then it looks to CtW and on down the line until one of my advocates has a position. If none do, I can set the default position to vote with management, against them or abstain. If I elect to abstain, MoxyVote withholds my votes from director nominees.

For individual shareowners, MoxyVote provides access to various information sources, the convenience if automated voting and the ability to align your votes with those supporting like-minded organizations. For shareowner advocates, it appears to be a cost-effective way to get out their message and recruit new members with similar values. Once the site begins to attract a large following, corporate management may also see value in getting involved. They could use the site to communicate with owners and potential owners, as a listening post to get a sense of where their retail investors stand on various issues, and in helping them meet quorum requirements.

I encourage readers to try all three of these sites: MoxyVote's, ProxyDemocracy.org and TransparentDemocracy.org. Please let me know what you think of each.

Prodding the SEC on an Accessible Shareowner's Registry and CDV

The SEC is proposing changes to the notice and access model for furnishing proxy materials to shareholders under File No.: S7-22-09. Reading through some of the comments that had been filed and posted by November 20th, I found to of particular interest. One of the most interesting comments was from Larry S. Eiben of Moxy Vote. Eiben recommends the SEC "expand its inquiry to a more wide-scale examination of how the proxy voting mechanism works in the Internet age and what steps the Commission can take to facilitate proxy voting by individual shareholders."

Not surprisingly, Eiben believes the development of electronic voting platforms for retail investors, like Moxy Vote, is the solution to several issues surrounding why most retail investors don't vote. The SEC could encourage such platforms by:

• clarifying that fees for electronic vote submissions should be paid by Issuers
• clarifying proxy solicitation, including the 60-day "blackout" period for participation in third-party on-line forums
• passing a rule that gives shareholders full control to request proxy ballots or VIF be delivered electronically to the voting platform of his or her choice

The second interesting comment letter came from the Society of Corporate Secretaries & Governance Professionals who write that "client directed voting" (CDV) would increase shareholder responsiveness and engagement. Unfortunately, their explanation of CDV envisions only shareholder directions to their "broker or bank custodian with advance standing instructions on the voting of certain appropriate types of proposals." The Society should be talking with MoxyVote.com, ProxyDemocracy.org, and TransparentDemocracy.org.

I submitted comments in hope that the SEC and the Society would begin connecting the dots between CDV and systems like Moxy Vote, especially as the SEC begins to begins to look at proxy plumbing/mechanics issues. In my comment letter, I suggest it is time to move from “immobilization” of securities through the depositary system to "dematerialization" of shares with a central real-time registry that can show all current holders and quickly reflect changes in securities positions, available to the issuer and to shareowners wanting to communicate directly with all shareowners. This would reduce overvoting, empty voting and tax evasion, as well as simplifying distribution of materials, solicitation of voting instructions, collection of proxies, verification and audit of votes, and the assignment of proxy rights to others, as outlined by the Investor Suffrage Movement.

Additionally, the SEC should take whatever steps are necessary to facilitate the use of Internet tools such as ProxyDemocracy.org, TransparentDemocracy.org, and MoxyVote.com, which allow clients to see the voting recommendations of others and to essentially vote by “brand.” Any “client directed voting,” system considered by the SEC should include such systems that offer a wide range of options, not just the five commonly discussed (always vote for management, always vote against management, abstain, vote in proportion to shareowner vote within my broker, let my broker decide). Glyn Holton, of the Investor Suffrage Movement and the United States Proxy Exchange, and I will spend much more time on these issues during the weeks ahead and we are hoping to collaborate with many readers. Let me know if you are interested in participating.

Thirty Years of Corporate Governance: Firm Valuation & Stock Returns

Martijn Cremers and Allen Ferrell developed the Cremers-Ferrell database, which tracks, from 1978-1989, approximately 1,000 firms’ G- and E-Index scores (composite indexes of shareholder rights and anti-takeover measures); the presence or absence of the 24 individual corporate governance provisions that constitute these indexes such as poison pills, compensation plans, and classified boards; and data on M&A activity, firm financials, institutional ownership, and stock returns. They then combined this new dataset with the Investor Responsibility Research Center (IRRC) database that covers 1990-2006, creating a comprehensive corporate governance database from 1978-2006.

According to their analysis, an increase of three points in a firm’s G-Index score (a higher score indicates fewer shareholder rights or more anti-takeover measures) reduces firm value by about a 3.3%. They find a robust negative association, both economically and statistically meaningful, between poor governance (as proxied by the G- and E-Indexes) and firm valuation for the 1978-2006 time period. However, they do not find that low-valued firms tended to adopt more G-Index provisions. Therefore, the corporate governance policies they measured affect firm value primarily through a takeover channel rather than through operating performance. Since abnormal returns were highest in the beginning of their time period, they hypothesize that investors learned the importance of governance over time.

Cremers, Martijn and Ferrell, Allen, Thirty Years of Corporate Governance: Firm Valuation & Stock Returns (November 7, 2009). Yale ICF Working Paper No. 09-09. Available at SSRN: http://ssrn.com/abstract=1413133

Private Ordering: No Solution

Among commentators opposed to proxy access through the adoption of Rule 14a-11, a common theme was that the SEC should refrain from imposing a uniform federal access procedure. Instead, these commentators urged, the SEC should facilitate private ordering to permit shareholders at each individual company to decide whether proxy access is desirable and to establish its precise contours. Implicit in many of the comments supportive of private ordering are assumptions that shareholders can easily propose appropriate proxy access procedures at individual companies and that the shareholder voting process is free from significant distortions.

The Limits of Private Ordering: Restrictions on Shareholders’ Ability to Initiate Governance Change and Distortions of the Shareholder Voting Process, Prepared by Beth Young, Senior Research Associate, The Corporate Library for the Council of Institutional Investors and the Shareowner Education Network, analyzed 491 companies in the S&P 500, 924 companies in the Russell 1000 and 2,817 companies in the Russell 3000.

Just under half the companies analyzed had either a restriction on shareholders’ ability to amend the bylaws or multiple classes of stock with disparate voting rights, or both. Among Russell 3000 companies, 48.5% of companies have at least one of these two governance arrangements in place. Additional distortions could be introduced into the voting process for management proposals to opt out of proxy access as a result of the operation of the broker-may-vote rule.

After reading the study, one has to conclude that "private ordering" is no solution. We need proxy access.

Sitcom Shareowners Meeting

The Office does a shareowners meeting. Humorous. Of course, it would have been nice to see how they portray shareowner activists and resolutions. Why not let us see the board trying to grapple with resolutions from CalPERS and John Chevedden? Maybe in another series. Thanks to Nell Minow for the heads up and link.

As an exercise to contemplate before the session, SVNACD asked prospective attendees to "consider the following question: what would a skeptical activist shareholder think if they knew exactly how many emails you sent and how many minutes you spent reading on your blackberry during your last board committee meeting?"

Lionel M. (Lon) Allan (right), Board Chair of the Silicon Valley Chapter of the National Association of Corporate Directors, introduced the panelists, F. Daniel Siciliano and Eric Finseth. Although he retreated to the back of the room, Lon peppered the panelists with informative chatter, adding a bit of informality and humor to what some directors may have viewed a scary topic. Electronic breadcrumbs could document more than you ever dreamed. Better start thinking a little more like a plaintiff's attorney.

Getting right to the homework assignment, Dan informed us that litigation might well ensue around the issue of how much attention you paid when the big decision the board got wrong was made. Yes, you were pretending to pay attention, but you were using your smart phone during the meeting and the ability to multi-task is a myth. A recent Stanford study by Eyal Ophir, Clifford Nass and Anthony Wagner provides what Dan believes might be admissible scientific evidence. People who are regularly bombarded with several streams of information do not pay attention, control their memory or switch from one job to another as well as those who complete one task at a time. Dan suggests, "if you aren't 100% engaged, then leave the room.

Read our report on this exciting SVNACD session.
Next session: The White Collar Defendant -- Fighting Back,
Presented by: Melinda Haag and Doron Weinberg.
Thursday, January 21, 2010. Continental breakfast at 7:30 am. Program - 8:00 to 9:30 am. Location: Wilson Sonsini Goodrich & Rosati, 950 Page Mill Road, Palo Alto, CA 94304

Ferlauto Joins SEC

Richard C. Ferlauto joins the SEC's Office of Investor Education and Advocacy (OIEA) as Deputy Director of Policy to help continue its increased focus on individual investors. OIEA serves the Commission as the "investors' office" and provides educational resources to help individual investors make informed financial decisions. Mary S. Head, who recently served as Acting Director of OIEA, has been named Deputy Director of the office. Kathleen M. Floyd has been appointed Deputy Director of Investor Education.

Rich leaves American Federation of State County and Municipal Employees, where he has been Director, Corporate Governance and Public Pension Programs since 2002. Previously, he was Managing Director, Proxy Voter Services for Institutional Shareholder Services and Director of Policy for the Center for Policy Alternatives. Currently, Mr. Ferlauto is a member of the PCAOB Investor Advisory Committee and The Conference Board Taskforce on Executive Compensation. He has been named to the Directorship 100 as one of the most influential leaders in corporate governance for the past three years. Mr. Ferlauto is a graduate of Georgetown University. (SEC Names Senior Officials to Investor Education and Advocacy Efforts)

How will AFSCME get along without him? At least I feel confident that OIEA will change for the better. Maybe they will actually put in an educational segment about proxy voting.

Step Into the WayBack Machine

They accused the directors of abuse of power, short-selling and self-enrichment. They argued that shareholder approval was required for the company to turn to the capital market to borrow funds. They demanded that large investors be entitled to vote on the appointment of new directors. Shareholders mobilized public opinion and exerted pressure on the government to ensure that more rights were granted to the shareholders.

To a limited extent, they won. The 1623 Charter of the Dutch East India Company (VOC) granted certain rights to large investors, including the right to nominate new candidates for appointment as director. It regulated insider trading by the directors and encouraged the directors to pay a yearly dividend to the shareholders. In addition, a committee of nine shareholders was entrusted with supervision of the VOC directors. This corporate body was known as the “Lords Nine.” (Shareholder Activism at the Dutch East India Company in 1622, Matthijs De Jongh, SSRN, 10/28/09)

For more papers on early shareowner activism and to listen to a brief talk by Stephen Davis, Executive Director at the Millstein Center, discussing Isaac Le Maire, go to the Center's Origins of Shareholder Advocacy. If we learn from the past, maybe we can actually change how capital markets move forward by empowering shareowners, providing a context for accountability.

Succession Planning

SEC Staff Legal Bulletin 14E revised its position on investor proposals seeking reports on CEO succession planning. In the past, staff allowed companies to omit the resolutions on ordinary business grounds because they related to the termination, hiring, or promotion of employees. Now, the SEC acknowledges “CEO succession planning raises a significant policy issue regarding the governance of the corporation that transcends the day-to-day business matter of managing the workforce.. recent events have underscored the importance of this board function to the governance of the corporation.” The Laborers’ International Union of America is submitting succession planning proposals. Corporations might avoid such resolutions by taking affirmative action. How The SEC Just Changed Succession Planning, Stephen A. Miles and Nathan Bennett, Forbes.com, 11/18/09, offers advice.

Monks Calls for Special Meeting Law

Bob Monks Delivers Lecture on Shareholder Activism (HLS Forum on Corporate Governance and Financial Regulation, on Wednesday November 18, 2009). The blog entry is brief but links to background materials are well worth reviewing. Below are a few salient points.

"The irresponsible use of power by Chief Executive Officers is the primary cause of failure of a private corporate governance regime." "Indispensable to the collapse of private governance has been the failure of government at all levels – executive, agency and judicial - to enforce existing laws, importing including those prohibiting just the conflicts of interest that have crippled ownership." "The core problem has been the disappearance of any practical or legal respect for the fiduciary standards that ensure a beneficiary of the loyal competence of the person responsible for managing his property."

A "dual classes of stock might be appropriate. It is well to remember that when Warren Buffett invests in marketable securities, he is usually able to secure a special classification that reflects the value added by his involvement. Nor has the dual class prevalent in Scandinavia lowered long term equity returns. Even American scholars comment favorably on such a notion: “Providing long-term shareholders a greater number of votes per share should become a permissible option.”"

The paper suggests two main policy initiatives:

• There must be effective enforcement of existing law so as to require fiduciaries to take appropriate action to protect and enhance the value of portfolio securities, and
• There must be arrangement for financing “activism” either as an appropriate corporate expense or as a designated portion of the investment management fees.

"We cannot hope to make progress until - once and for all - we face up to the reality that a self selecting board cannot ever meet the very real needs for independence at critical points in the governance structure." "Directors selected pursuant to a self selecting process cannot be considered in any meaningful way to be independent." Monks suggests "a pre-emptive federal statute conferring on ten percent of voting shareholders the right to call a special meeting at which a majority acting can remove any or all of the directors with or without cause."

Don at Dawn

While not directly related to corporate governance, a fellow State of California retiree has a great blog around energy and climate change issues. For years, I've subscribed to Don Schultz's news clips for years. Now it is great to see it in a blog, Don at Dawn. Here's a couple of items that caught my eye this morning in Restructuring India:

Start-up company, First Energy, applies gasifier technology used in power plants to make a stove that burns more efficiently and with less smoke. It uses a perforated chamber and small fan to get just the right amount of air to keep a fire burning at a high temperature, meaning less smoke and quicker cooking. It has sold around 400,000 of the $23 stoves across India. Says Mahesh Yagnaraman, head of First Energy. "This is not a gizmo like a cellphone. But it is definitely a life-changing product because the houses will not be smoky."

Anurag Gupta distilled a bank branch down to a smartphone and a fingerprint scanner. A bank representative goes directly to a village and can set up shop anywhere there is shade. Savers line up and give an identification number, scan their fingers and then deposit or withdraw small amounts of rupees. Transactions are recorded through the phone and the representative later visits a standard branch to pick up or drop off rupees as needed. Mr. Gupta named his innovation Zero, after one of India's most important innovation -- the number zero -- invented by Indian mathematician Aryabhata in the sixth century. Indian banks already are using Gupta's system to open millions of new accounts. The cost per "branch" is about $50 a month for daily services, versus thousands for a standard branch or ATM.

China awoke to climate change with a storm in January 2008. Suddenly, severe ice storms brought much of the nation to a standstill. For two weeks, fierce winds, sleet, and snow downed power lines, shuttered businesses, and razed more than 200,000 homes across southern and central China. All told, more than 100 people were killed. China’s worst storm in decades was, according to United Nations scientists, an illustration of what a changing climate may herald for the future. “For the ordinary people,” says Hu Kanping, editor of the Environmental Protection Journal, “it was a historical moment for them to know what is climate change.”

The most power-hungry television sets could soon be banned from store shelves in California as state energy regulators consider a first-in-the nation mandate intended to lower electricity demand. The regulations will require televisions sold in California to be more energy efficient beginning in 2011. The requirement would be tougher in 2013, with only one-quarter of the TVs on the market currently meeting that standard.

Don does a great job of covering development of the green economy, grid vulnerabilities, water and all things energy. A great read for a quick coffee break that can sometimes be so fascinating you'll want to stay and explore for hours.

Latham at Stanford University

Mark Latham, Director of VoterMedia.org and ProxyDemocracy.org, as well being a member of the SEC's Investor Advisory Committee, made the case to Stanford University students for expanding the options being considered by the SEC for client directed voting. Now, will we be able to convince the SEC?

See our special report of this November 16, 2009 event, sponsored by the Arthur and Toni Rembe Rock Center for Corporate Governance.

Director Attitudes Shifting: Laggards Should be Voted Off

A recent survey of by Corporate Board Member and PricewaterhouseCoopers found that "58% of the survey respondents think investors should be able to communicate with the board at any time, a big increase over the 37% who felt that way in 2008. Even more impressive, 82% say shareholders should be able to ask the board questions at the annual meeting, versus 52% last year." (The Buck Moves Into the Boardroom, Corporate Board Member, Fourth Quarter, 2009)

RMG policies regarding director elections don't appear to take into account what directors or director candidates say, unless covered under the general rubric of "qualifications" and "strategic plan and quality of critique," applied in contested elections. Political candidates can occasionally be knocked out of a race for serious blunders. Shouldn't shareowners take obvious blunders by directors into account when voting?

"Love it, or leave it" was a popular refrain applied critics of the Vietnam War but few politicians today would take such an all or nothing approach. Citizens would vote against candidates who essentially say "if you don't like the way I'm voting, you should move out of my district." While the above survey shows the attitudes of many directors have shifted, not all have embraced the benefits of dialogue and shareowner input. For example, Lowell W. Robinson (a director with International Wire Group and the Jones Apparel Group) was quoted saying, "I still cling to the belief that if you don't like a company, sell your stock; otherwise, trust management."

I like T. Boone Pickens Jr's response to this arrogant perspective. “Most of the time management’s attitude toward shareholders is ‘If you don’t like the way we run things, sell your stock.’” “That’s like the gardener telling the estate owner, ‘If you don’t like the way I take care of your property, sell it and move out.’ That’s not the way the real world works.”

I would advise a withhold vote against directors, such as Mr. Robinson, who espouse such anti-shareowner sentiments, unless there is evidence that demonstrates the statements to be a temporary aberration, obviously more than counterbalanced by their value enhancing words or deeds. Of course, since most board actions take place in what is essentially a "black box," it may be difficult for directors like Mr. Robinson to convince shareowners of their worth, even if they are willing to take direct questions from shareowners. Shareowners of International Wire Group and the Jones Apparel Group should consider asking for such evidence from Mr. Robinson and others expressing their contempt of shareowners who are less than complacent.

CorpGov Bites

"Looking ahead to the 2010 proxy season, Georgeson predicts that proposals relating to executive compensation will continue to dominate the debate," said David Drake, President, Georgeson Inc. Directors receiving withhold/against votes of 15% or greater jumped more than 68% from 2008 to 2009, with more than 1,000 directors at more than 375 companies receiving such votes. Wait until 2010, with no broker votes on elections. Other resolutions gaining momentum include separating the roles of the chairman and CEO and a shareholder's right to call a special meeting. (2009 Annual Corporate Governance Review) Earlier, Rick Grubaugh of D.F. King & Co. provided insight into issues related to shareholder proposals seeking to allow shareholders the right to call a special meeting in an interview with Broc Romanek.

Great commentary by Nell Minow on Motley Fool site (This Is How to Change Corporate Governance, 11/12/09). She points to the need for better clawback provisions ("We want executives to have an incentive to get the numbers right the first time, and the only way to do that is not reward them when they get it wrong.”) and other reforms. On Tom Donohue, CEO of the Chamber of Commerce, "[Donohue] has hijacked capitalism on behalf of executives rather than investors. He's a terrible director on all of the companies on which he serves. He's a director for Sunrise Senior Living, which had accounting fraud. He was a director for Qwest, which had accounting fraud. He's a director for Union Pacific (NYSE: UNP), where they supported the bonuses of the executives by attributing revenue from the IPO of a division as operating revenue. So three strikes and I think he should be out." Movie Mom strikes again.

Rich Koppes recently announced his coming retirement from law firm practice, Broc Romanek picks his brain on the "long view." In a few brief minutes they capture, mostly by tracing Rich's career, a lot on where corporate governance has been and where it is going. The three legs of the stool (CEO, Board, Shareowners) are much more balanced today than when he started but we still need proxy access, majority vote directors and a few other reforms. For the curious, go back to our interview with Rich in 1996 as he left CalPERS. Rich makes it clear that although he is retiring from Jones Day, his work in the field will continue.

The September issue of Corporate Secretary has a good article on new SEC disclosure proposals.

Latham & Watkins LLP and The Altman Group have both analyzed proxy access comment letters sent to the SEC. Click through for Latham and Watkins. For the Altman Group, request to proxyaccess@altmangroup.com or call 212-681-9600.

Little direct bearing on corporate governance but we are all influenced by the tension between Islam and the West. Reflections on the Revolution in Europe: Immigration, Islam, and the West by Christopher Caldwell (Reviewed in The New Republic, 11/10/09) is worth a read.

Insider Trading Discussed

The Galleon case raises questions about insider trading at a time when hedge funds and others opaque pools, "live or die on their ability to gather information that competitors don't have." Why Insider Trading Is Hard to Define, Prove and Prevent (Knowledge@Wharton, 11/11/09) discusses the issues.

"There are a number of studies that indicate a lot of insider trading is occurring," says ays, adding: "Usually there is a radical increase [in trading] before the public announcement of the event. So the question is: What is explaining that increase...? And the best explanation is that somebody is getting the information ahead of the news."

"The Galleon case stands out because prosecutors claim to have clear evidence the defendants knew they were breaking the law. They accuse those charged with making about $60 million on illegal trades, and said it was the first time court-authorized wiretaps had been used in an insider trading case."

SOP Survey

The Shareholder Forum initiated an independent survey of a wide sampling of marketplace investors to help participants in their "Say on Pay" program understand what information corporate managers and research professionals should be providing.

NYSE Commission on Corporate Governance

NYSE Euronext (NYX) completed the formation of the Commission on Corporate Governance to address U.S. corporate governance and the overall proxy process. The formation of this commission was first announced in September. Consistent with the NYSE’s role as a leading advocate on governance issues, the commission, chaired by Larry W. Sonsini of Wilson Sonsini Goodrich & Rosati, brings together leading experts and representatives from public companies, institutional and individual investors, broker/dealers and other advisors. Complete list of commission members.

The commission has begun its deliberations and will work with policymakers and other interested constituents to evaluate and make recommendations on pressing corporate governance and proxy reform, including a review of:

• The roles of, and relationships, accountability and communications among, Boards of Directors, Management, Stockholders and other corporate stakeholders;
• The proxy voting process, including transparency of the process, the benefits and costs of recent and continuing regulatory initiatives in the proxy process;
• The role of proxy advisory services, institutional investors and individual investors within the proxy process, including practices which can further educate investors about, and encourage them to participate in, the proxy process;
• Corporate governance structures and corporate mechanisms impacting the governance of the corporation;
• Stockholder access to corporate proxy cards, including recent developments in state law and the proposed initiatives by the SEC.

Governance Reform for Corporations and Democracies

November 16, 2009 from 1:00 pm - 2:00 pm
Stanford Law School, Room 90
Lunch will be provided; registration required
The Arthur and Toni Rembe Rock Center for Corporate Governance presents a free luncheon lecture with Mark Latham, Director of VoterMedia.org and Proxy Democracy.

Mark Latham has spent years developing new tools for voters (investors and citizens) to hold elected leaders accountable in corporations and democracies. The financial crisis, changes at the SEC and the decline of mainstream media are opening doors for implementing these ideas. The Rock Center always provides a great lunch and I know Mark Latham will be one of the most interesting speakers they have had. His work is of vital importance in restoring trust to markets and democratic systems.

Mr. Latham received his PhD in Finance from MIT in 1984, supervised by Fischer Black and Robert C. Merton. He was Assistant Professor of Finance at the University of California, Berkeley, until 1989. From 1989 to 1995 he worked for the New York investment banks Salomon Brothers and Merrill Lynch, mainly on derivatives arbitrage trading in Tokyo equity markets. Funded with his Wall Street earnings, he has dedicated himself since 1996 to improving the governance of corporations and democracies. He currently serves on the U.S. Securities & Exchange Commission's Investor Advisory Committee, as a representative of individual investors. Prepare by reading a few of Latham's publications.

Upcoming Meetings & Events

Jeffrey Callison's show, Insight, on November 16th from 10am to 11am will include an interview with CalPERS board candidates will probably be on for about 15 or 20 minutes. In the Sacramento area, you'll be able to listen on KXJZ at 90.9 on the FM dial. Elsewhere, listen on the internet. An archived copy of the program will be posted on the site several hours after the show, so if you miss it live, you can still hear it later.

The International Corporate Governance Network (ICGN), whose members represent $9.5 trillion in assets under management, is co-hosting its fall conference in Washington DC with the Capital Area Chapter of the National Association of Corporate Directors (NACD), the largest US group representing Boards of Directors. Directors and shareowners will discuss aspects of the SEC’s current agenda, pay practices, director nomination practices and risk management, among other issues. Washington DC 18th -19th November. Details.

Federal vs State Corporate Governance Standards, Weinberg Center for Corporate Governance, Lerner College of Business & Economics, University of Delaware, November 19th, 2009 at 9:30am in 125 Alfred Lerner Hall. Details. Guests: John Castellani, President, Business Roundtable; William Clark, Senior Partner, Drinker Biddle & Reath LLP; Rich Ferlauto, Director, Pension and Investment Policy, AFSCME; Harvey Goldschmid, Dwight Professor of Law , Columbia Law School; The Honorable Travis Laster, Vice Chancellor, Delaware Court of Chancery; Norman Monhait, Member, Rosenthal, Monhait & Goddess, P.A.; A. Gilchrist Sparks, Partner, Morris, Nichols, Arsht & Tunnell LLP; Ann Yerger, Executive Director, Council of Institutional Investors.

How Technology Impacts the Boardroom. SVNACD. 11/19/09 7:30-9:30 AM Eric Finseth and Dan Siciliano will give brief review of the latest and greatest changes in directors duties of care and loyalty (including the ephemeral "duty of good faith"). However, the majority of the discussion will be reserved for the implications of technology in the boardroom as concerns director behavior, the satisfaction of these duties, and the unexpected consequences of the use of technology by directors and those around them.

Carnegie New Leaders Event: Web 2.0 and Corporate Accountability (with live webcast). An opportunity to discuss the emerging findings from a 6-month research project on web 2.0 and corporate accountability launched by the Harvard Kennedy School's Corporate Social Responsibility Initiative in July 2009 and conducted by Sea Change Media. Thursday, November 19, 2009 06:00 PM to 07:30 PM. Details.

Directors Forum has become one of the country’s premier corporate governance conferences. It offers up-close interaction with today’s corporate governance thought leaders like Leo E. Strine, Jr., Vice Chancellor, Delaware Court of Chancery; Mary L. Schapiro, Chairman, Securities and Exchange Commission; John J. Castellani, President, Business Roundtable; William A. Ackman, Founder and Managing Partner, Pershing Square Capital Management LP. Don't miss the Pre-conference Bonus Sessions: “Legal Issues in the Year Ahead.” January 24-27, 2010 in San Diego. Details.

Principles for Strengthening Governance of U.S. Corporations. Northern Calfironia NACD, Sacramento, 12/10/09 luncheon. Anne Sheehan, Director of Corporate Governance at CalSTRS and Richard Koppes, Of Counsel, Jones Day Law firm will present the program. Corporations today are navigating a tough environment. Public and investor confidence has been eroded and the U.S. government seeks solutions in the form of corporate intervention and prescriptive rulemaking. As the financial crisis unfolded, NACD took the lead and convened the business community and investor groups to create a new framework for strengthening governance. NACD, The Business Roundtable and the Council of Institutional Investors collaborated to distill and articulate the fundamental principles on which there was broad consensus. Details.

Beyond SRI: The Future of Socially Responsible Investing. Marlboro, Vermont. 12/11/09, 5-7:30pm. Socially responsible investing, or SRI, is experiencing a period of exciting transition. The practice of factoring environmental, social, and governance (ESG) considerations into investment decisions, introduced some four decades ago, is now integrating into mainstream investing, according to recent reports from Business for Social Responsibility and Netherlands-based asset manager Robeco. Details.

Walden Asks Broadridge Not to Eliminate In-Person Meetings

Timothy Smith of Walden Asset Management sent a letter urging Broadridge to review their decision to eliminate their in-person shareowner meeting and to market "virtual annual meeting" software to companies, implicitly encouraging a trend to eliminate actual AGMs where investors, management and Directors interact with each other face to face. Walden strongly supports company efforts to webcast meetings, allowing those who are unable to attend in person opportunities to see the meeting and ask questions, they are fearful that Broadridge will enthusiastically market programs to eliminate in-person meetings.

Smith's fear appears well justified, given that Broadridge has chosen eliminate their own in-person meeting. I hope other investors will contact Broadridge's Investor Relations staff on this issue with a similar message. Using virtual meetings it is just too easy to ignore the tough questions. Additionally, almost all of the AGM's I've attended have been almost completely scripted. The chance for real interaction often comes in informal encounters before and after the formal meeting. Don't let those opportunities vanish into virtual reality. Who wants to live in The Matrix?

Into the WayBack Machine

Ten Years Ago in CorpGov.net

Laborers International Union of North America (LIUNA) resolution asks Flour, PPG Industries and Texaco to provide for an increase in the voting rights of shareholders who hold stock for an extended period of time. Similar proposals have been submitted by International Brotherhood of Electrical Workers' (IBEW) to MGIC Investment and by United Brotherhood of Carpenters' (UBC's) to Mead. IRRC Corporate Governance Highlights, 11/19/99.

John Chevedden continues his campaigns at Northrop & Airborne. After receiving substantial majorities last year, and being ignored by the companies, he's back. Will Northrop submit its poison pill to a vote by shareholders? 64% voted in favor last year. Will Airborne hold annual election of all directors? Last year 70% voted in favor.

Stephen Davis argues that remuneration issues in the UK are only "the tip of the governance iceberg." Davis favors legislation which would mandate annual elections for the board as a whole. In addition, each committee should be required to submit an annual report to investors discussing their membership, director attendance and work product.

Governance experts weigh in on battle for American Home Products. Richard Koppes questions whether Warner-Lambert "is fulfilling its fiduciary duty to shareholders" because of its use of an options package explicitly designed to kill any chance other suitors, such as Pfizer. Jeffrey Gordon said the option grant is likely to be upheld in court, especially since the attractive accounting method is being phased out by accounting bodies. As long as shareholders can vote up or down, Warner-Lambert's moves aren't violating good governance. Others appear to disagree, including Joseph Grundfest and Nell Minow. (see WSJ, p. C1, 11/17/99)

Five Years Ago in CorpGov.net

Merrill Lynch's Richard Bernstein examined the returns of the 100 largest stocks in the S&P 500 based on market capitalization from 1994 through the second quarter of this year. The portfolio was rebalanced every quarter over the decade. Companies that split the two top executive jobs made up about a fifth of the sample. Those a "split" strategy had average returns of 22% vs 18% for stocks with a single chairman and CEO. The strategy paid off even more for tech stocks. (Outperform with split leadership, The Record, 10/25/04)

In a November 1, 2004 letter, Boeing said it would not de-stagger its board. According to John Chevedden, the Boeing announcement followed 4 majority shareholder votes supporting this topic. The Council of Institutional investors recommends adoption of any shareholder proposal which wins but one majority shareholder vote. Boeing apparently feels that 4-times this threshold is not enough.

Writing in the November 2nd edition of Compliance Week, Karen M. Kroll argues that several events may signal a sea change in the way corporate executives report environmental liabilities in their SEC filings. She mentions the SEC’s new interpretation of “triggering events” that require an 8-K filing, and the FASB’s issuance of guidance concerning FAS 143, as well as the push from institutional investor members of the Investor Network on Climate Risk. Instrumental in raising the bar has been the Rose Foundation for Communities and the Environment, especially their report “Fooling Investors and Fooling Themselves.”

CorpGov Bites

Toby Webb, founder of Ethical Corporation, discusses Some Thoughts on Where CSR came from and who leads... It include some good talking points.

As the health care reform debate shifts to the U.S. Senate, leading faith-based institutional investors are pressuring 36 major companies to state publicly if the U.S. Chamber speaks for them in its aggressive campaign to kill efforts to overhaul the U.S. health care system. All of the targeted companies had previously agreed, at the urging of shareholders, to embrace health care principles that are now inconsistent with the anti-reform stance of the Chamber. The three dozen targeted companies are (in alphabetical order): Aetna; American Express; AT&T; Bristol-Myers Squibb; Cardinal Health; Cisco Systems; Duke Energy; DuPont; Eli Lilly; Exxon Mobil; General Electric; General Mills; Goldman Sachs; Home Depot; IBM; Kellogg; Kohl’s; Manpower; Marriott; McDonald’s; Medco; Merck; Peabody; Pepsi; Pfizer; Safeway; Staples; Starbucks; Target; 3 M; UnitedHealth Group; United Technologies; Verizon; Walmart; Wellpoint; and Xerox. (ICCR press release, 11/10/09

The California Foundation for Fiscal Responsibility is having another go at cutting back public pension funds in California through a ballot initiative. It ties the full retirement age for most CalPERS covered employees to the federal standard. For many that would mean retiring at age 67, instead of 63. Those workers paying into Social Security would get a defined pension based on no more than 1.25% of pay, instead of 2%. Obviously, if the initiative passes, the clout of CalPERS, CalSTRS and other California funds in corporate governance would begin to decline. (Group again files proposed measure to reduce public pensions in California, SacBee.com, 11/7/09)

Stephen M. Davis and Jon Lukomnik argue that institutional investors, not consultants like RiskMetrics, should collectively define “standards of good practice.” Proxy advisers would then then judge companies according to how practices measure up against those standards, instead of developing their own standards with investor input. "Some neutral body—or perhaps even the White House or U.S. Treasury—should convene a summit of investor and director leaders and spearhead the work of composing best practice principles on governance, including executive pay." (Advocating New Best Practices for Governance, Compliance Week, 11.10/09)

PIRC bemoans the by Insight Investment to disband its well-regarded responsible investment team. It is undoubtedly a setback for the industry. Unfortunately one of the side effects of the team being disbanded is removal of Insight’s voting and engagement record. "It was actually one of the first few asset managers to take the step of making its voting record publicly available..." on "every vote on every resolution at every company – and in a very easy to use online database." PIRC believes voting disclosure in the UK needs to be mandatory and in a standardized format. (The case of the vanishing votes, PIRCAlerts, 11/10/09)

The Conference Board Governance Center released its first in a series of research digests called Board Book. The first issue’s focus is Board Leadership and CEO/Chair Separation. The publication cites a handful of papers, articles, speeches and research that analyze CEO duality.

A new BBC World Service global poll finds dissatisfaction with free market capitalism widespread, with an average of only 11% across 27 countries saying that it works well and that greater regulation is not a good idea. In only two countries do more than one in five feel that capitalism works well as it stands--the US (25%) and Pakistan (21%). The most common view is that free market capitalism has problems that can be addressed through regulation and reform. Majorities would like their government to be more active in owning or directly controlling their country's major industries in 15 of the 27 countries: Russia (77%), and Ukraine (75%), but also Brazil (64%), Indonesia (65%), and France (57%). (Wide Dissatisfaction with Capitalism -- Twenty Years after Fall of Berlin Wall, 11/9/09)

Proxy Plumbing

I've updated my previously posted draft analysis (changes highlighted) of the differences between the announced positions of the Shareholder Communications Coalition and The Altman Group. Again, any errors in interpreting their positions are strictly mine. I've expanded on my own comments, especially in the area of requiring disclosure of owners to provide a fully auditable trail in proxy voting, to discourage fraud and other criminal behavior, and to encourage shareowners and companies to build long-term relationships.

When I was a kid back in the 1960, growing up in Pittsburgh, the average holding period was about seven years. My neighborhood of corporate executives and shareowners was not typical of the times, but one behavior would be even less recognizable today. Employees and shareowners were loyal to their companies. One of my friends would only buy gas at a Gulf station. Others were loyal to either Gimbals, Horns or Kaufmann's, even though all three department stores carried much the same stock at much the same price. A friend's father, who took a second mortgage on his house to buy more Poloriad stock was always raving about the company and their products.

I'm not looking to go back to the good old days and the companies I metioned are probably all gone, but I do think there is something wrong when shareownership in a company can turn over in seven days and ownership holding periods for the average company is measured in months, rather than years. I'm convinced that, of the options to reduce short-termism and casino style ownership, getting rid of "street name" ownership could be one of the more important contributions of the current proxy plumbing effort. It would make possible a full audit trail in corporate elections, encourages shareownership (rather than shareholding) through relationship building, and is likely to discourage share lending, short sales and equity derivatives that decouple voting rights from financial interests in a firm.

Donald, David C., The Rise and Effects of the Indirect Holding System - How Corporate America Ceded its Shareholders to Intermediaries, September 26, 2007,provides a very good explanation on the law, development of the indirect holding system as a "temporary" solution, how that became a profitable niche industry, and how once technology had developed to the point where a direct registration system was feasible it was absorbed instead into the DTTC system so that intermediaries could could continue to play a central role and could continue to profit. Donald argues DRS system could address problems such as empty voting and could spread the cost of settlement more equitably. See bottom of page 55. "If the CNS operations of NCSS were tied into a network of transfer agent depositories, transfers of ownership resulting from trades on securities exchanges would simultaneously result in transfers of registered ownership."

It is best paper I've seen on the subject, recommended to me by J. Robert Brown, who wrote the definitive piece more than twenty years ago. The Shareholder Communication rules and the Securities and Exchange Commission: An Exercise in Regulatory Utility or Futility?, Journal of Corporation Law, Vol. 13, p. 683, 1988.

Read my arguments and send me your comments. References to other relevant materials are greatly appreciated as I continue to analyze proxy plumbing issues.

Burlington Northern

The Employees Retirement System of the City of New Orleans filed a lawsuit in Dallas claiming that Burlington Northern's directors breached their fiduciary duties "by attempting to coerce Burlington Northern shareholders into agreeing to a sale to Berkshire under terms which do not maximize shareholder value." Burlington's directors agreed to lock-up and "preclusive defense measures," including a termination fee and a no-shop, no-talk provision "before any price-maximizing process took place in a blatant effort to ensure that controlling shareholder, Berkshire, their favored partner," is Burlington Northern's ultimate acquirer, the suit states. (Pension Fund Sues Berkshire, Burlington Northern Over Deal, WSJ, 11/6/09)

The situation reminds me of a Information Advantages of Large Institutional Owners, a paper by Karen Schnatterly, Kenneth W. Shaw, and William W. Jennings, which found the greater the percentage of shares held by the largest institutional investor, the greater the bid-ask spread in share prices. The results imply that only the largest of a firm's institutional owners - and no other institutional owner - is perceived to hold an information advantage. If any investor ever had informational advantages, it is Warren Buffett. While many institutional investors might expect the largest owner to gather information and monitor firm decisions to enhance firm value, the research results of these authors found that " large institutional owners are perceived to have trading advantages, even in seemingly efficient markets. Second, a managerial implication of our results is that a greater percentage of shares held by the largest institutional owner increases the firm’s cost of capital."

I'm also reminded of Stone v. Ritter and Ryan v. Lyondell. Plaintiff alleged the directors knew that they had a known duty to act to ensure an offer was the highest available but they chose not to act. Therefore, good faith was implicated for purposes of the motion to dismiss. What was crystal clear was the need to document "actions" taken, even if they would otherwise be viewed as non-actions, since if the board "acts," its actions are reviewed under the more favorable business judgment rule.

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.

In the case of Burlington Northern, there was no auction, no "go shop" agreement. In fact, it was the opposite. As a shareowner, I want to know what steps our board took to ensure they were getting the best price. What I've heard so far doesn't ease my concern. I have no doubt Warren Buffett is a good negotiator, maybe in this case too good. (Disclosure: I'm a shareowner in both Burlington and Berkshire Hathaway, as well as Goldman Sachs, acting as financial advisors to BNSF.)

Clawbacks

Thanks to actions taken by the G-20 at its Pittsburgh Summit in September and the U.S. Treasury’s special pay master last month, the term “clawback” will reverberate throughout the board rooms of companies worldwide in 2010. Unlike the S-O clawback provision, the trigger under TARP and ARRA are not tied to a financial restatement. Instead, they are tied to financial statements that are later found to be materially inaccurate but not necessarily due to misconduct or fraud (i.e. if a company pays an executive a bonus when receiving TARP or ARRA funds that may have been included as income during that period). RiskMetrics will tend to support clawback shareholder proposals if a company’s compensation policy does not align with that of TARP recipients. (TARP or Not, New Generation of Clawbacks Are Here to Stay, The Conference Board Governance Center Blog, 11/5/09)

Holly J. Gregory

The latest Governance & Proxy Review from TheAltmanGroup concludes an interview with Holly J. Gregory of Weil, Gotshal & Manges, LLP. Among her observations: "It is no longer enough to simply cite competition and retention concerns to justify large packages and grants." "The idea that independent risk committees of the board should be mandated for every public company is one reform idea that simply defies logic." "The propensity of certain proxy advisors to recommend against directors for any single item on a long list of one-size-fits-all governance no-no's, rather than on a broader view of the director's skills and qualifications and contributions, needs to be adjusted in the new world of heightened shareholder influence." "There is value to our economic system in allocating to boards the power and discretion to manage and direct the affairs of the corporation, while enabling shareholders to participate as passive investors with the benefit of limited liability for the actions of the corporation and the ability to freely enter and exit from their investments."

The Economics and Politics of Corporate Social Performance

This paper by David P. Baron, Maretno A. Harjoto, Hoje Jo won this year's Moskowitz Prize for excellent research in the SRI field. It provides an empirical test of a theory that relates corporate financial performance (CFP), corporate social performance (CSP), and social pressure from government and social activist for improved social performance. A three-equation structural model is estimated for a large number of firms for 1996-2004. The estimates are statistically and economically significant and consistent with the theory. CFP as measured by Tobin's q is increasing in CSP, indicating that it is rewarded by consumers, employees, or investors, and decreasing in social pressure. CSP is increasing in social pressure, indicating that social performance is responsive to social pressure which mitigates some of the negative effect of social pressure on CFP. CSP is also increasing in CFP, which is consistent with social performance being a perquisite for management. Social pressure is decreasing in CFP and increasing in CSP, which is consistent with social pressure being directed to soft targets that are likely to be responsive. The measures of CSP and social pressure are also disaggregated, and the relations among CFP, CSP, and social pressure are largely due to responsive CSP and social pressure arising from private politics. Download the pdf.

NYSE Commission on Corporate Governance

This Week in the Boardroom (11/5/09), Scott Cutler talks about the new Commission and its mission. He provides some hints as to future direction and process. Best practices, executive compensation, proxy voting, proxy advisory services, federalization are among the many topics. Q&A session involved discussion of co-CEOs and healthcare benefits for directors. Education segment involved Bill Allen, director of New York University Center for Law and Business and former judge with Delaware's famed Court of Chancery. Some discussion of duties, such as loyalty, good faith, etc. and when to hire outside counsel or advisors.

Schapiro on Proxy Plumbing

SEC Chairman Mary Schapiro addressed a meeting of the Practising Law Institute in New York on November 4th. Following are a few highlights on what she termed Proxy Mechanics:

With over 800 billion shares being voted every year at over 7,000 company meetings, it is imperative that our proxy voting process work — starting with the quality of proxy disclosure and continuing through to the accuracy of the annual meeting voting results.

That is why we are undertaking a series of initiatives related to the fundamental goal of enhancing the system through which shareholders exercise their franchise.

We're not just looking into the disclosures that make it into a company's proxy materials — we're also looking at the entire process through which proxies are distributed and votes are tabulated. And, I have asked the staff to draft a "concept release" in the coming months through which we would seek public comment on areas of interest to us. The concept release to be voted on by the Commission is expected to probe a variety of areas:

We'll be asking about ways to ensure accuracy in vote tabulation, given that voting results on many items are becoming increasingly close and many companies have adopted majority voting for directors.

We'll be asking about whether our rules adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf — something called "overvoting". And in other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership — known as "empty voting."

We'll also be asking about ways to address the voting rate by retail investors. Retail investors have a history of low participation rates, but notice and access distribution of proxy materials may contribute to a further reduction in participation rates. This poses a special challenge for companies with broad retail investor bases. That is why some have proposed client-directed voting — where brokers would be allowed to solicit voting instructions from their shareholder clients in advance of the company proxy materials.

Additionally, the concept release will ask about the need to allow beneficial owners of a company's securities to object to having their names and addresses disclosed to the company. Some have advocated that we abolish this system and instead permit companies to learn the identities of all of their shareholders so that companies can communicate more directly and cost-effectively with them.

Further, we'll be asking about the role of proxy advisory firms in corporate voting. Given the influence that these firms' recommendations have on corporate voting outcomes, we'll probe the need for rules to ensure that advisory firms are basing their research and recommendations on accurate and reliable information. And, that they are providing adequate disclosure of any conflicts of interest they may have in providing voting recommendations.

We'll be asking about whether shareholders should be more easily able to communicate with one another.

And, finally, we'll be asking whether any rule amendments are necessary to ensure that our federal proxy rules are flexible enough to adapt to changing legal developments at the state level, such as dual record dates for annual meetings.

Access Authority at a Cost

The House Financial Services Committee approved a provision backed by Rep. Maxine Waters, to ensure the SEC has the legal authority to impose new proxy access rules to bolster shareholders' ability to nominate directors to corporate boards. The SEC plans to issue new proxy rules next year, but those rules are almost certain to face a court challenge. Unfortunately, the bill also woud permanently exempt companies with market capitalizations of less than $75 million from the audit requirements of Sarbanes-Oxley. (House Panel OKs Small-Business Exemption on Accounting Rules, WSJ, 11/4/09)

Takeover Defenses

Frank Aquila and Melissa Sawyer provide a brief but excellent overview helpful to both directors and shareowner activists in Takeover Defenses: A Director’s Primer. (BoardMember.com)

Lessons From James Chanos for the Rest of Us

Ten Lessons From The Financial Crisis That Investors Will Soon Forget (If They Haven’t Already!), presentation by James Chanos, with great cartoons. (thanks to GuruFocus.com):

1. Borrowing Short and Lending Long is Still a Bad Idea
2. Accounting Matters…A Lot!
3. Conflicted Rating Agencies: Still Not Unbiased Observers
4. Regulate the Activities Not the Actors5. ‘Value at Risk’ May Put Your Firm at Risk
5. Messrs. Glass and Steagall Were Right After All
6. Too Big to Fail = Too Big to Exist
7. Capitalism on the Upside and Socialism on the Downside is Bad Policy
8. Quantitative Easing (‘Helicopter Finance’) Has a Cost
9. Insurance Without Reserves is Not Insurance
10. Shooting the Messenger Does Not Change Reality

Agreement by Many on FASB Oversight

Cindy Fornelli, executive director of the Center for Audit Quality; Tom Quaadman, executive director for reporting policy and investor opportunity at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness; and Jeff Mahoney, general counsel for the Council of Institutional Investors sent a joint letter to the leaders of the House Financial Services Committee to discourage possible proposals that would realign the oversight of FASB within the structure of systemic risk regulation. The letter said the SEC should remain “the primary agency with oversight over accounting standard setting.” (Letter Encourages Congress to Retain SEC Oversight of FASB, Journal of Accountancy, 11/3/09)

Alert! Contact Your Representative Re Proxy Access

Proxy Access legislation is moving in the US House of Representatives this week. Shareowners should contact members of the House Financial Services Committee as soon as possible to support the Waters-Peters amendment, which will go to a roll call vote on Wednesday, 11/4/09. The amendment seeks to affirm the SEC's current authority to propose proxy access rules mandating that public companies disclose in their proxy materials the names of all candidates running in director elections. The Chamber of Commerce is preparing to sue the SEC to prevent shareowners from learning the names of all nominees in free and fair elections. This amendment to the financial reform legislative package, now moving its way through Congress, is required to avoid unnecessary litigation and any further delay in establishing the right of owners to keep directors accountable.

ShareOwners.org makes sending these important e-mails a one click process. Please use their form and do it now.

CalPERS

By his own estimate, Alfred J.R. Villalobos netted his clients at least $16 billion in capital through 2005. His two firms have earned about $53 million in fees from investment funds that did business with CalPERS over the last seven years, records show, a sum that impresses even hardened veterans of state politics. (He earned $53 million opening doors to CalPERS money, LATimes, 11/3/09)

Fred Buenrostro, then CEO of CalPERS, held his wedding at the home of good friend and former CalPERS board member Alfred J. Villalobos. On his state conflict-of-interest filings for 2004, Buenrostro didn't report receiving any gifts from Villalobos or Arvco. Roman Porter, executive director of the state Fair Political Practices Commission, said in-home hospitality provided to a state official, including a dinner, beverages and occasional lodging, isn't subject to reporting requirements and gift limits.

But Porter said the regulation intends only to exempt an occasional dinner party or overnight stay, not a businessman lending his mansion to a senior state official to host a private wedding and reception. "The FPPC may have to look at this regulation to ensure that it properly describes the exemption," Porter added. He said he found no record of Buenrostro or Villalobos seeking ethics advice on the matter. (Ex-CEO at CalPERS accepted favor from placement firm boss, SacBee, 11/3/09)

At my urging, Jeffrey Callison, Host of "Insight" on Capital Public Radio, will be interviewing both CalPERS candidates currently involved in a run-off for one of the "at-large" seats. The discussion is booked for Monday, November 16. The show airs from 10:00 -11:00 am. The CalPERS discussion will probably happen earlier rather than later in the hour. Insight can be heard in a large part of Northern California on the FM dial: 90.9 KXJZ in the Sacramento area; 91.3 KUOP in the Stockton/Modesto area; 90.5 KKTO in the Tahoe (and Reno) area; and 88.1 KQNC in the Quincy area. Listeners elsewhere in California can listen to the live stream at capradio.org/insight, or go there a few hours after the broadcast to download the archive version.

Exec Pensions Surge

Pensions for top executives rose an average of 19% in 2008, with more than 200 executives seeing pensions increase more than 50%, even as share prices at the companies declined an average of 37% in 2008 and many firms froze employee pensions and suspended retirement-plan contributions. (Pensions for Executives on Rise, WSJ, 11/3/09. Thanks for the heads up from Gary Lutin of the Shareholder Forum.)

RMG Acquires KLD

The rapidly changing landscape of environmental, social, and governance (ESG) research providers received another major update today, as RiskMetrics Group announced the acquisition of KLD Research & Analytics. The acquisition, which has been widely anticipated for a month, follows RiskMetrics' purchase of Innovest Strategic Value Advisors, like KLD a provider of ESG research, in February. (RiskMetrics Acquires KLD, SocialFunds.com, 11/3/09; press release)

Obama, Oh Mamma

The White House is quietly working to undercut a key post-Enron reform, significantly weakening protection for everyday investors and threatening the administration's image as a champion for financial regulatory reform.The White House position, according to those familiar with Emanuel's argument, is that small businesses should not be the focus of onerous regulations because they aren't the ones causing the problems. And if the Maloney amendment passes, it would allow Democrats to say they're champions of small business. (White House Quietly Working To Weaken Investor Protection, HuffingtonPost.com, 11/2/09)

ICGN

ICGN Mid-year Conference takes place in Washington DC. The conference is hosted by the National Association of Corporate Directors (NACD) and will focus on improving dialogue between the corporate director and shareholder communities toward the mutual objective of improving long term corporate sustainability. It will be held at the JW Marriott hotel on the 19 of November and is preceded by a Dinner on the 18. Agenda. Register.

6th Annual FCD Directors’ Institute

The 6th Annual FCD Directors’ Institute mirrors the topics of today's news headlines — Executive Compensation, Risk Management, Shareholder Value, Boardroom Effectiveness. The Directors’ Institute provides an opportunity to address these most pressing issues for your company in a uniquely engaging environment. FCD has lined up nationally recognized experts and well known local corporate governance practitioners as panelists and keynote speakers for its 2-day interactive conference. November 10 - 11, 2009, Irvine, California.

Proxy Access Analysis

Latham & Watkins LLP and Georgeson Inc. published another in their series of Proxy Access Bulletins and Analyses. This latest analysis recaps where proxy access stands, where they think we should go. summarizes many comments to the SEC, outlines key issues, and forwards what they call a "modest proposal," pasted below:

• First, permit unlimited private ordering by shareholder vote, with an additional limited right for directors to adopt or amend bylaws to correct mistakes, cure ambiguities and the like, subject to subsequent shareholder ratification at the next annual meeting. This is the only practical way in which flexibility can be achieved. Also, as noted above, it would vindicate the shareholder franchise and thus be totally consistent with the purpose and philosophy of an access rule.
• Second, limit the access nomination process to a triennial schedule by putting a moratorium on access nominations for the two-year period following an access nomination, so that companies are not faced with the prospect of annual access election contests and so that directors elected through access can be re-nominated by the board without fear of “access creep.” This limitation would also go a long way in preventing the abuse of proxy access for control-related purposes.
• Finally, require a continuous two-year “net long” holding period (excluding participation in share lending programs prior to the submission of a notice of an access nomination) to ensure that access nominations are available only to true long-term holders. As discussed above, a two-year holding period has been endorsed by prominent representatives of every constituency involved in the access debate: companies and the private bar, trade associations, traditional institutional investors, and labor unions and public employee pension funds. Moreover, both the proposed Shareholder Bill of Rights Act in the Senate and the proposed Shareholder Empowerment Act in the House contemplate a two-year holding period.

I was disappointed they didn't include in their analysis the United States Proxy Exchange letter I signed onto from Glyn Holton, Bob Monks, John Harrington and others. I suppose our 69 pages of comments were too difficult to fit into the boxes used in their analysis. However, sometimes it pays to think outside the box, especially on an issue the SEC has been grappling with since the beginning.

Will Comply or Explain Come to NASDAQ?

Nasdaq in August did something that might steer the corporate governance discussion toward adopting some kind of “comply or explain” type of policy when it sought comments about adopting Corporate Governance Best Practices. The Nasdaq Listing and Hearing Review Council proposed a list of potential best practice recommendations that members would have to adopt on a “comply or disclose” basis. See Nasdaq proposal. Nasdaq ‘Best Practices’ Proposal May Be Move Toward ‘Comply or Explain,’ Conference Board - Governance Center Blog, 11/2/09)

Some of those best practices include:

• Executive sessions for independent directors at every board meeting.
• At those executive sessions, address issues such as tone at the top, use of self-evaluations for the board, whether or not independent directors are adequately involved in agenda setting, and the company’s risk management strategy.
• Continuing education programs for directors.
• Limits for directors on the number of outside boards they sit on.
• Annual director election.
• Independent board chair and/or independent lead director.

These "best practices" hardly seem to be much of a move forward.

Support Petition to Keep Blank Votes Blank

Coverage continues to roll out on our petition to the SEC, which would amend a rule that allows blank proxy votes to go to management. See The SEC and Investor Suffrage, Dollars and Sense, 5/22; You Can Correct an Outrage, Motley Fool, 5/29/09; Don’t Let Companies Change Shareholders’ Blank Votes, Harvard Law School Forum on Corporate Governance and Financial Regulation, 6/2/09; Blank Votes Turn Magically to Management, SVNACD; The Problem of Blank Votes, theRacetotheBottom, 5/26/09. Mentioned by the Council of Institutional Investors in their May 14th Corporate Governance Alert, in Global Proxy Watch and Shareholder Activism: Activists Ask SEC to Eliminate Voting Bias in the July edition of Kennedy's Investor Relations Newsletter. Please read our petition and send your supporting comments to the SEC. (see submitted comments) Latest mention is Voting and Corporate Governance: Having a Say, Oxford University Press Blog (7/16/09). Thanks to Chris Mallin. Voice your opinion by sending an e-mail to rule-comments@sec.gov with File 4-583 in the subject line.

Recently, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company's soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as "broker voting," which has already been repealed on "non-routine" matters and, we hope, will soon be repealed for so-called "routine" matters, such as the election of directors. For example, even though "broker voting" has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company's soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to "broker voting."

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don't want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority "provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case." (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating "voting instructions" to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to "forms of proxy," not the "voting instruction form," there is no violation. However, subdivision (1) refers to the "person solicited" and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox... Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, are:

• John Chevedden, Rule 14a-8 proposal proponent since 1996
• Glyn Holton, Executive Director, United States Proxy Exchange
• Mark Latham, Ph.D., VoterMedia.org
• Eric M. Jackson, Ph.D., Managing Member, Ironfire Capital LLC
• James P. Hawley, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Williams, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Eggers, President, Proxy Democracy
• Bradley Coleman and Erez Maharshak, Proxy Democracy

Again, please submit comments on the petition to rule-comments@sec.gov with File 4-583 in the subject line. (posted 5/20/09; link http://www.corpgov.net/news/news.html#BlankVotes)

News from 2009: July, June, May, April, March, February, January,

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

There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are still current... going back to 1995. Thankfully, we have made progress on many issues and 2009 should yield a victory for proxy access.

with the Corporate Governance NETwork

Contact: James McRitchie, Editor (916) 869-2402. All material on the Corporate Governance site is copyright © since 1995 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved. Feel free to use any of these publicity shots without seeking permission.