News from March 2003. The news is free; your purchases from Amazon help us pay the bills. Search: All Products Books Popular Music Classical Music Video Toys Consumer Electronics Keywords: March News OMB Upholds Mutual Fund Vote Disclosure Rule The Office of Management and Budget approved the Securities and Exchange Commission’s rule requiring mutual funds to publicly disclose proxy votes, handing a setback to the $6 trillion fund industry. Funds will have to start recording their proxy votes beginning July 1 and disclose their 12-month voting records ended July 1, 2004 starting Aug. 31, 2004, according to the SEC. "Disclosing proxy voting could eliminate potential conflicts of interest and may encourage funds to become more engaged in corporate governance reform, which will benefit all investors," SEC spokesman John Nester told Reuters. OMB was required under the Paperwork Reduction Act to review the rule, but because the SEC is an independent regulatory agency, even if OMB had decided to question the SEC rule, which it did not, its recommendations would not have been binding, OMB spokesman Trent Duffy said. The AFL-CIO applauded the decision. Labor unions claim mutual funds want to keep shareholders in the dark because they typically vote with management to oppose reforms. Unions also say the fact that funds manage money for corporate clients may pose a conflict of interest in voting proxies. Fund Democracy, as well as many socially responsible investment mutual funds also backed the rule. See joint letter. The Investment Company Institute, the leading trade group for the mutual fund industry, said its members will abide by the rule, but would like the SEC to revisit it at some point. (Feds OK New SEC Mutual Fund Rule, 3/28/03) Xerox Tops CalPERS Focus List CalPERS placed Xerox Corporation at the top of its corporate governance "Focus List" for targeting in the upcoming proxy season. CalPERS asked Xerox to take immediate steps to expand the board by three independent directors and split the position of Chairman and Chief Executive Officer. "It is time for Xerox to bring in new blood," said Sean Harrigan, President of the CalPERS Board. "It’s disconcerting that the same members that oversaw Xerox during its worst period are still there. Investor confidence in Xerox is extraordinarily low, and these steps are overdue and critical for restoring investor confidence and improving corporate governance." The 2003 Focus List also includes: Gemstar-TV Guide; JDS Uniphase; Manugistics Group; Midway Games, Inc.; and Parametric Technology. Their Focus List was selected from more than 1,800 U.S. corporations, and was based on the companies’ long-term stock performance, corporate governance practices, and an economic value-added (EVA®) evaluation. EVA measures a company’s net operating profit after tax, minus its cost of capital. By using EVA ® and stock performance, CalPERS has pinpointed companies where poor market performance is due to underlying financial performance problems as opposed to industry or extraneous factors alone. Xerox tops CalPERS list as one of the most ineffective boards. The company was fined by the SEC and forced to restate earnings from 1997 though 2000. Its Board has also been publicly accused of financial manipulation by its own former employees. "We were shocked to learn that Xerox has a policy that its board members are ‘strongly recommended’ not to communicate directly with institutional investors," said Rob Feckner, Chair of CalPERS Investment Committee. "This is reason enough to ensure that a fresh perspective is added to this board." In August 2001, Xerox’s auditor KPMG reportedly issued a management letter that told the company "that its ‘tone at the top’ was a material weakness," according to a Bloomberg news story. Other problem companies under CalPERS microscope include Gemstar, whose out-going CEO Henry Yuen and CFO Elsie Leung were granted severance packages totaling $22 million and $7 million, respectively. The two executives retained their Board seats and together will swap a total of about 20 million stock options for some 8 million restricted shares and 9 million new options. CalPERS wants Gemstar to commit to a majority of independent directors on its board, audit, compensation and nominating committees. Gemstar’s stock performance declined 88.2% for the one-year period ended December 31, 2002 versus its peer group in the Russell 1000 Consumer Index that fell 24.2%. From 1998 to 2001, its EVA declined by approximately $984 million. CalPERS also wants Gemstar to develop and seek shareowner approval for an executive compensation policy that considers performance-based stock options. JDS Uniphase scored the worst out of the companies CalPERS screened in terms of EVA, a direct result of what is believed to be a lack of financial discipline in the Company’s acquisition strategy during the late 1990’s internet boom. Its EVA fell by $11.5 billion between 1999 and 2002. CalPERS wants JDS to eliminate its co-Chairman structure in favor of a separate Chairman and CEO, declassify the Board and seek shareholder approval for the company’s poison pill. JDS Uniphase’s stock performance was down approximately 71% in the year ended December 31, 2002, compared to its peers in the S&P 500 Telecom Equipment Index that fell approximately 54%. Parametric Technology has ignored CalPERS' repeated requests to meet and discuss performance and governance concerns. CalPERS is concerned that each Board member was paid 100,000 options or more "in recognition of extensive work during Fiscal year 2001," at a time when Parametric's stock declined 41%. Parametric has a six member classified board. Midway’s stock is down more than 77% for the five year period ended December 31, 2002 versus its peer index the S&P Smallcap Leisure Products Index that lost 16%. CalPERS believes that Midway has not been able to capitalize on the rapid growth of the entertainment software industry because of inadequate execution of its business plan. The Board also lacks a lead independent director and only 27 percent of its 11 directors are independent according to CalPERS definition of independence. CalPERS wants Midway to add two new independent directors in the next year and separate the positions of its Chair and CEO. Manugistics Group’s similar lack of separation between the CEO and Chair and no lead director has left its nine-member board with clear issues of independence. The nominating committee is less than 100 percent independent and three of the nine board members have affiliated relationships with the Company. Manugistics performance was down 88% for the one-year period ended December 31, 2002 versus a 46% decline for its peers in the Russell 2000 Technology Index. Seven additional companies have been put on CalPERS monitoring list for poor corporate governance, and possible actions regarding the companies will be disclosed throughout the proxy season and year. Withhold Recommended at TI Institutional investors provide a false sense of security to the investing public when they only "withhold" their votes. In reality, it's a message of impotence. Institutional Shareholder Services (ISS) is urging its clients to oppose the re-election of the directors of Texas Instruments, including Thomas J. Engibous, the company's chairman and chief executive. The Texas Instruments board adopted a costly stock option plan (setting aside 240 million shares to be granted to employees as stock options, 14% of existing shares) without obtaining shareholders' approval, so ISS is recommending that stockholders withhold their votes for the eight directors who can stand for re-election. Institutional shareholders own 68.7% of Texas Instruments' shares outstanding, while officers and directors own only 0.83%. ISS explained that "ompanies need to get the message that reforms are out there ...'" (Texas Instruments Directors Come Under Fire, NYTimes, 3/29/03) What ISS fails to point out is that even if the entire 68.7% of institutional shareholders vote to "withhold," when the 0.83% vote to re-elect themselves, the BOD of Texas Instruments will continue "business as usual" at the golden trough. That's why we need an open ballot. CII Endorses Open Corporate Ballot! The $3 trillion Council of Institutional Investors (CII) voted to ask the SEC to enact rules that would allow shareholder nominees for directorships to be listed on corporate proxies. The SEC will also revisit six cases were it sided with management and prevented votes being held on the open ballot issue. Alan Beller, head of SEC's corporation finance division head and SEC commissioner Paul Atkins said the SEC will take up the matter very soon. Mr. Atkins said any shareholder should have the right to present proposals for consideration, "yet the reality is that all shareholder proposals simply cannot be placed on proxy ballots," because they are too costly and time consuming. Atkins acknowledged the status quo benefits the corporate executives, saying "management is free under current rules to dominate the proxy game." We haven't been able to confirm but believe that CII's petition asks the SEC to consider allowing shareholder groups who have held shares for at least three years and have at least 5% of a company's outstanding stock to nominate directors and include those nominations on the corporate ballot. I believe they've limited applicability to a minority of the board in any given year or will do so in their petition. (Pension Group Asks SEC To Change Proxy Ballot Rules, DOW Jones, 3/28/03: SEC Asked To Review 6 Blocked Proxy-Ballot Access Bids, Dow Jones, 2/27/03) We understand CII's petition will request that the Commission change all relevant securities laws and regulations necessary to facilitate shareholder access to management’s proxy card, including 13D and 14a-8 rules. The 5% threshold was probably chosen as a nod to the power of he corporate community, which has a great deal of influence at the SEC. We assume CII limits applicability to long-term investors to ensure that short-term holders don’t use it for short-term gain through control changes. The committee emphasizes that it is not its intention that the provision could be used to unseat an entire board. E-Mails to SEC Urged by SIF The Social Investment Forum urged its members to write to the SEC re AFSCME "no action" letters and SEC Rulemaking Petition File No. 4-461, submitted by Les Greenberg of the Committee of Concerned Shareholders and James McRitchie, Editor of CorpGov.Net. Here's a sample e-mail: To: chairmanoffice@sec.gov cc: mzucker@organize.afscme.org (Michael Zucker, AFSCME), brees@aflcio.org (Brandon Reese, AFL-CIO), concerne@host16.ipowerweb.com (Les Greenberg, Committee of Concerned Shareholders), jm@corpgov.net (James McRitchie, CorpGov.Net), Anny@cii.org (Ann Yerger, Council of Institutional Investors) Dear Chairman William H. Donaldson, _____________ (put your company name here with assets or identifying info) is urges the Securities and Exchange Commission to overturn the SEC's "no action" letter that allows Citigroup to exclude American Federation of State, County and Municipal Employees' (AFSCME's) binding proposal from its proxy, and similar decisions with respect to proposals submitted by AFSCME to AOL Time Warner Inc., Exxon Mobil Corp., Bank of New York Co., Eastman Kodak Co., and Sears Roebuck & Co. I understand you have received similar requests for reconsideration from the California Public Employees Retirement System (CalPERS), Connecticut Treasurer Denise Nappier, New York City Comptroller William C. Thompson Jr., Michigan Treasurer Jay B. Rising, Keith Johnson, general counsel of the Wisconsin Investment Board, and many others. The SEC should not prohibit a vote to allow a shareholder or groups of shareholders to include director nominees on the company's proxy card. I urge you to take this matter up with the full board of the SEC and to retract the "no action" letters. Boards were created to represent the interests and concerns of shareholders, not management, and should be constructed with this in mind. Even the Conference Board's Blue Ribbon Commission on Public Trust and Private Enterprise (January 2003) acknowledged that investors "have no meaningful way to nominate or elect candidates short of waging a costly proxy contest." William B. Chandler III, Chancellor of the Delaware Court of Chancery, and Leo E. Strine, Jr., Vice Chancellor of the Delaware Court of Chancery, have called for a corporate election system that would "require equal access to the proxy machinery between incumbents and insurgents with significant (e.g., five or ten percent) nominating support...the rhetorical analogy of our system of corporate governance to republican democracy will ring hollow so long as the corporate election process is so tilted towards the self-perpetuation of incumbent directors." ("The New Federalism of American Corporate Governance System," Penn Law and Economics Institute conference on Control and Transactions, 2/8-9/2002). Shareholders are increasingly frustrated by corporate elections that provide no reasonable avenue for input by owners into the selection of directors. Entrenched managers and directors will only improve corporate governance when they can be held personally accountable--through the possibility of being voted out of office and replaced by candidates nominated by shareholders. Ownership-based governance is likely to reduce the corrupting influence of concentrated power and reduce the need for oversight regulators. I also urge the Commission to take up Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461, which addresses the same issue through a revision of the SEC's own regulations. A recent background paper by the $3 trillion Council of Institutional Investors indicated that petition has "re-energized" the "debate over shareholder access to management proxy cards to nominate directors and raise other issues." See Equal Access - What Is It? at http://www.calpers.org/whatshap/calendar/board/invest/200303/Item08d-03.pdf. CalPERS and the Council of Institutional Investors recently endorsed open ballot resolutions. Yet, the SEC has still not taken up the petition in a proposed rulemaking. Patrick McGurn of Institutional Shareholder Services has called an open ballot the "holy grail" of corporate governance. It is also a keystone for those of us seeking a richer, more democratic society. I urge you to take the steps necessary to open the corporate ballot to shareholder nominees in order to unleash the self-regulating power of free markets, and to ensure directors are truly independent and accountable. Sincerely, Pension Funds Urge Open Ballot Pension funds from California, Wisconsin, New York, Michigan and Connecticut have written a letter th the SEC seeking to overturn staff "no action" letters to six companies, allowing them to omit proposals to allow shareholders with at least 3%of a company's stock to place director nominations on the company's proxy ballot. The Financial Times reports that "equal access is quickly becoming one of the fiercest corporate governance issues being debated ahead of US companies' shareholder meetings, many of which take place in April and May. Without that access, union activists and others claim they cannot afford to propose candidates because of the cost of a campaign that reaches all shareholders." (SEC under pressure on board nominations, 3/25) Investors, led by the American Federation of State, County and Municipal Employees (AFSCME), asked six companies to put the proposal on their annual meeting ballots. The companies are AOL Time Warner Inc., Exxon Mobil Corp., Bank of New York Co., Eastman Kodak Co., Citigroup Inc. and Sears Roebuck & Co. (see CalPERS Urges SEC to Rethink Stance on Barring Shareholder Votes, LATimes, 3/26/03) A recent background paper by the $3 trillion Council of Institutional Investors indicated a petition to the SEC by Les Greenberg of the Committee of Concerned Shareholders and James McRitchie, Editor of CorpGov.Net to amend Rule 14a-8 has "re-energized" the "debate over shareholder access to management proxy cards to nominate directors and raise other issues." See Equal Access - What Is It? View the petition at Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461. See Press Release Comments. Support the petition by e-mailing Mr. Jonathan G. Katz, Secretary, SEC. Need for Good Corporate Governance Spreads Now, even those on the sandy beaches of Fiji recognize the importance of good corporate governance. Public Enterprise Minister Irami Matairavaula said, "good corporate governance helps to ensure that corporations take into account the interests of a wide range of constituencies as well as of the communities within which they operate, and that their boards are accountable to the company and the shareholders." Mr Matairavula delivered the opening address at a corporate governance workshop at the Outrigger Reef on Tuesday, saying good governance helped to ensure corporations operated for the benefit of society. Recent formation of the Fiji Institute of Directors “is a testimony to the significance and efficiency of good corporate governance." Perhaps the International Corporate Governance Network should consider Fiji for one of its upcoming meetings. (FijiLive.com, 3/27/03) California Pressures Offshore Companies California Treasurer Phil Angelides is cracking down on U.S. companies that set up their legal headquarters offshore to escape paying millions in taxes. He is sponsoring two bills to close corporate tax loopholes and bar expatriate corporations from doing business with state government agencies. "Corporate tax burdens have fallen over time ... because of aggressive tax maneuvers by companies. We don't think it's right for companies to skirt their (tax) obligations," Angelides said. California joins other states, including Texas, Pennsylvania and Massachusetts, proposing crackdowns on expatriate companies. North Carolina already has passed a government contract ban. CalPERS and CalSTRS are also pressuring these companies to reincorporate in the United States. The state Franchise Tax Board estimates tax loopholes used by these expatriate companies cost California $10 million a year in corporate income tax revenues. That loss is projected to grow to $132 million over the next decade. If more companies follow suit in the future, that loss could surge to $180 million, officials said. SB 1067 (Speier) would prohibit expatriate companies from using a tax computation method that allows them to reduce their share of taxable corporate income in California. SB 640 (Burton) would ban state government contracts with expatriate companies. ('Offshore' firms get more heat, Sacramento Bee, 3/27/03) Back to the top Halliburton Vote to Go Forward Halliburton, the company linked with US Vice-President Dick Cheney and poised to pick up significant Iraq-war contracts, has been told by the SEC that it will not be issued a no action letter and allowed to drop a shareholder proposal on its operations in Iran. The proposal, by pension funds based in New York, seeks a vote on the company's activities in Iran, along with other states that might be considered to be sponsoring terrorist activity. It calls for a Board committee to review such operations. Corpwatch reported that Halliburton is working alongside troops in Iraq providing logistical support for the war there. As always, such a role is controversial given the continuing link with the Vice-President. However the Whitehouse has denied any influence in awarding the contract. (Halliburton seeks to avoid proxy vote on Iran, SRIMedia, 3/25/03) (Halliburton Makes a Killing on Iraq War, CorpWatch, 3/20/03) Donaldson Joins Those Seeking Governance Reforms at Exchanges In a letter to the New York Stock Exchange, Nasdaq and others, Securities and Exchange Commission Chairman William Donaldson asked them to report by May 15th outlining their board structure and policies ensuring that they are serving the public well. Donaldson said, "If you're going to set standards for other people, you've got to set standards for yourself," and he noted that it had taken some urging from his agency to bring about change at the New York Stock Exchange and Nasdaq Stock Market. William H DonaldsonDonaldson's request came in letters to the 10 self-regulatory US stock markets: the Chicago Board Options Exchange and the American, Boston, Chicago, Cincinnati, Nasdaq, New York, Pacific, Philadelphia and International Securities stock exchanges. "There are a number of issues afoot as to how you have a board that is constituted to protect the public," Donaldson told reporters. "In the light of the era that we're in right now, just as every board in the country is looking internally to board structure, it's only logical that the exchanges should be reviewing theirs." Once the major stock markets submit their self-reviews and any changes they propose, "we may have judgments of our own" about whether reforms are needed, Donaldson said. "These exchanges are self-regulatory organizations. They're entitled to devise their own governance structures," he said. "We have an oversight of that, and we will exercise that oversight." Chairman Donaldson said that reviews are to be submitted by May 15th of this year. "Bottom line, how do your governance practices reflect those expected of corporations traded on your market?" he wrote. Asked by reporters on a conference call what prompted the commission to act, Donaldson said the SEC has for some time expressed concern about the adequacy of the governance process of self-regulatory organizations. (SEC seeks corporate governance data from exchanges, Reuters, 03.26.03) NYSE Faces Self-Examination The New York Stock Exchange, which sets boardroom standards for many of the largest U.S. companies, is to set up a new committee to look at its own corporate governance. The new committee is to be finalized at the NYSE's next board meeting in April, a spokesman said. He declined to comment further. (NYSE to review its own corporate governance, Reuters, 03.25.03) NYSE Reforms Needed After the recent flap over Sanford Weill's nomination and withdrawal, Leon Panetta and Arthur Levitt said it was time for a fresh look at the exchange's board. Panetta says, "for public perception today you need people who can be clearly defined as representing the public." Robert M. Devlin, the chairman of NYSE's nominating committee, said the eight-member committee would meet again soon to choose a nominee to replace Mr. Weill. Maybe they should meet to make the Big Board more democratic. (N.Y.S.E. Urged to Reform Process, NYTimes, 3/25/03) The NYSE board has 12 public company or investor representatives and 12 securities industry directors. After this it is chaired by Richard Grasso and co-chief operating officers Catherine Kinney and Robert Britz. The nominating committee is comprised of 8 people who are all outside of the board itself; these include two CEOs, the heads of regional money management firms, a former university president, and the head of a charity for girls. Spitzer Wants Bogle on NYSE New York State Attorney General Eliot Spitzer placed Vanguard founder Jack Bogle on his short list for placement on the New York Stock Exchange. John Biggs, former chairman of TIAA-CREF, Peter Clapman, also an executive with the pension giant, and Sen. Howard Metzenbaum, current chairman of the Consumer Federation of America, are three others named by Spitzer as people he would like to see on the NYSE board. Weill Yields on NYSE Post Citigroup's Sanford Weill withdrew his nomination as a director to represent public investors on the board of the New York Stock Exchange after his nomination was strongly criticized by New York Attorney General Eliot Spitzer. Spitzer said he was "apoplectic" when he read that Mr. Weill had been nominated. "To put Sandy Weill on the board of the exchange as the public's representative is a gross misjudgment and a violation of trust,'' Mr. Spitzer said. "He is the chairman of the company that is paying perhaps the largest fine in history for perpetrating one of the biggest frauds on the investing public. For him to be proposed as the voice for the public interest is an outrage.'' The Salomon Smith Barney securities unit of Citigroup has agreed to pay $400 million in fines and payments as part of a broad settlement to end investigations into conflicts of interest among stock analysts. NYSE directors are nominated by a committee of exchange members to serve two-year terms. This year, the exchange needs to replace 3 of the 12 public members of the board, including Martha Stewart, who stepped after down during an insider trading investigation. The other nominees are Herbert Allison, chief executive of the TIAA-CREF, and Andrea Jung, CEO of Avon Products Inc. The exchange membership is to vote on the nominations June 5. In a conversation ahead of Mr. Weill's decision to withdraw, John Coffee, a professor of securities law at Columbia University, called the choice of Mr. Weill "embarrassing." He added: "Proposing him to represent the public ignores that his firm has great contingent liabilities to the investors he is supposed to be protecting." (WSJ, Citigroup's Weill Withdraws Nomination to NYSE Board, 3/24/03) Changing Boards The latest Spencer Stuart Board Index found a 44% jump in the number of new outside directors in the last year based on analysis of S&P 500 company proxies. The average retainer is $39,538, up 31% in the last five years. Other findings include: Reduced size, from 12 members in 1997 to 10.9 in 2002 4.3 committees, reduced from 5 in 1997 only 5% of audit committee members are active or retired CFOs or retired accounting firm partners 3/1 ratio of outside to inside directors remains constant but is expected to shift soon average age or outside directors remains at 60 16% of outside directors are female but only 12% of all directors. 18% of boards have no women directors, compared with 15% five years ago. 75% of all boards have an African-American, 25% an Hispanic and 10% an Asian…all at least a 20% increase since 1997. 33% have an international director, up 50% since 1997. Outside directors by position 41% active CEO/Chair/President 12% retired CEO/Chair/President 11% academic/not-for-profit 7% investment managers/investors 5% CFOs 5% other corporate executives 19% other CEO Profile Relatively Unchanged Average age 55 99% men Average tenure as CEO is 6.5 years Average if 1.2 directors, down from 2 in 1997 Still, with all the changes, of boards that are seeking a director with a specific background, 71% seek at active CEO...more encouraging is that 60% seek diversity, 28% financial expertise, 27% technology expertise and 22% international expertise. See “Portrait of boards on the cusp of historic change,” Julie Daum, Directors & Boards, Winter 2003. Amalgamated Bank Takes Sprint to Another Level It is being called the most sweeping reform of a corporate boardroom ever produced through shareholder litigation. In addition to winning $50 million for shareholders, the agreement a number of current board members will be replaced when their current terms expire. Additionally, Sprint has confirmed that Mr. Esrey and Mr. LeMay will no longer hold executive offices at Sprint or remain on the Board, although Sprint maintains their removal is not related to the litigation. Outside board directors will meet at least twice a year without management and an independent director will set the agenda, a power currently reserved for the CEO. The settlement also imposes new rules to prevent directors and officers from vesting their stock on an accelerated basis. Former employees of Sprint must wait five years after leaving the company before they can be considered for the board. Auditors used by Sprint must wait three years. See Sprint Corporate Governance Enhancements at Milberg Weiss. The team negotiating the settlement included union controlled Amalgamated Bank, William S. Lerach, a Senior Partner with Milberg Weiss, and Robert A. G. Monks, Founder of LENS Governance Advisors, Institutional Shareholder Services and the Corporate Library. We see it as a good sign of what can be done when talented people come together. Back to the top CalPERS Joins Open Ballot Movement, CII Next? CalPERS voted to a pursue an SEC rulemaking aimed at gaining greater shareholder access to management's proxy for the nomination of directors. The following points were raised in support of Agenda Item 8d, recommendation 3, which passed without modification: Minimum thresholds for shareholders to nominate directors: Provide that shareholders having in aggregate at least 5% of a company's outstanding shares may nominate directors using management's proxy. To avoid the onus of 13(d) requirements, staff is specifically recommending that the proposal include a request for the SEC to exempt open access groups from 13(d) requirements. Staff also recommends that requirements be included that only shareholders of at least 1 year be permitted to nominate candidates. The 1 year requirement should not apply to those shareholders providing a second to the nomination in order to reach the 5% threshold. Staff would seek clarification within the rule that the 5% aggregation of shareholder needed to nominate directors would not constitute a group under 13d. In essence, a shareholder that wishes to nominate directors would need to gather a second to the nomination from at least 5% of the shares outstanding. To make it clear that this 5% would not constitute a group, it can be provided that shareholders providing a second to a nomination does not even bind the entity to vote for the candidate(s). Takeover concerns: In an effort to minimize takeover concerns, provide that shareholders may only nominate less than a majority of the entire board's occupied seats in any single year. This would mean that over a two year period shareholders could change control of a corporation through this process. This policy should be written such that less than a majority of seats occupied on the board can be targeted in one year to prevent multiple shareholders from targeting different seats in one year and aggregating more than a majority. Reimbursement of expenses: The rule should provide that shareholders utilizing the open access rule may seek reimbursement for reasonable expenses from the company regardless of the outcome, but do not mandate reimbursement through rule making. The purpose of open access proposals is first and foremost to provide greater accountability. However, this policy in any form already greatly reduces the cost of nominating directors to company boards. A point that has been raised in support of mandating that companies reimburse shareholders for proxy contest costs is the fact that management has complete access to company funds to defend themselves. We have found in many cases that management will spend company assets freely for this purpose. In one sense, merely adopting open access rules even without reimbursement provisions is likely to mitigate this factor. This may be true because boards that permit waste in defending some members may simply be strengthening the case for their removal. Some level of flexibility regarding this issue may be appropriate in developing and commenting upon possible SEC action. While staff recommends that CalPERS not support mandates for reimbursement in any and all open access proxy contests, some reimbursement provisions in specific circumstances may be appropriate. We seek flexibility to analyze and support reimbursement provisions that are carefully crafted to help prevent wasteful spending by companies and keep the process fair for shareholders. While Les Greenberg, of the Committee of Concerned Shareholders, and I had hopes that CalPERS would lower the threshold requirements to 3% or less so that smaller shareholders could play more of a role and 13d complications could be avoided, I was delighted that they did not limit candidates so nominated to an easily isolated one or two but provided for up to half the seats to be included. I also like the possibility of reimbursement for reasonable expenses. These are important features that others should endorse. CalPERS has shown real leadership in this important effort. (For Greenberg's position and that of the Committee of Concerned Shareholders see below.) CalPERS is expected to submit its recommendations to the Council of Institutional Investors (CII), which is expected to vote later this month on whether to ask the SEC to enact rules that would allow shareholder director nominees to be listed on corporate proxies. The Council has 130 members -- including large public, labor and corporate pension funds -- and they control more than $3 trillion in assets. See CII's informative report on the issue, Equal Access - What Is It?, that CalPERS staff included in the Board packet as background material. In other governance matters, CalPERS approved two letter writing plans: The first will urge audit committee to ensure auditors are not hired for nonaudit work, such as tax advice and consulting, still allowed under auditor-independence rules but representing an obvious potential conflict of interest. If companies fail to heed this advice, CalPERS might withhold votes for audit-committee members, list them on their Internet site and/or consider the company for inclusion on their yearly "focus list." The second will request that companies seek shareholder approval for any adoption of equity-based compensation or a material change to an existing plan. Concerned Shareholders Welcomes CalPERS' Concern for Open Ballots but Critical of Approach Greenberg's position and that of the Committee of Concerned Shareholders is that, in order to function as their own "watchdogs" in holding Directors personally accountable for their acts, ALL Director-candidates of Shareholders whose nominators meet the requirements of Rule 14a-8 (Shareholder Proposals - continuously owned at least $2,000 of the Company's stock for at least one year) should have access to the Company's ballot. (Petition for Rulemaking, SEC File No. 4-461) They believe it is purely arbitrary to restrict such access only to those holding 3% or 5% or 10% of the shares of the Company or to limit nominations to one half of the number or board positions. Pursuant to general corporate law, ALL Shareholders of record have the right to nominate Director-candidates. (However, pursuant to current SEC Rules, the names of those Director-candidates need not appear on the Company's ballot.) ALL Shareholders should be able to vote on all Director-candidates, even those nominated by Shareholders with relatively small share holdings. Other plans try to impose paternalism by the wealthy. The real issue is whether a Director-candidate, if elected, is qualified to serve the collective best interests of ALL Shareholders. It is not an issue of his/her wealth or the wealth of the person(s) who nominated him/her. (Even if it were, Shareholders should determine the importance of the issue.) Persons or groups that own 3% or 5% or 10% of a Company's shares ALREADY have the financial means to conduct a full proxy contest without the need for any SEC Rule change. Historically, very few, if any, of those persons have shown the inclination to hold Directors accountable. There is no assurance the a 3% or 5% or 10% nominator ownership requirement will have any impact on the current situation. There is no suggestion that members of a Company's Nominating Committee, also, need meet the 3% or 5% or 10% nominator criteria. Those persons can make nominations without owning any share of a Company's stock. The numbers 3% or 5% or 10% are arbitrary when the Shareholder Proposal criteria (continuously owned at least $2,000 of the Company's stock for at least one year) has already been tested for many years and has proved to be effective. A 3% or 5% or 10% shareholder ownership requirement may have been the result of a misplaced fear that hordes of "riffraff," "know-nothings," "crackpots" and/or "nobodies" would storm Companies' gates to seek Directorships. Such predictions of doom and gloom are not supportable. Even "riffraff," "know-nothings," "crackpots" and/or "nobodies" are aware of and would not cavalierly subject themselves to the legal exposure of serving as Directors. Further, there are many safeguards in SEC Rule 14a-8 to assure that Companies would not be harassed with frivolous Director candidacies. Also, a 3% or 5% or 10% shareholder ownership requirement may have been based upon a misplaced political attempt to reduce anticipated protests from "Corporate America." Let "Corporate America" protest! After the financial shenanigans at Enron, Global Crossing, Tyco, WorldCom, Adelphia, Lucent, Xerox, Qwest, Ahold NV and other public companies, a protest against the rights of individual Shareholders by "Corporate America" would be absurd and met with public scorn. 3% or 5% or 10% nominator requirements would be complex to implement. It would necessitate a substantial revision of current SEC Rules. It would not simplify the current process. Further, forming groups and holding them together for an extended period will prove to be a very onerous taste. Opponents to change might argue that equal access to the Company ballot "might be abused by dissidents to mount a no-premium corporate takeover disguised as a boardroom coup." (Staff Report to CalPERS Trustees.) Let's not assume that Shareholders have little or no intelligence. The Director-candidates can set forth their respective positions and the Shareholders can vote. If the "dissidents" prevail, it would be because the majority of Shareholders desired that result. Institutional Selloff and Forced CEO Turnover Robert Parrino, Richard W. Sias and Laura T. Starks investigate whether institutional investors "vote with their feet" when dissatisfied with a firm's management by examining changes in equity ownership around forced CEO turnover in their recently published "Voting with their feet: institutional ownership changes around forced CEO turnover." (Journal of Financial Economics, 4/1/03) Their results reveal that institutional investors that engage in momentum trading, are more concerned about holding prudent securities, or are better-informed sell to individual investors and institutional investors that are not engaged in momentum trading, are less concerned about holding prudent securities, or are less well-informed. This results in a substantial shift in shareholder composition prior to forced CEO succession. They conclude that the shift in ownership composition may influence boards of directors when they decide whether to force a CEO from office and in selecting a new CEO. The change in institutional investor ownership in the year prior to turnover can be used to discriminate forced CEO turnovers from voluntary turnovers and firms in the matched control sample. Moreover, an outsider is more likely to be appointed CEO following a decline in institutional ownership. HKExcitement Shareholder activist David Webb has announced his candidacy for directorship of the Hong Kong Stock Exchanges and Clearing Limited (HKEx), which is holding its first elections after almost 3 years of listing, or "listlessness," as Webb terms it. Under its unique constitution, only 6 out of 13 directors can ever be elected. In what may be a first for Hong Kong and would also be relatively unprecedented elsewhere, a shareholder has nominated a candidate for a directorship at the annual general meeting of a listed company. In most companies the board picks its own members. "It is time for HKEx to adopt a more representative board which better reflects the interests of its shareholders and investors at large," says Webb. (see webb-site.com) Back to the top Shareholders Push for Their Own Directors Phyllis Plitch, writing for Dow Jones Newsletter "Corporate Governance," heightened awareness of the open ballot movement with her recent article, "Investors Push for a Director of One's Own on Proxies." She starts by noting that "to many corporate-governance and investor activists, annual director elections are a big charade" since "the only names that appear on shareholder voting ballots are those that already have the blessing of the existing board." Investors don't get to choose, only to vote yes or no, much like elections in the old Soviet Union. Of course, investors can run their own nominees but to do so means spending huge sums on proxy solicitations, while the company is free to use shareholder investments to campaign for the board sanctioned candidates. She cites the following as evidence the movement toward open ballots is gaining steam: In January the Conference Board's blue-ribbon commission decried the process whereby "shareholders have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest." Delaware Chancery Court Chancellor William B. Chandler III and Vice-Chancellor Leo E. Strine Jr. recently described the election process as a "forgotten element of reform." They suggested that policy makers take up the issue of management biased elections and require equal access to "the proxy machinery between incumbents and insurgents with significant nominating support." "As of now, incumbent slates are able to spend their companies' money in an almost unlimited way in order to get themselves reelected, they wrote. "This renders the corporate election process an irrelevancy, unless a takeover proposal is on the table and a bidder is willing to fund an insurgent slate." American Federation of State, county and Municipal Employees submitted binding and nonbinding proposals at several firs, including Citigroup) to "in effect take a fake democratic process and make it real," according to Michael Zuker, director of corporate affairs. AFL-CIO plans a rulemaking petition asking the SEC to create an absolute right to allow shareholders direct access to the proxy. David Martin, a former director of the SEC's division of corporation finance, suspects the SEC will claim forcing companies to open the proxy is outside their purview, and a matter for state legislation. Lawrence A. Hamermesh, a professor at Widener Law School in Delaware is quoted doubting that a more open ballot is practical, since there is so little evidence of "a larger pool of independent directors willing to serve." In another article in the same edition, Senior Editor Neal Lipschutz provides hints to a likely solution by suggesting that "CEOs Should Stay Off Others' Boards." "Serving on another board, he or she would likely be sympathetic to giving the CEO broad latitude of action without pesky board interference and would likely think the sorts of compensation packages that tend to be the norm for CEOs are well justified." Of course, that would mean eliminating the most common board profession from board service but we fully agree with Lipschutz that eliminating CEOs on boards would increase board independence and, probably, conscientious involvement. There is no lack of talented individuals willing to serve on corporate boards, only a mindset by many that limits diversity and stifles creativity. In the February 27th edition of the Dow Jones Corporate Governance, Phyllis Plitch headlines "Companies Say the List of Qualified Directors is Depressingly Short," but apparently that list includes few, if any, who are not CEOs. She cites the example of Edward Lawler III, a prominent author of books such as "Corporate Boards" and Organizing for High Performance." Although he founded the Center for Effective Organizations more that 20 years ago at the University of Southern California, he belongs to that pool of talent that lies outside current CEOs or notable names in sports or government, and is, therefore, overlooked by corporate boards seeking to fill vacancies. Elsewhere in the February 20, 2003 edition, editor Michael Rapoport endorses the open ballot movement, indicating that "shareholders are a company's owners, and as such they should be allowed every practical opportunity to determine a company's direction - even when that direction isn't one that the company's management would choose. What are executives and directors afraid of? Democracy?" ISS Friday Report, dated 3/14/03, reports that SEC Commissioner Paul Atkins said that allowing shareholders greater access to the proxy ballot could provide some added incentive for directors to take their responsibilities more seriously. The remarks came during and after a speech at the Cato Institute in Washington D.C.. Atkins said the issue "needs to be looked at" but declined to indicate when the SEC would do so. Underfunding Jumps Some 79% of all state plans are now underfunded, up dramatically from 31% in 2000 and 51% in 2001, according to a new report from Wilshire Associates. By comparison, Wilshire estimates private pension plans had a combined 86% funding ratio as of December 31, 2002. Of the 123 programs included in the Wilshire report, 28 had a ratio of assets to liabilities that exceeded 100%, even limited to a current snapshot. Another 28 had a ratio of 90-99%, and another 29 were between 80% and 89%. New European Corporate Governance Fund Three former members of Sterling Investment Group, a privately owned Monaco-based investment firm, have formed a company dedicated to shareholder activism. Knight Vinke Asset Management will provide a range of corporate governance-led investment services to institutional clients. The new fund aims to invest in sound but underperforming UK and European companies and will attempt to improve their value through active engagement, with a bias towards capital preservation. Eric Knight, the company's co-founder, left Sterling almost a year ago. The two other principals are Patrick Dewez and Louise Curran, who left Sterling last year. Knight Vinke Asset Management is expected to be granted a license under the US Investment Advisers Act. Based in New York, the company will have an administrative office in Geneva. The company has already secured a $200M investment by CalPERS, the California Public Employees' Retirement System which is also reportedly seeking to take an equity stake in the firm. Mutual Funds Examined Members of the House Committee on Financial Services heard testimony from seven industry leaders in a heated four-hour session. Among the key issues were the rise in fund fees and expenses, the widespread use (and abuse) of soft-dollar commissions and the role of independent directors. Pointing to its "alarming" turnover rate, Chairman Michael Oxley (R- Ohio) spoke about the lack of clarity in the way fees are disclosed and funds’ failure to provide breakpoint discounts promised in prospectuses. "That is simply unacceptable," he said. Captaining the team of witnesses in favor of further reform in the industry was Jack Bogle, founder of the low-cost Vanguard Group, whose Vanguard 500 index fund has trounced its peers by 76% over the last decade. The seasoned veteran provided statistical evidence that the rise in mutual fund fees over the last 20 years has had an adverse effect on annual performance. Warren Buffett recently criticized mutual fund directors in his annual Berkshire Hathaway report. Buffet says fund directors have only two important responsibilities: "obtaining the best possible investment manager and negotiating with that manager for the lowest possible fee." "When it comes to independent directors pursuing either goal, their record has been absolutely pathetic." NYSE to change Definition of Independent Directors New York Stock Exchange has gone back to the drawing board regarding rules for independent directors. The primary changes relate to financial relationships between the company and employees, consultants, suppliers, and customers (and their immediate family members). The original proposal provided that no former employee can be “independent” until five years after the employment has ended. Now NYSE proposes to allow a rebuttable presumption that a director has a material relationship with the company if he or she receives from the company as an employee or consultant, or otherwise, more than $100,000 per year in “direct” compensation, other than fees for services as a director and pensions or other deferred compensation that is not contingent on continued service. This presumption can be overcome by a board decision that the compensatory arrangement is not material if made unanimously by the independent directors. In contrast, the listing standards NASDAQ has proposed would flatly ban employees from being considered independent, and uses a $60,000 level to disqualify from independence a person who accepts payments other than compensation as a director. Executive officers and employees of suppliers or customers which do business with the listed company at a level exceeding the greater of $1 million or 2% of the gross revenues of the listed company or the supplier or customer have a disqualifying material relationship. Boards may have discretion to find that a director who is associated with a firm that is a consultant or advisor to the listed company (such as a law or investment banking firm) lacks a “material relationship,” if the amount of business the firm does is less than the greater of $1 million or 2% of the consolidated gross revenues of either the listed company or the firm. In contrast, NASDAQ’s proposal, disqualifies from independence a partner, controlling shareholder or executive officer of an organization which made or received payments in excess of the greater of $200,000 or 5% of the recipient’s gross revenues. The full text of the NYSE’s filing is available at http://www.nyse.com/pdfs/2003-06fil.pdf. The full text of NASDAQ’s filing is available at http://www.nasdaq.com/about/2002_141_A_1.pdf. Securities Law Suits Up Federal securities class action litigation suits increased by 31% between 2001 and 2002, rising from 171 to 224 filings. The companies sued in 2002 also lost more than $1.9 trillion in market capitalization during the class periods, a 24% increase over the comparable figure for companies sued in 2001, according to a report released by The Stanford Law School Securities Class Action Clearinghouse in cooperation with Cornerstone Research. "This multi-billion dollar average is a result of 40 'mega' filings in 2002 where the defendant companies each lost more than $10 billion in market capitalization. These cases alone account for 82 percent of the total market cap loss reflected in the 224 filings," according to John Gould, vice president of Cornerstone Research and the principal author of the study. in 2001, almost 60% of the companies sued were listed on the Nasdaq; in 2002, fewer than 40% of the companies sued were listed on the Nasdaq. A total of 3% of companies listed on the national stock exchanges were defendants in securities class action lawsuits filed in 2002 compared to 2.3% in 2001. Back to the top Record Restatements Restatements, due to "accounting errors," were up 22% over last year, according to a recent report issued by the Huron Consulting Group and the companies are bigger. Last year, the majority of companies that restated had revenues of $100 million or less. In 2002 58% had revenues greater that $100 million and 22% were megacap companies. (Investor Relations Business, 2/24/03) Board Independence and Compensation Up A survey by Hewitt Associates found that 38% of companies plan to increase the amount of compensation granted through board retainers, 31% will raise compensation for committee chairs, especially those of audit committees. This year, 29% planned to increase the percentage of outside directors, compared to 12% in 2002. (Investor Relations Business, 2/24/03) Investor Trust Grows Trust in US companies by shareholders has increased over the last six months, despite corporate scandals, according to Edelman's fourth annual trust survey. The most trusted brands in the U.S. are Johnson & Johnson, Coca-Cola, Microsoft, Ford, McDonald's Bayer A.G. and Pfizer. While 80% of respondents trust the news media, only 13% said they most trusted information found on corporate web sites. Investor relations needs third-party validation for support. (Investor Relations Business, 2/24/03) Webcasting Commonplace The vast majority of companies Webcast their conference calls, according to a survey by Message Bank LLC/KCSA Worldwide (80% in 2002 compared to 72% in 2000). Audio steaming is ubiquitous but only 10% utilize streaming video. 90% of companies, compared to 66% in 2000 provide replays. (Investor Relations Business, 2/24/03) Value and Index Positions Up Money managers have reduced exposure in growth companies (-9%) and increased investments in companies trading below market averages (2%) and indexes (6%) over the last six months, according to Thomson Financial. (Investor Relations Business, 2/24/03) Annual Reports Come Up Short Despite all the recent emphasis in the press on ethics, only 4% of companies clearly stated board policies on hiring, firing and evaluating their CEOs in their annual reports. Less than 1/2 discuss company values and management philosophy or environmental policies, 1/5 discuss codes of conduct. All UK companies in the Shelley Taylor and Associates sample of the 50 largest global companies included their governance policies, compared with 50% of European companies and just 30% of US firms. Quantity and quality weren't well correlated. UBS A.G. had the longest report by ranked lowest in terms of disclosure. British reports were ranked the best overall. (Investor Relations Business, 2/24/03) Back to the top Nell Minow: Corporate Governance Mom The March 1st issue of CFO includes a great interview with Nell Minow, editor of The Corporate Library and author of The Movie Mom's Guide to Family Movies. In her role as Movie Mom, Minow warns parents about material that is inappropriate for children. Minow's working on another Internet site that will allow parents to contact studios directly with their concerns. As "Corporate Governance Mom," Minow (with Robert Monks), established Institutional Shareholders Services to help shareholders use their votes in corporate elections to add value. Now, at The Corporate Library, she is facilitating access to data concerning corporate interlocks, CEO contracts and other corporate mischief. Instead of just speculating that many CEO have taken control of corporations (to the peril of shareholders), she is documenting it. Just as parents have to be the grownups with their children, Minow says that boards must be able to say no to CEOs when they seek outrageous pay and benefits that are not linked to performance or when they use the corporation as their private cookie jar. One of Minow's most quoted observations is that "boards are like subatomic particles - they behave differently when they are being observed." She has now added that "knowing they are being observed will make a difference." The Corporate Library is letting board know they're being observed, if even at a distance based on public disclosures. CFO's interview gives insight into what this leading thinker in corporate governance sees as the central issues in corporate governance and what steps can be taken to address them. The central theme is that boards must become more effective and shareholders must be their enablers. It isn't just a few bad apples. Minow points out that Jack Welch was lionized as the "best CEO of the last 30 years." Yet, when he retired Welch demanded "lifetime dry cleaning, apartment, Knicks tickets, and catering bills be covered - and the board went along." What we have, she argues, is "a failure to understand what the role of the board should be in those kinds of negotiations." On board independence, Minow says "that's gone a little too far," but then adds, "it is hard to judge who is or is not independent from the disclosures that we currently have." Yes, you can find out if the director is a full time employee, the company's banker or lawyer but what about a board member who played jazz clarinet with the CEO? How "independent" is he? I don't really think Minow meant that "actual" board independence has "gone a little too far." I think she means the box ticking approach to obtaining "independence" has gone too far. Minow sees board member investments as vitally important. "The first thing you should do after agreeing to go on a board is to buy a lot of stock...if people have at least $100,000 invested in a company, it seems to affect the stock performance." Having a lot of your assets tied up with the company makes a board member dependent, not independent. More importantly, it aligns their interests with those of other shareholders. Among the most important reforms to Minow are the following: Boards must meet without the CEO present. Directors should be paid more. "If I ruled the world, I would allow shareholders to nominate one or two candidates on the management's proxy slate every year." "My backup (plan) is a very independent nominating committee working with a search firm." More important than independence is alignment, opportunity and accountability. Directors who have a significant proportion of their assets tied up in the company's stock are more likely to speak out if they see problems or opportunities. Directors who are paid on a scale equal or greater than their other endeavors see board service as a job, rather than an honor or obligation. They'll be more prone to take the job seriously. Directors who are appointed (essentially) by an "independent" nominating committee are more likely to question the CEO. However, if directors were actually nominated and elected by shareholders they might be truly independent (with their own power base) and they would be truly accountable if they can also be removed by shareholders. Minow limits her fantasy to one or two candidates a year. That seems so limiting. How much influence can one member have? While she's fantasizing, why not let all the board members be nominated and ecected by shareholders. Why hold back in a fantasy? When asked if shareholders bore any responsibility for the widespread corruption of Tyco, Enron and WorldCom, Minow responded that "shareholders were the enablers. They voted in favor of a lot of bad pay plans, they voted to reelect a lot of poor boards, and they failed to pay attention to many, many red flags." But I would ask what choices were they given? Where were the alternative candidates? Minor points out that shareholder's have been corrupt at times, noting that Deutsche Asset Management changed their vote on the Hewlett-Packard/Compaq merger after Carly Fiornina gave them a check for $1 million. That may be true, but most shareholders don't get that opportunity. Minow's most quoted observation is on point, at least potentially. Boards should behave differently when observed; Institutional Shareholder Services and The Corporate Library are giant steps in that direction. But Minow also notes that despite Sarbanes-Oxley, "the most important change will come from the market itself, when shareholders insist on better corporate governance." In other words, at the risk of extending Minow's line of thought, boards will behave differently when shareholders demand and obtain the tools they need to both observe boards and hold them accountable. CEO's shouldn't be able to bribe board members or shareholders but only when shareholders have the tools to hold boards accountable will market forces work their magic. Doubling unlikely jail time, stiffening accounting rules, setting behavioral standards for corporate attornies...these measure don't really facilitate the ability of shareholders to police their own companies. There's no substitute for democratic elections where shareholder play the key role in determining the company is operated in a way that enhances value. (The Prime of Ms. Nell Minow, CFO, 3/1/03) ICI Attempts to Undermine Fund Disclosure; Investors Push Back The Investment Company Institute is collecting data from fund companies to create a new estimate for how much it will cost firms to comply with the proxy voting disclosure rule. They will outline their findings in comments to the Office of Management and Budget. The OMB is reviewing the possible costs and paperwork burdens the rule entails and may suggest alternatives to the SEC, should it deem that disclosing proxy votes is burdensome to the fund industry. It does not, however, have the authority to rescind the rule. The ICI expects cost estimates to be higher. "This is all a red-herring. The [fund] industry doesn't oppose this because of the cost. The basic premise is they don't want to disclose their proxy votes and their cozy relationships with companies," said Michael Garland, of the AFL-CIO's office of investments. "They had to stretch it [cost estimates] out to 20 years to get a big number," said Adam Kanzer, general counsel and director of shareholder activism at Domini Social Investments. The OMB comment period ends on March 14, 2003. Write to: Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Room 3208, New Executive Office Building, Washington, DC 20503 (or email your comment to: nknuffma@omb.eop.gov, and send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0609, with reference to File No. S7-36-02. You can also email your comment to the SEC at: rule-comments@sec.gov. CorpGov.Net signed on with Fund Democracy, Consumer Federation of America, Financial Planning Association, Consumer Action, U.S. PIRG, Citizens Funds, Social Investment Forum, Domini Funds, Robert A.G. Monks, Consumers Union, The Catholic Funds, AFL-CIO, CalPERS, AARP, National Association of Personal Financial Advisers to send a Joint Letter to the OMB dated March 6, 2003. Please join us in this effort. Ontario Teachers' Snags Maple Leafs and Raptors U.S. Pension Funds Lose $1 Trillion Pensions&Investments reported both items and it was tough to decide which headline to lead with. We went with fun! The Ontario Teachers' Pension Plan has taken a majority interest in Maple Leaf Sports and Entertainment, parent of the Toronto Maple Leafs hockey team and the Toronto Raptors basketball team, along with the Air Canada Centre and Maple Leaf Gardens arena. See press release. The fund won't be calling the plays but will get choice "director seats" at all the games. On a less positive note, U.S. pension funds and endowments lost more than $1 trillion over the last three years, according to a study of 1,700 funds by Greenwich Associates. Corporate pension funds lost 14.6% last year, compared with -10.1% in 2001. Public pension funds lost an average 9.3% in 2002, slightly below the 8.9% decline in 2001; the largest 78 state pension funds lost $240 billion in assets over the last three years. Endowments and foundations lost 6.3% in value in 2002, compared with 5.9% in 2001. Read more at P&I's Headline News. Corporate Governance to Strengthen the Enterprise Sector London, 29th April - 2nd May The workshop is designed for key decision makers in government and the private sector who are involved in the promotion and implementation of social, corporate and ethical responsibility. Speakers include Mierta Capaul (Private Sector Advisory Corporate Governance, World Bank), Dr Simon Zadek (Institute of Social and Ethical AccountAbility) and Grant Kirkpatrick (Corporate Affairs Division, OECD). Frequently Asked Questions. Back to the top Corporate Governance Japan We add links frequently and most are posted with little fanfare. However, we're delighted to introduce readers to a relative internet newcomer, Corporate Governance Japan. Founded as an on-line forum in autumn 2002, their objective is to "promote broader understanding and lively debate about the ongoing process of change within Japanese corporations." Corporate Governance Japan presents an excellent set of links, bibliography and most importantly a small, but growing set of commentaries with facility for readers to post comments. These excellent columns present a Japan that is searching, challenged by the pressures of internationalization. Each commentator demonstrates respect for the notion that best practices in corporate governance may take separate paths depending on county, company and other factors. The first commentary is The Twilight of the Stakeholder Corporation? Germany's Relevance for Japan by Gregory Jackson. Although the Anglo-American model predominates at this time, Jackson points out that institutional investors within that model only rarely play an active monitoring role within specific companies. Our conclusion then, is that accountability is therefore weak. If Japan wants to preserve the strengths of its enterprise community, Germany may be instructive. Jackson characterizes the German model as a constitutional one, where corporations "externalize many governance functions onto corporatist associations and the welfare state, as well as internalizing societal interests within the firm through strong legal rights within decision-making." In Japan, stakeholder voice arises from close mutual dependence within the firm." Constitutional and community models involve different forms of legal coercion. German horizontal "class" structures accomplish something of the same goals as Japan's vertically segmented "enterprise" interests and identities. Germany has adopted shareholder-value measures and greater transparency but unions have exerted codetermination powers to enhance employee participation and improve managerial accountability, while sharing gains with investors. Jackson believes Germany's constitutional model can provide Japan with an example of how to accommodate shareholder-oriented practices "by contractualizing existing legally mandated arrangements, tailoring them to the situation of the specific firm." The legal checks and balances can provide a stable footing to "negotiated outcomes among stakeholders." While recent legal reforms in Japan facilitate foreign direct investment, "management and core employees often remain resistant to change. In the worst cases, corporate management is left increasingly unchecked" after the removal of "mutually reinforcing firm-specific commitments." Like Germany, Japan could opt for "politically-constructed rights and responsibilities" by "widening the definition of its enterprise communities and placing the rights and responsibilities of stakeholders on a more public footing." As I read Jackson's analysis I could see parallels in the U.S with the rise of pension funds, such as CalPERS, which are heavily influenced by unions. Like their German counterparts, CalPERS and Taft-Hartley funds could gain additional leverage for employees by encouraging the use stock option and ownership plans among employees. When combined with participation in decision-making, such plans strengthen employee morale and productivity, allowing gains to be shared with investors. At the same time, they could improve managerial accountability by increasing both the incentives for employees to monitor and their ability to influence corporations at the board level through shareholder action. Jackson's is only the first of several commentaries on Corporate Governance Japan. Much can be gleaned from each. This excellent forum for debate is off to a great start. 1-888-622-0117 Call that number to contact the FBI if you suspect corporate fraud. According to reports, the FBI hopes its toll free number will generate "four or five investigations per month." Corporate Transparency by Country The Economist sampled disclosures by country (with 0 being information not there; 1 information there but hidden; 2 information easily found but hard to understand/incomplete; 3 information easily found, understandable and complete. Results: Germany topped with a score of 1.3 France 1.2 UK 1 US 0.5 Japan scored the worst with 0.4. With 3 being the top possible score, it looks like all have plenty of room for improvement. (from The Corporate Governance Alliance Digest, 3/3/3) Association for Integrity in Accounting Launched AIA, which promises to represent the public interest in accounting, will focus on four main areas: watching the watchdogs; restoring professional independence; assuring corporate accountability and disclosure; and redeeming accounting education. The mission of the Association for Integrity in Accounting is to "provide an independent forum to present and advance positions on a wide range of critical accounting and auditing issues, standards and regulations affecting the accountability and integrity of the profession and the public interest in maintaining trust and confidence in accounting," said founding member Linda Ruchala, an associate professor of accountancy at the University of Nebraska-Lincoln. "For too long, the public interest voices in the accounting industry have been overwhelmed by corporate pressures," said Nader, whose Citizen Works organization is helping fund the new group. (Ralph Nader Forms SEC Oversight Group, newsday.com, 3/3/3) Annual Reports Fall Short The SEC's review of annual reports filed by Fortune 500 companies in 2002 found financial statements are still not sufficiently clear and accurate. Companies too often "simply recited financial statement information without analysis or presented boilerplate analyses that did not provide any insight into the companies' past performance or business prospect as understood by management." They failed to disclose key accounting policies regarding the treatments of restructuring charges, tax liabilities, pension funding and reserves for possible losses. (Firms Still Fall Short On Disclosure, SEC Says, Washington Post, 2/28/3) Check them out yourself at the Annual Reports Library, which has a collection of over 1.45 million original reports and proxies from corporations, foundations, banks, mutual funds and public institutions. See also CorporateInformation.com. Future of Corporate Control The current edition of Donald Nordberg's EDGEvantage includes an item titled "The Fifth Stage of Capitalism - Power to the Intermediary." It is a reference to "Understanding Pension Fund Corporate Engagement in a Global Arena," a paper by Professors Gordon L. Clark and Tessa Hebb, School of Geography and the Environment, University of Oxford. The authors build from Robert Clark's 1981 paper “The Four Stages of Capitalism.” In stage one the entrepreneur reigned supreme. The professional manager held the cards in stage two, as documented by Berle and Means in their analysis of the 1930s managerial economy. The third stage of capitalism witnessed the ascendancy of the portfolio manager and the rise of financial intermediaries. The fourth stage of capitalism, which began to emerge in the 1970s and 80s was what Peter Drucker saw as "pension fund socialism," with mass control of the financial system. Clark and Hebb posit a fifth stage where large institutional investors who represent broad share ownership, dominates the financial system. These institutional investors "mediate beneficiaries’ future claims against the actions of firms today." Beneficiaries have been unable to take the role of central actors, even though investments made in their names are potentially controlling. (Ed: seems to me that stages three and four have appeared more as subsets of stage two, rather than as full blown.) Clark and Hebb compare pension fund members and beneficiaries to the "silent majority." They are "often referred to but seldom seen in the world of pension fund management. In the fifth stage of capitalism, institutional investors are seeking increased control over firm-level decision-making. They see several drivers toward activism by institutional investors: Lack of ability to exit leads an increasing need for voice to ensure long-term shareholder value for their beneficiaries. Corporate governance, as a movement, has focused institutional investors first on issues of board governance such as the role of independent directors, senior management compensation, and the use of poison pills to the broader areas of firm-level transparency and accountability. The growing impact of socially responsible investing (SRI) has developed as result of the newly introduced British SRI disclosure legislation, out of institutional investors' concerns for the long-term share value of their investments, and union activism. A fourth driver of pension fund engagement is the globalization of financial markets combined with the rise of international social, environmental and accounting standards. They conclude with the statement that "pension fund corporate engagement holds new possibilities for humanizing capital in the global arena." Perhaps the upcoming disclosure of votes by mutual funds will move them in the direction of public pension funds...one can hope. Surf's Up Hawaii, where East meets West, is attempting to attract high-tech firms by offering a 100% state tax credit for high-tech investments (Act 221 credit), a 20% tax refund for research and development (paid regardless of tax liability), nonexpiring net-loss carryforwards, and no state taxes on stock-option gains. More than 100 firms have qualified, including Landmark Networks and Pihana Pacific (part of Equinix Inc.) Back to the top with the Corporate Governance NETwork! Contact: jm@corpgov.net All material on the Corporate Governance site is copyright ©1995- by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.