Corporate Governance News: May-June 2004

After going it almost alone in Iraq, with a "coalition of the willing," both George W. Bush and John Kerry appear to recognize the need to work with the Uited Nations and broad coalitions. When will American corporations learn the same lesson? Just 70 of the 1,500 companies that have signed onto the UN Global Compact, which promotes standards for human rights, labor, environmental and anti-corruption standards. With all the standards American firms are required to follow, one might think they would want to encourage corporations based in other countries to raise their standards.

Companies from about 70 countries have signed on, including 330 French firms and 93 from India. About half are from developing nations. The pact is strictly voluntary and advisory; there are no penalties or enforcement; perhaps that's the problem.

Twenty major investment companies -- including Banco do Brasil, Credit Suisse Group, Deutsche Bank, Goldman Sachs, HSBC and Morgan Stanley -- have endorsed “connecting financial markets” to environmental, social and governance criteria, and agreed to bring other actors in the financial world into play on making these factors standard components in the analysis of profitability and investment decision-making. The 20 companies control $6 trillion in assets.

UN Secretary General Kofi Annan told a recent gathering: “I ask you all to work together – business, civil society, labor and governments – and to work with the United Nationa, so reduce the global risks we all face and to realize the promise of a fairer, more stable world.” We have to start somewhere.

Lucian Bebchuk and Alma Cohen investigated empirically how the value of publicly traded firms is affected by arrangements protecting management from removal. A majority of U.S. public companies have staggered boards that substantially insulate the board from removal via a hostile takeover or a proxy contest. (Program on Corporate Governance, John M. Olin Center for Law, Economics, and Business, Harvard Law School, Olin Paper No. 478) They find that:

As the proportion of independent, outside directors on a board and its oversight committees increases, the likelihood of corporate fraud decreases, according to a study of U.S. companies published in the June issue of Financial Analysts Journal, a research publication for investment practitioners worldwide published by CFA Institute. The study also found that companies that had a board compensation committee tended to be more likely to commit or be accused of fraud - although, the fewer ties compensation committee members had with the company and its executives, the less likelihood there was of corporate fraud.

Their results support NYSE and NASDAQ requirements for independent directors and Sarbanes-Oxley Act requirements for audit committees. Regarding their finding that companies accused of fraud were more likely to have a compensation committee, the authors write, "The implication is that compensation committees have been ineffective in evaluating and properly rewarding the performance of top executives. They may also have designed compensation packages with dysfunctional incentives."

Composition of the compensation committee was a significant mitigating factor. The more independent directors on the committee were of any other business or personal ties with the company, the less likelihood there was of corporate fraud.

The researchers did not find statistically significant differences between the fraud and no-fraud groups when they tested for:

The authors conclude that "the influence of the CEO on the board does not detract from its effectiveness in monitoring for fraud."

After the Enron collapse, ex-CEO Ken Lay, ex-CEO explained to Congress the biggest accounting loophole: not expensing stock options. While regulators have proposed to fix this problem, rich Silicon Valley executives are fighting to keep their stock options off the books. The AFL-CIO is letting its members know, "that's bad news for the retirement savings of America's working families who depend on companies having honest accounting."

How much do these execs take home in stock options? A few examples follow:

Failure to expense stock options has widened the pay gap between CEOs and workers. Last year, the average CEO made 301 times the average worker's pay, up from 42 times in 1980. Executives disproportionately benefit from stock options and this cost has been kept off the books. Worse, the failure to expense stock options has artificially boosted profit reports-making some under performing CEOs and companies look robust. Help fix this problem by urging the regulators to make stock option expensing mandatory. Get active.

The City Council of Berkeley, California last approved a resolution to amend the U.S. Constitution to say that corporations should not enjoy the same constitutional protections and rights that real people enjoy. The resolution also supports amending the U.S. Constitution and the California Constitution to say that the First Amendment free speech protections should not apply to corporate expenditures.

In approving this resolution, Berkeley becomes the third and largest municipality in the country to pass such a resolution, which is non-binding and only advisory. The other cities to pass similar resolutions are Arcata, California and Point Arena, California. Get active.

Virtual Shareholders Meeting

ICU Medical held its annual shareholders meeting solely online. Even though Delaware law has permitted virtual only meetings since 2000 and Inforte was the first (and only, until ICU) company to do so, Delaware companies have been loath to go that route due to fear of shareholder wrath. Last year, Seibel Systems backed off plans to conduct a virtual only meeting after shareholders saw the proxy materials filed by Seibel and complained. Learn more about virtual meetings at RealCorporateLawyer.com.

California State Insurance Commissioner John Garamendi said Friday that he wouldn't support Anthem Inc.'s $16-billion acquisition of the parent of Blue Cross of California unless the Indiana company spends hundreds of millions of dollars on healthcare programs for California's poor.

Garamendi said he believed the compensation figure could hit $600 million when stock options held by WellPoint executives were included — a potential windfall the insurance commissioner called "reprehensible."

State Treasurer Phil Angelides said that public pension funds representing about $530 million of stock in Wellpoint and Anthem planned to withhold their votes on the transaction. Among the groups are the California Public Employees' Retirement System, the California State Teachers' Retirement System, the New York State Common Retirement Fund, the New York State Teachers' Retirement System, the Los Angeles County Employees' Retirement System and the Illinois State Board of Investment. (Garamendi Questions Costs of Deal to Buy Wellpoint, LATimes, 6/26/04)

Shareholder activist John Chevedden noted that a 19-member board of directors, which the New WellPoint proposes, is considered too large to be an effective board by corporate governance experts. Thus, there there could be a power vacuum which could be filled by powerful and unchecked Chairman of the Board. Additionally, shareholders will not be able to vote on the lavish golden parachutes as a separate ballot item. And there are unanswered questions. What is the preset value of the claimed $2 billion of savings which will not be realized for 10-years compared to the ultimate cost of $4 billion in transaction costs incurred now – which will require interest payments over 30 years? What percent premium will shareholders in the old Well Point will receive?

According to the National Association of Securities Dealers, investor disputes are on the rise. Last year, the most ever investor disputes were filed -- almost 9,000 -- and this year could see just as many or more. That's almost double the number of disputes filed a decade ago.

"There's always some joker willing to risk going to jail to steal $1 billion," says Vincent DiCarlo, a former Securities and Exchange Commission attorney who now specializes in securities arbitration cases in private practice in Sacramento, CA. "When I was at the commission, it took me a long time to figure out how the system worked; the sanctions imposed didn't deserve to even be called sanctions, and we were only able to bring a small number of cases." He says the dysfunction stems mostly from the lack of liability and responsibility accorded to those entrusted with accountability: accounting and law firms.

The failings of auditors, lawyers and Wall Street firms to spot large-scale corporate fraud have been reported ad nauseam. From banking conglomerate Citigroup to auditor Arthur Andersen, huge fines have even been imposed. But what's curious is the fact that no major reform has taken hold. Sure, there's the Sarbanes-Oxley Act, which calls for more financial disclosures and accounting oversight for public companies. But those are matters between institutions. When it comes to investors, they're left to arbitration. (Investors Fending For Themselves - Commentary: Time For Securities-Law Overhaul, CBSMarketWatch.com, 6/14/04)

A survey of 100 Fortune 500 by andBeyond Communications found a positive correlation between candid communication and superior share-price performance. Top-ranked companies boosted their share prices over a two-year period by 21.5%, while bottom-ranked companies saw only a 7.3% increase. A review of 2003 annual-report letters found that 87% of CEOs failed to candidly report their bottom-line performance. "As companies spend millions of dollars to comply with Sarbanes-Oxley, it is alarming that only 13 percent of the CEOs in our survey met this simple test of forthright investor communication," said L.J. Rittenhouse, president of andBeyond. "Companies that offer generalities without meaningful and straight-forward explanations will never restore investor trust." (Link Found Between Candor, Share Prices, CFO.com, 6/15/04)

In an attempt to curb conflicts of interest at mutual funds that resulted in trading and sales scandals at more than 20 companies, the SEC voted 3-2 to require mutual funds to have an independent chair. The move will mean big changes when the rule take effect in 18 months, at least on paper for the $7.5 trillion industry, since an estimated 80% of funds have boards led by insiders. (Independent Chairman at Mutual Funds: SEC Rule, SRI Media, 6/23/04) The question remains, will independent chairs and boards with 3/4 independent majorities really get control of their external money market managers? Putnam Investments' board is chaired by an outsider. But the company, a unit of insurance broker Marsh & McLennan, was the first charged with fraud for having turned a blind eye to trading abuses.

Fidelity's 292 funds fall under the purview of a sole board of trustees that has long been run by Edward C. Johnson III, its chairman and chief executive. While Johnson will give up his board of trustees chairmanship, "He will continue to provide day-to-day management oversight of the company," Loporchio said. "This rule really does not change the way Fidelity Investments is run at all." (SEC Bars Fund Employees From Serving as Board Chairs, LATimes, 6/23/04) Isn't that reassuring?

Mercer Bullard, founder and president of Fund Democracy, thinks Chairman William Donaldson "is doing what's necessary to prevent legislation."

While requiring independent chairmen is "a good, meaningful step," Bullard said that there are "much stronger steps" that the SEC may have sidestepped with this move. Those steps include requiring funds to include portfolio costs in expense ratios, to disclose fees in dollar terms in shareholder statements and banning companies from making "back-door" payments to brokers push their funds. Focusing on independent chairmen "is not going to be as transformative, but he (Donaldson) can score a lot of political points," Bullard said. (Independent fund boards: A good first step, CBS MarketWatch, 6/23/04)

The Corporate Library features a quote of the week. This week's quote is from Brian Heil, founder and CEO, ProxyMatters.com. ”It is very important for shareholders to vote their proxies. Many people think that it doesn't matter. But, mathematically, your vote on a proxy is more important than your vote in a presidential election.” Considering the influence of corporations on politics, the quote is doubly true.

Bowne Financial Print has released "The Initial Public Offering: A Guidebook for Executives and Boards of Directors" (Second Edition), authored by Patrick J. Schultheis, Christian E. Montegut, Robert G. O'Connor, Shawn J. Lindquist and J. Randall Lewis with the law firm of Wilson Sonsini Goodrich & Rosati.

The guidebook offers readers a practical view of the IPO process and provides helpful advice on how to conduct a successful IPO in today's environment. It provides an overview of the legal framework governing the IPO process, including what issues to consider when contemplating going public, how to assemble the IPO team, how to prepare and file the registration statement, and what to do after a company has gone public.

This new second edition addresses a business, financial and legal landscape that has changed dramatically since the first edition's publication in 1998. It also includes listing requirements of the NYSE and NASDAQ, a sample IPO timeline and a compliance calendar, as well as a summary of selected post-Sarbanes-Oxley SEC rules and analysis.

A printed copy of is available from Bowne or can be downloaded for free at http://www.bowne.com/.

The Alliance for Democracy, an advocacy group, is considering the following for protest banners:

Frankly, I like the book cover quote of Monks and Minow: "Corporations determine far more than any other institution the air we breathe, the quality of the water we drink, even where we live. Yet they are not accountable to anyone." Creating structures to ensure accountability isn't "anti-corporate;" it is pro-sustainability.

Out of 108 million people in the US who work in the private-sector, 21% own stock in the company they work for, showing the importance of employee stock ownership programs. Among unionized employees that level is even higher at almost 28%. The median value of the employees’ employer stock ownership is over one-fifth of annual pay. Ownership ranged from a high of nearly 60% of employees in computer services to a low of nearly 14% in agriculture/mining/construction, with percentages for durable manufacturing, wholesale, utilities, non-durable manufacturing coming in at approximately 30%, 23%, 55%, and 30% respectively.

In total, there are approximately 10,000 ESOPs in the US, covering 8 million employees (8% of the private sector workforce). These employees draw in excess of 3% of their total compensation from ESOP contributions. 10% - are in publicly traded companies. However, these companies employ approximately 50% of the nation's 8 million employee owners. (Survey Confirms Employee Ownership is Wide Spread in America, Washington, DC, 6/17/04)

ISS issued a summary of the proxy season to date and one result has been a flurry of analyses by the usual pundits. Keith L. Johnson of SWIB is quoted by Barry Burr in Pensions & Investments (All Investor Eyes on Busy Proxy Season, 6/14/04) saying, "There are a lot more shareholder resolutions." Similarly, "It is probably the busiest we've ever seen in terms of shareholder resolutions and activism, " according to Charles Elson, of the Center for Corporate Governance. ISS' own Patrick McGurn calls this year "the end of the routine proxy season."

Yet, Stephen Taub, of CFO.com, looks at the same data and writes "Proxy Season Quieter in 2004, Says ISS." (6/18/04) In 2003, the ISS recommended that votes be withheld from audit-committee members at several hundred companies because the audit firms were permitted to conduct non-audit work. For that reason, ISS recommended that clients vote against ratification of the outside audit firm for 7% of companies in 2003, but for only 4% of companies in the 2004 proxy season. The 2004 figures total fewer than 75 companies, including only three in the Standard and Poor's 500, according to the ISS.

PLANSPONSOR.com reports that ISS urged clients to withhold voting support for director nominees at only 32% of companies this year, compared to 38% last year and 52% in 2002. Not only were there fewer recommended director vote withholdings, the 2004 season saw a 5%+ drop in shareholder proposals making it to the ballot and a 66% reduction in proxy fights compared to the more contentious 2003 season. (6/16/04)

Ralph D. Ward, publisher of online newsletter Boardroom INSIDER, sums up the proxy season in the succinct style which fans his growing reputation. He says the U.S. proxy season 2004 was "the most explosive in memory" -- but the real investor victories happened far from the spring's noisy annual meetings. "The season kicked off in March with Walt Disney CEO Michael Eisner drawing a shocking 45% 'no' vote on his board reelection. Then, activist megafund CalPERS, as a governance protest, 'withheld its votes to reelect directors at 90% of the companies in its portfolio,' the most famous being Warren Buffett on the board of Coca-Cola. At Safeway Stores, angry investors fought the reelection of chairman Steven Burd, and a record 200 proxy proposals on executive pay were filed at other corporations."

Those were the noisy events widely reported in the press. "Yet for all the heat of these battles, almost all failed. Eisner has held on at the Magic Kingdom, CalPERS took major criticism for spreading itself too thin, Burd was easily reelected, and the handful of proxy issues that actually won a majority were ignored by management." The real results, notes Ward, happened outside the annual meeting spotlight, "with backchannel pressure bringing many corporate surrenders on adding independent directors, expensing options, and rolling back poison pill defenses. Ward compares the 2004 proxy wars to the trench warfare of WW1." "You have massive, bloody battles that seem to bring nothing but stalemate, while the real changes are triggered behind the scenes back home -- through negotiation, political turmoil, and even revolution."

New exchange listing standards have provided a "Rule Book" for companies and their investors. ISS points out that many of their withholds in 2002 and 2003 were levied at companies that were still in the corporate governance Dark Ages. "They lacked basic best practice ingredients like independent key committees and, in the case of many boards at small- and mid-cap firms, had no key panels in place at all. Additionally behavioral changes taking place within U.S. company boardrooms. Whether it is viewed as directors more diligently accepting their responsibilities to shareholders or, the threat of ballot access, good boards stopped ignoring majority votes on shareholder proposals and started voluntarily implementing positive change.

John Connolly, president and chief executive officer of ISS, added, "The 'shareholders gone wild' scenario fails to hold water with respect to ISS or the general proxy voting trends. The indicators tell a different story -- a story of increasing constructive dialogue, awareness and understanding between companies and their shareholders. (Institutional Shareholder Services Releases Preliminary Proxy Season Review, 6/20/04) More companies that ever paying attention to ISS and availing themselves of resources such at TheCorporateCounsel.net's 2004 Proxy Season Resource Center in order to be prepared.

Yet, investor votes continue to be ignored or circumvented by boards. True, Walt Disney directors took the chairmanship away from Eisner but they chose Eisner ally, ex-Sen. George Mitchell, as chairman, over the objections of several big institutional holders. At Gillette, 68% of the votes cast favored ending staggered board elections. "When a vote like that is ignored, you have to say governance isn't working," says Robert Monks. (see Experiments in Corporate Governance, WSJ, 6/21/04)

Behind the whole season has been the specter of the SEC's rulemaking, Security Holder Director Nominations, S7-19-03. If that disappears or gets compromised into nothing worthwhile, the likelihood of a costly "revolution" would rise. It is obvious The Corporation is in need of reform. Either its owners start addressing issues, such as sustainability and fairness, or we will all pay a heavy price down the road.

The Financial Accounting Standards Board will hold public roundtables on its proposed stock-option expensing rule. The first meeting will be held on 6/24 at the Sheraton Hotel in Palo Alto, CA; the second will be held on 6/29 at the FASB headquarters in Norwalk, CT. The comment period ends on 6/30. (see Share-Based Payment—an amendment of FASB Statements No. 123 and 95) Both roundtables will be available via Webcast and will run from 9 a.m. to 1 p.m. (Compliance Week, 6/15)

Unfortunately, the Financial Services Committee of the House of Representatives voted 45-13 recently to restrict the option-expensing standard proposed by the FASB.

H.R. 3574, the Stock Option Accounting Reform Act, would require an economic impact study before FASB would be permitted to implement its proposed rule. In addition, the bill would require companies to expense only stock options granted to the top five officers. Small businesses would be entirely exempt from FASB's rule; newly public companies could forgo expensing for three years.

FASB, which is expected to issue a final rule by the end of this year, backed off a similar proposal in 1994 under opposition led by the Business Roundtable. Don't let it happen again. The bill next faces a vote in the full House, where, as of last month, the measure had 107 co-sponsors.

CACI International Inc. (CAI) is facing growing pressure over its role in the Abu Ghraib prison scandal from California pension funds that own large stakes in the company, according to the Washington Post. Directors of CalPERS plan to meet today to discuss concerns about management controls, training, and legal procedures at CACI, while CalSTRS planning to discuss the issue at its July 7 meeting. CACI employs Steven Stefanowicz, an interrogator in Iraq who has been implicated in an Army report on prisoner abuses at the infamous prison. CACI's stock has shed 16% since that connection was reported. (PlanSponsor.com, 6/14/04)

CalPERS Targets Disney, Maytag and Others for Reform

CalPERS said Maytag's board refused to implement shareowner proposals backed by majority votes. CalPERS said it wants Maytag to declassify its board by the 2005 annual meeting, seek shareowner approval of a poison-pill provision and adopt formal equity ownership requirements for its directors.

At the 2004 Maytag annual meeting Ray T. Chevedden sponsored a shareholder proposal to declassify its board. Nick Rossi sponsored a shareholder proposal to seek shareowner approval of a poison-pill provision.

The 2004 annual meeting marked the 6th consecutive year that the declassify proposal topic won more than 50% of the yes and no votes cast. This meeting also marked the 4th consecutive year the poison pill proposal topic won more than 50% of the yes and no votes cast. (Contact: John Chevedden, 310-371-7872)

The Wall Street Journal reports that Donaldson wants a compromise and he wants some access to be accomplished but he has "already agreed to eliminate another controversial provision that would have empowered small groups of shareholders to force votes on proposals to allow shareholders to nominate directors."

"Mr. Donaldson is exploring a plan supported by some in the business community and at least one Republican commissioner that would give boards a chance to fix their problems before allowing voting shareholders to include their own nominees on corporate proxies, the ballots used in votes on company matters. Under the proposal, if more than 50% of cast votes are withheld from a board member, the board's nominating committee could name a replacement. The plan may require companies to consult with shareholders about the replacement. Under one scenario, if more than 50% of the votes at the next annual meeting are withheld for the replacement, the company would have to include a shareholder-backed nominee on the ballot the following year."

The alternate plan is apparently known internally as the "cure" proposal, because it gives companies time to cure their problems. Under the cure, shareholders would have a three year wait to effect even a minor change. The Business Roundtable appears to be in control. That is totally unacceptable to shareholders we have been in contact with. (SEC May Dilute Plan to Increase Holders' Power: Under Pressure From Businesses And Resistance From Democrats, Donaldson Considers Alternative, 6/8/04)

For proposal 3 -- Shareholder proposal regarding classified board 340,292,471 shares were voted For this proposal, representing 88% of the votes cast, and 46,457,898 shares were voted Against this proposal or Abstained from voting, representing 12% of the votes cast.

For proposal 4 -- Shareholder proposal regarding Rights Plans, 329,490,426 shares were voted For this proposal, representing 85% of the votes cast, and 57,260,039 shares were voted Against this proposal or Abstained from voting, representing 15% of the votes cast.

For proposal 5 -- Shareholder proposal regarding Majority Vote, 345,397,692 shares were voted For this proposal, representing 89% of the votes cast, and 41,352,780 shares were voted Against this proposal or Abstained from voting, representing 11% of the votes cast.

At the company's annual meeting April 28, 90% of the shareholders attending backed proposal by Harold Mathis to make all its directors stand for re-election each year. Last year, his proposal got 85% of the vote. A majority of shareholders voted for it in each of the two previous years as well. Yet Baker Hughes still staggers its board elections, saying it is in investors' best interest. (He's big on democracy, even if corporations aren't, Houston Chronicle, 5/29/04)

Shareholders will have more power over executive perks under corporate law changes proposed by Labor. Opposition corporate governance spokesman Stephen Conroy released Labor's response to the CLERP (Corporate Law Economic Reform Program) Bill number 9, which is being examined by a parliamentary inquiry.

Senator Conroy said the government's Bill failed in two main areas.

"It fails to sufficiently hold boards accountable and fails to sufficiently empower shareholders."

He said corporate scandals such as HIH, Ansett and One-Tel, high salary packages to executives and termination payments in spite of poor performance, and the perceived failure of audit committees had outraged shareholders, employees and retirees.

Labor's amendments would include prohibiting limited-recourse loans to directors and key executives and banning the payment of options, bonus payments and other retirement benefits (other than statutory superannuation) to non-executive directors. They would also require shareholder approval of termination payments which exceed one year's salary and ensure the disclosure of the duration of contracts and equity value protection schemes.

"To further toughen the Bill, Labor will also move amendments in relation to audit reform, financial reporting, enforcement, shareholder activism, conflicts of interest and analyst independence," Senator Conroy said. "We believe that there needs to be a greater balance where shareholders are able to take these things into their own hands and stop the sort of excessive corporate payouts, particularly when companies have failed."

Online debate of possible reforms is being organized by the Australian Public Policy Research Network, moderated by its co-founder Dr. Richard Curtin. Anyone in the world can participate free of charge by registering on the APPRN web page. All participants are invited to vote on the importance of 14 suggested agenda items for reform that are presented in the discussion paper on 'Agendas for reforming Corporate Governance, Capitalism and Democracy' prepared by Shann Turnbull.

Fearing a 3/2 split vote might harm the SEC's authority, the Commission's has again delayed reforming boardroom elections. The Financial Times reports to expect a vote in late June at the earliest, perhaps as late as August.

A second controversial reform is in the area of mutual fund governance, mandating independence of fund chairmen. "That plan is bitterly opposed by some of the largest fund groups in the US and some of the SEC's Republican commissioners. A third controversial area is a plan to force hedge funds to register with the SEC. The SEC's draft plans on boardroom elections are likely to be modified before they become formal regulations." (SEC split delays vote on board election rules, 5/31/04)

Sir Philip B. Watts, former chairman of Royal Dutch/Shell, was awarded a pay and option package worth more than $10.7 million in 2003, reports the New York Times. Proven annual reserves were overstated by about one-fifth in each of the last six years.

The picture that has emerged is one of "an institution with lax controls and struggling to keep promises made to markets and investors, particularly in its exploration and production department." (Shell Discloses a Large Pay Package for Its Former Chairman, 5/29/04)

Alfred Donovan goes much further, accusing Shell of hiring undercover operatives to deliberately intimidate shareholders. See Shell2004.com.

A 5/24/04 Op-Ed article by former SEC chairman Arthur Levitt in the New York Times supports the SEC proposal to give qualified shareholders limited ability to place a director's name on ballot for company's board. Noting concerns of the Business Roundtable that a small number of shareholders would pursue narrow agendas at expense of most other investors, Levitt counters their pressure would be mitigated by the economic incentives of profitability and efficiency. Finally, they would have to win majority support for their candidate.

The SEC estimates the proposal would trigger nominations at only 43 of 14,484 public companies. Why so few? Because the SEC has proposed to limit nominations to shareholders with 5% of the company's stock. Someone at the Times improperly entitled Levitt's article "Let the Little Guy in the Boardroom." What "little guy" holds 5% of a coproration's stock? The largest public pension fund in the country rarely holds more than about 1%. Yet, CalPERS is typically referred to as the 800 pound gorilla (Google lists 101 such citations) not the "little guy." More fact checking is needed at the Times.

It is also good to see Amy Borrus of BusinessWeek endorsing the SEC's proposal (see Stick to Your Guns, Mr. Donaldson, 5/24/04). However, let's not be mistaken, the proposal would do nothing for the "little guy." It's like the British offering the top ten landholders in the American colonies one seat in Parliament, if they can agree together on who to nominate. That's hardly democracy...but it might be enough to postpone the revolution.

Corporate Governance Japan will hold its 179th Executive Luncheon Meeting at the Hotel Okura on June 17, 2004 from 12:00 p.m. - 2:00 p.m. Register directly with the Hotel Okura.
Speaker: Dr. Gregory Jackson, Fellow, Research Institute of Economy, Trade and Industry
"Japanese Corporate Governance in Transition: Toward a New Paradigm?"
The Atlantic Room (Main Building, first floor)

Broc Romanek, of TheCorporateCounsel.net noted that May 20th was the height of the proxy season with more meetings scheduled on that day than any other. His blog is an important source for anyone trying to keep up with SEC rules and guidance. They got everything from a pdf file of Spitzer's complaint against Grasso (106 pages) to interviews with John Wilcox on Weaknesses in the Proxy Process and David Thornquist on Electronic Due Diligence in M&A. If you don't subscribe, try the No-Risk Trial.

ISS' Friday Report indicates the 61% withhold from 4 directors at Federated Department Sotres may have been the highest proportion of the season -- and without an organized vote-no campaign. The result was probably a combination of ignoring previous majority votes on resolutions and the high proportion of institutional ownership. Subscribe.

CSR Academy, sponsored by UK Dept. of Trade and Industry, seeks partners for educational program. Contact Andrew.p.dunnett@btinternet.com.

Common thread to Ralph Ward's Boardroom INSIDER this month... Boards are becoming more active in setting and approving the CEO’s strategy, in laying out the benchmarks of his performance, and making the job a truly “at will” position. Ward provides advice on defining the job, succession, and more.

Booz Allen Hamilton study of the world’s 2,500 largest publicly traded corporations finds companies that split CEO and Chairman roles have about 4-5% worse returns. Forced turnover of CEOs who were hired from outside the company reached striking levels in 2003; In North America, 55% of outsiders who left were forced to resign; in Europe, 70% left involuntarily. CEOs who had previously led other companies delivered returns for investors 3.7% per year lower than first-timers from inside the company. Get those succession plans ready! See summer 2004 issue of strategy+business magazine.

Tim Leech covers the Four Pillars of SOX 302, 404 and 906 in the 5/25 edition of Compliance Week. Companies must demonstrate conclusively that they have four "pillars" in place:
1. Macro Level Anti-Fraud Analysis;
2. Macro Level Assessment Against A Control Model;
3. Sufficiency Of IT General Controls; and
4. Reliable 10-K, 10-Q Accounts, Notes And Supplemental Disclosures.

A recent survey of more than 200 senior financial services executives by PricewaterhouseCoopers suggests that recent changes in corporate governance were driven by the desire to comply with regulations, rather than to improve institutions’ management tools, and that companies aren’t reaping the potential benefits. They “do not appear to have improved the quality of their dialogue with the stakeholders they picked out as critical — customers and shareholders and 43% did not regard their employees as critical stakeholders! See Accounting Today.

The Canadian Institute of Corporate Directors (ICD) is in the final stages of a central directors register that will be a one-stop shop for corporations and search firms looking for board members. If everything goes as planned, it should be up and running by Sept. 1.

Investigators have dismissed 80% of the 156 whistle-blower claims examined under Sarbanes-Oxley. Of 43 cases resolved on appeal, plaintiffs have prevailed only twice. According to Tamara Loomis, plaintiffs and their lawyers are still "testing the margins" by learning, for example, the statute does not apply retroactively. See Corporate Counsel, Whistle While You Work, 6/04.

A Time Magazine survey referenced by David Brooks in the New York Times (“The Triumph of Hope Over Self-Interest,” 12/03) may help to explain recent tax cuts. The survey asked people if they are in the top 1% of earners. Nineteen percent said they were. A further 20% said they expected to be someday. [Not only are all the inhabitants of Lake Wobegon above average – they are way, way above average.]

May 2004 News

Buy Side Managers Favor SEC Proposal

Despite opposition from the Business Roundtable, nearly 80% of the 120 buy side portfolio managers and research professionals surveyed by Broadgate Consultants, Inc., believe the SEC's proposals to give shareholders more power to nominate corporate board directors is a good step toward better governance. About three-quarters of respondents believed that the board structures of mutual funds are in need of reform.

Just over half of the respondents -- 53% -- believed that the Sarbanes- Oxley Act has been effective in promoting better corporate governance and protecting investors. (Press Release, 5/27/04)

Wake-up Call for Safeway

The company said 33.2% of shareholders supported a proposal that the chairman of the board be an independent director - a proposal that would remove the CEO from the chairmanship and against which Safeway management had recommended. Later in the meeting, Safeway said the final tally of shareholder votes withholding support of CEO Steven Burd's re-election to the board of directors was 17%.

Credibility GAAP?

Should Generally Accepted Accounting Principles be set by the Financial Accounting Standards Board (FASB)? Anyone who has been awake for the last ten years knows the answer. As Liz Fender of the Financial Accounting Coalition for Truthful Statements (FACTS) said recently, "Congress interfered with FASB about 10 years ago and with all of the recent events that have shaken the public's trust in the financial markets, we are surprised that they are once again contemplating such a move."

Join with Facts, a broad coalition of 30 pension funds, consumer/investor groups and labor unions... urge Congress to stay out of the FASB's process for considering a proposed rule requiring companies to expense all stock options. The coalition believes that accounting rules are best decided not by Congress but by FASB, an independent body charged with setting accounting standards. FASB has the expertise to fully evaluate accounting issues. It has an open, independent process for considering new accounting standards.

Less than two years have passed since the Sarbanes-Oxley Act of 2002 established a mechanism ensuring that FASB would be independently funded and free from any pressures from special interest groups. HR 3574 S. 1890, "The Stock Option Accounting Reform Act," undermines this important reform by allowing Congress to succumb to pressure from special interests and override FASB's independence. These bills would inject Congress directly into the accounting standard-setting process by mandating which stock compensation should be expensed and by what methodology, as well as establishing special exemptions for small businesses. Please let your representatives know you oppose HR 3574 and S. 1890.

Record at Alaska?

Four Alaska Air (ALK) shareholder proposals each exceed a 60% vote at their May 18, 2004 meeting. Could it be a record – 4 proposals each exceeding 60% at one meeting? Here's the run-down per Steve Nieman, shareholder.

Proposal 3: Establish Simple-Majority--69.9% in favor
Proposal 4: Stockholder Rights Plan--69.3% in favor
Proposal 5: Shares Not Voted Not Counted--17.5% in favor
Proposal 6: Higher Standards for Lead Independent Director--25.3 % in favor
Proposal 7: Independent Board Chairman--31.7% in favor
Proposal 8: Establish Confidential voting--61.2% in favor
Proposal 9: Reporting Employee Stock Ownership--5% in favor
Proposal 10: Establish Cumulative Voting--62.4% in favor

How High Net-worth Individuals Can Improve Corporate Governance

1. Write to Mr. Jonathan G. Katz, Secretary, SEC supporting their rulemaking, Security Holder Director Nominations, S7-19-03. Let them know that instead of raising trigger levels, they should get rid of them altogether. True, the public comment period is over, but the SEC is still listening.

2. Let Maureen Nevin Duffy know you will subscribe to The Corporate Governance Fund Report if she restarts her publication. Duffy's newsletter was primarily aimed at institutional investors "pushing back." However, individual investors also found it was the best source for learning of the actions of activist funds, such as Herb Denton's Providence Capital, Highfields Capital, Wyser-Pratte Management, etc. Add your name to her mailing list.

3. Invest in governance funds. For example, I have investments with Andrew Shapiro who runs Lawndale Capital. Robert Monks is planning to launch a dedicated corporate governance hedge fund with John Higgins of Ram Trust Services. There are others.

4. Invest directly in companies with activist board members who are working to turn companies around. For example, I invested several years ago in Apria Healthcare and more recently in Valeant Pharmaceuticals International based on my confidence in the ideas of Ralph V. Whitworth and Richard Koppes.

5. Join advocacy groups like Responsible Wealth, a national network of affluent Americans concerned about deepening economic inequality. While one of their main focuses is on tax reform, they are also very active in corporate governance.

6. Submit your own shareholder resolutions. I'm particularly fond of those submitted by the Corporate Monitoring Project. The premise of their proposals is that individuals often to not take the time to vote their proxies in their own best interests. Their resolutions are designed to use competing intermediaries -- such as proxy advisors -- to provide individual shareholders more widespread advice on proxy issues. These proposals fit nicely with the multi-year process contemplated by the SEC's rulemaking, Security Holder Director Nominations, S7-19-03.

7. Encourage your mutual funds and pension funds to adopt policies to strengthen corporate governance. See, for example, the policies of CalPERS, which are now a bit dated but still a good place to start.

Separation of CEO and Chairs on Rise

Seagate Technology has joined the growing number of companies to separate the roles of the chairman and CEO. Earlier this year, Walt Disney Co., Dell Inc., and Oracle Corp. separated their top positions. According to Institutional Shareholder Services, the percentage of companies that have separated the positions of chairman and chief executive officer increased from 45% in 2001 to 50.4% in 2003. But the biggest increases were in the small-cap sector; the S&P 500 and S&P 400 showed only incremental increases. According to the Corporate Library, 377 CEOs in the S&P 500 chair their own boards, compared with 394 last year.

Is CalPERS doing its real job or pursuing side agendas?

That's the title of a recent piece in the Sacramento Bee by columnist Dan Walters who writes that CalPERS is part of a larger, nationwide effort by labor unions to gain leverage with corporations by wielding the investment power of public pension funds. Walters points to CalPERS President Sean Harrigan, who is also a high-level official with the UFCW, and the fund's dispute with Safeway.

According to Walters, "The overriding issue is this: Should those who control public pension funds concentrate on improving investment returns and thus serve the interests of pensioners and taxpayers, or should they pursue other agendas that have little or nothing to do with their primary duties?"

Contrary to Dan Walters, there is no conflict between CalPERS serving the interests of members and fighting for worker rights.

Walters thinks that if Safeway were to continue to pay good wages, their “profits would plummet.” But CalPERS is looking to Costco as a model, not Wal-Mart's Sam's Club with which it competes. Costco pays workers 40 percent more and gives them better benefits. Their annual sales last year were about equal but Costco has one-third fewer employees. Six percent of Costco's employees leave each year compared to 21 percent of Sam's. Costco's operating income was higher, as was their operating profit per hourly employee and sales per square foot.

Most CalPERS members are struggling to make the world a better place through public service. If CalPERS can earn good returns with collateral benefits, that’s a plus. Real estate loans to members have earned about 20% a year since the early 1990s. Is that a “side agenda” or smart growth? Safeway said they had to demand draconian cuts because of the competitive challenge posed by Wal-Mart. Yet, Costco shows companies can earn more while doing good. That's a model CalPERS should continue to encourage. (disclosure: the publisher of CorpGov.net is a shareowner of Costco)

This Week in Governance

Patrick McGurn of Institutional Shareholder Services gives out midterm grades on post-Enron reforms. Click here to listen to this audio report-card. A great new service from ISS.

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Gold's 8 Rules for Board Accountability

In a recent speech to the Society of American Business Editors and Writers, Stanley P. Gold of Shamrock Holdings, Inc. provided this agenda for corporate governance reform:irectors must remember that their first duty is to speak for the owners of the enterprise - the shareholders, and that the CEO works for them, as the owners' representatives, not the other way round. Despite encouraging steps in this direction there is still a long way to go to democratize boardrooms...but we must be sure we are going in the right direction.

Each director should have to pass a reasonable proficiency test.

I wasn't surprised to learn that the majority of sitting directors cannot pass a simple exam on the meaning and impact of a balance sheet and profit and loss statement. Directors who are unable to effectively question assumptions, performance or strategies can easily be bamboozled and managed by the people they are supposed to oversee. If doctors, lawyers, and taxi drivers need licenses certifying their competency, then directors certainly do too. They should take proficiency tests as a prerequisite for eligibility to serve as directors of public companies.
Directors should be required to have continuing education.

Beyond basic proficiency to serve on public boards, directors should also have to annually attend further education classes to keep up to speed with new legislation, corporate law, marketing and management trends and relevant industry developments. Continuing education is a requirement of every licensed profession; it should be a requirement for every director of a public company.
Each director should have to stand separately.

Each and every director should be personally accountable for his or her performance and provide, in the proxy statement, a personal statement... in their own words...of what they have done and what they intend to achieve. Each director, one-by-one, should address shareholders at each corporate annual meeting and answer specific questions from the floor. We should not permit directors to hide behind the rubric of "the board."
Shareholders should be able to call for an extraordinary general meeting.

This is a practice that works well in the UK... any meeting of the shareholders other than the scheduled annual general meeting is known as an extraordinary general meeting. The ability of the shareholders to call to account directors when they have acted improperly will be a significant deterrent against such conduct. The length of notice depends on the nature of the resolutions being put to the meeting. Such a mechanism provides shareholders with the ability to convene a meeting of the shareholders on matters they consider to be of pressing important to shareholder interests; they can use such an extraordinary meeting to oust one or more directors they deem inadequate. It usually requires the consent of between 5 to 10 percent to convene such a meeting.
Shareholders need to be encouraged to be long-term investors.

Tax policy should be used to craft economic policy. Capital gains tax laws, for example, should be amended to encourage longer-term holding of shares. A sliding scale that reduces the amount to tax over time will encourage shareholder/directors to think strategically about the longer-term outlook of the company, instead of focusing on the quarter-to-quarter results. More stability in the capital markets is good for all of us.
Real world experience for directors.

Directors are usually isolated from the business...they hang together in a corporate cocoon and hear only what management tells them. The independent directors should be required to meet twice a year with the largest shareholders without senior management present. This is what six large public pension funds are asking of the Disney board. Such interchanges should be institutionalized. The exchange of views and information would be valuable and illuminating for both parties and provide directors with an independent perspective on the business... as befits their independent role.

They should also meet regularly with operational management to learn about the business first hand. This would also be a tremendous morale booster internally. General electric has shown the way here...they have mandated that each of their outside directors regularly visit the company's operating centers, without senior management present.

Even more helpful would be a visit to customers. Directors can place some reliance on expert studies, but without direct, personal experience of the business and the issues involved, they are shortchanging the shareholders. It would be of great help to directors to know what the company's customers think of their products and services.
Public directors.

I think it would be helpful if boards of public companies included a couple of public directors, selected from an approved list compiled by the SEC or some other appropriate state or federal agency. This would bring a much-needed extra dimension to the boardroom in terms of the greater social purpose of a company; such public directors could voice the concerns of numerous stakeholders.
There ought to be a limit on what the company can spend on the re-election of its directors.

In a recent Disney "withhold campaign", the Roy E. Disney family spent between $3-5 million. My best guess is that the walt Disney company spent over $35 million to re-elect michael eisner and george mitchell, as well as the other directors. They spent this out of the corporate treasury thereby using the shareholders' funds to defeat the will of the owners. No where else in American life is the playing field so skewered toward the incumbent. To prevent this in the future, there ought to be strict spending limits on the use of corporate funds by incumbent directors.

California Republican Party Criticizes CalPERS

"Like Donald Trump after a long day of watching tycoon wannabes struggle to gain his approval, CalPERS board members are trying to hand out pink slips to the directors at 90% of the companies in which the fund owns shares," begins an article posted on the Republican Party's website entitled "CalPERS Puts Social Agenda Ahead of Profit."

"In next year’s state budget, taxpayers will subsidize CalPERS to the tune of an estimated $2.6 billion, due in part to the fund underperforming the last three years. Given that CalPERS is responsible for providing retirement and health benefits to 1.4 million public employees, retirees and their families, you’d think getting a better return on their investment would be a top priority. Not quite."

“The theory behind CalPERS’ attack on corporate boards is that directors should focus solely on maximizing returns. Yet CalPERS has invested billions in ‘economically targeted investments’ aimed at providing ‘collateral benefits to targeted geographic areas, groups of people or sectors while providing pension funds with prudent investments.’ If such investments fall short, of course, California’s taxpayers can be forced to pick up the tab.” (Forbes, May 10, 2004)

"How unfortunate that the 1.4 million people served by CalPERS – not to mention taxpayers – can’t sit across the table from the recalcitrant CalPERS board and shout, 'You’re fired!'"

Yet, the article fails to provide any evidence that CalPERS members are unhappy with the strategy pursued by the Board. Far from viewing their Board as disobedient, I suspect that most members find their strategy of investments aimed at providing collateral benefits refreshing. As public employees, many CalPERS members spend their entire careers promoting environmental protection, health, and public welfare. If our pension fund can help make the world a better place, while earning good returns, why should we object? As I told a reporter from Investor's Business Daily, "they take a long time frame. It doesn't do any good after 20 years to have a good return if we're all frying." (Calpers Activism Hits Even Healthy Firms, 5/4/04)

Sure, CalPERS has been "underperforming the last three years." They lost 7.2% in 2001, 5.9% in 2002 and gained 3.9% in 2003. However, the S&P 500 lost approximately 15% of its value during the last three years. Regarding economically targeted investments, CalPERS couldn't tell me the record for all such investments but they could tell me that their real estate loans to members (which certainly has popular collateral benefits to members) have earned about 20% a year since the early 1990s.

Investments are going to have ups and downs. That would be true even if Republicans ran the CalPERS Board...but they aren't likely to get that chance anytime soon, even with Arnold Schwarzenegger in the governor's office.

French Shareowners Flex Muscle

While the SEC debates action on its access rule," French shareowners in the bankrupt Eurotunnel gathered proxies for 60% of the equity and threw out the whole board. Unlike votes on directors at US corporations, French ones are binding. The new board has split the roles of chairman and chief executive. It remains to be if their measures can rescue value but at least there is no question shareowners have a voice. (EDGEvantage.co.uk, LIGHT AT THE END OF EUROTUNNEL AN ON-COMING TRAIN?)

OECD Governments Ratify Governance Code

According to a report by EDGEvantage.co.uk, the 30 member-governments of the Organization for Economic Co-operation and Development (OECD) have ratified – with modest changes – a controversial code of corporate governance that would give shareholders stronger rights in most of the member countries. When the draft was circulated in January its call for shareholders to be able directly to nominate directors sparked opposition.

The draft suggested, "Shareholders, including institutional shareholders, should be allowed to consult with each other on issues concerning their basic shareholder rights as defined in the principles above, subject to some possible exceptions to prevent abuse." (emphasis added). The words "some possible" were dropped from the final text. Provisions to protect whistle-blowers, a call on institutional investors to disclose their voting policies and steps to reduce conflicts of interest throughout the investment process remain intact.

However, the code is only a recommendation. Donald Nordberg, reminds his readers "the previous OECD code, from 1999, was used mainly in developing countries outside the OECD area. But this code goes beyond many of the measures adopted in the major industrial powers that belong to the organization, even codes put in place after the Enron and WorldCom affairs sparked global interest in governance." (GOVERNMENTS RATIFY TOUGH OECD GOVERNANCE CODE, WITH MINOR CHANGES, 4/22/04)

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