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October 2004

Disney Moves For No-Action

Walt Disney Co. (DIS) has notified the SEC it intends to exclude the shareholder resolution to allow shareholder nominees on thie proxy from its 2005 ballot, arguing the proponents are out of legal bounds, according to a report in WSJ ( Disney Seeks To Thwart Pension-Fund Bid For Vote On Dir., 10/28/04)

"The company respectfully requests the staff of the division of corporation finance of the commission confirm that it will not recommend enforcement action to the commission if the company excludes the proposal from its 2005 proxy materials," a Wachtell lawyer wrote, in the so-called no-action letter to the division.

In the past, SEC lawyers have shown a willingness to allow such non-binding resolutions, as long as they are precisely drafted to mirror the agency's original proposal. But according to Disney, the resolution doesn't precisely follow the SEC's original rule proposal. For one thing, those who subitted the resolution don't quite hold 1% of Disney's shares.

Among other arguments, Disney makes a seemingly hyper-technical point in a footnote, noting that the SEC has been sympathetic to such arguments in the past. In the footnote, Disney notes that the SEC's rule proposal says shareholders holding 5% for "at least" two years would be eligible to submit a director nomination, but the pension resolution calls for a nomination from shareholders holding 5% for "more than" two years.

"As a result, the proposal by the sponsors would deprive those who hold the requisite number of shares of company common stock for exactly two years to be a nominating shareholder, contrary to the shareholder nomination procedure in the commission's proposed rules, and as a result, the proposal is properly omitted," Disney's lawyer wrote in the footnote.

The footnote cites a decision earlier this year by the staff of the SEC blocking a similar proposal at Qwest Communications International Inc.'s (Q) annual meeting. As submitted to Qwest, the non-binding resolution urged the board to allow investors holding "at least 5%" of the stock to float a nominee in the company's proxy materials. But the company argued - and the SEC agreed - that, in order to be a fitting ballot resolution, qualified shareholders had to own "greater than 5%" in line with the exact language of its proposed rule.

The four funds -- CalPERS, the New York State Common Retirement Fund, AFSCME Pension Funds, and the Illinois State board of Investment -- should hold firm on Disney and should widen their net to others as well.

Dissidents Will Change Board Dynamics

The 4th quarter edition of Directors & Boards carries a cutting edge article on evolving boardroom etiquette. James Kristie’s introduction to “Dissidents, and dissent, in the Boardroom” notes the topic of dissident directors takes on heightened focus in the context of the SEC shareholder access proposal. The article provides an edited version of a discussion by nine experts who gathered at the University of Delaware’s John L. Weinberg Center for Corporate Governance where Charles Elson is the Director. What follows are just a few statements that grabbed my attention; there are many more.

Frank Balotti, a prominent attorney, who recently represented a dissident, noted “The dissident was kept out of the decision-making process by the board, which formed a committee consisting of all directors other than the dissident.” Of course, that was where all the work got done. Interestingly, even though his client was basically a eunuch, the company’s stock price dramatically increased because investors didn’t know it and anticipated change.

Stephen Lamb, who serves on the Delaware Court of Chancery, asked if a dissident has to fight to get information, who pays for it? Frank told him the first thing boards do when dissidents join is “change the by-laws to make it so they are no longer mandatorily obligated to indemnify if you have to bring a suit against the company.”

David Ikenberry, a professor at the University of Illinois in Champaign, has researched 350 cases of companies involved in proxy contests. If you had invested a dollar in the average company where dissidents gained control of the board, it would be worth 20 cents 12 months later. Why so poorly? This is probably due to the fact that dissidents are only getting involved in the worst cases.

Ralph Whitworth, of Relational Investors, suggested that “to give control of a board to a dissident would seem to b the most desperate situation – one where the shareholders have thrown up their hands and said, ‘Sure, let’s let these folks give it a try.’” That is much different than turnaround situations he has been involved in as a minority board member. He raised one infrequently used tool; board members have the right to state their dissenting views in the proxy.

Peter Langerman, of New Jersey’s Division of Investment, said that explaining on the record why board votes are split would be another way for dissidents to drive shareholders crazy.

There was also a good discussion around muzzling dissidents with confidentiality agreements – where that is appropriate, and where it isn’t. Attorney Gilchrist Sparks suggests the need for an evolving code of conduct in that area.

Elson summarized, dissident directors “may not be such a bad thing as a way to encourage a sort of non-group-think within the boardroom.” “We’ll have to work our way through it, but it is remarkable that we are having this conversation today with this level of agreement.”

Surely, there will be many lessons along the way, but as Whitworth observed, Sarbanes-Oxley did nothing to change the fact that “incumbents make out the ballot, they nominate the slate, they send out the ballot, you sign it, you send it back to them, they have somebody count it, they tell you how the vote turned out – and, whether you vote for the slate, against the slate, or vote not at all, you get the slate.” The proposed SEC rule would begin to change that and boards will evolve. I'm betting that dissidents will sharpen performance, lead to a longer-term perspective, and broaden the horizons of boards to new dangers and new opportunities.

AFSCME Resolute

The American Federation of State, County and Municipal Employees (AFSCME) Pension Fund and Connecticut Retirement Plans and Trust Funds have filed an annual meeting proposal aimed at giving shareholders a greater voice in electing directors at Halliburton, according to the WSJ. The proposal is aimed at beginning a process that could ultimately give shareholders the right to nominate up to two new board members on the company's annual meeting ballot, according to the report. The Halliburton resolution calls upon the company to essentially become subject to a non-binding version of the currently stalled SEC rule proposal.

The resolution follows similar efforts by AFSCME and public pension funds last year at Marsh & McLennan Cos. (MMC) and more recently at Walt Disney Co. (DIS). In the past, the SEC has been willing to allow such non-binding resolutions, as long as they are precisely drafted to mirror the agency's original proposal. The goal "is to test and promote the use of proxy access as a tool for shareholders to use at companies whose boards we believe have failed," said Richard Ferlauto, director of pension investment policy of AFSCME. Expect many more similar resolutions. (AFSCME, Conn. Pension Funds File Halliburton Proposal, 10/27/04)

A copy of the shareholder proposal is below.

RESOLVED, that stockholders of Halliburton Company ("Halliburton") ask
that Halliburton become subject to the stockholder right of access to the
company proxy statement afforded in the SEC's proposed Rule 14a-11 (the
"Rule"), which would (a) allow a stockholder or group that has held over 5% of
Halliburton's outstanding common shares for over two years ("Nominating
Stockholder") to nominate a specified number of candidates ("Nominees") who
are independent from the Nominating Stockholder and Halliburton for election
to Halliburton's board of directors and (b) require Halliburton to allow
stockholders to vote for Nominees on Halliburton's proxy card and to make
certain disclosures regarding Nominees in Halliburton's proxy statement.
In the case of Halliburton, the Rule would allow a Nominating Stockholder
to nominate two Nominees, because Halliburton's board currently has 11
members. However, Halliburton's bylaws set the board size range from eight to
20 directors. In the event that Halliburton's board is expanded to 20
directors, the Rule would allow nomination of three Nominees.

SUPPORTING STATEMENT
Currently, the process for nominating and electing directors is a closed
system, with incumbent boards determining whom to nominate and stockholders
ratifying those choices. Although stockholders may use their own proxy
materials to advance director candidacies, the expense and difficulty of doing
so means that such challenges are rare outside of the hostile takeover
context.
The SEC has proposed to provide stockholders with the opportunity to
nominate director candidates using the company proxy statement under certain
circumstances. One circumstance is when holders of a majority of shares
voting approve a stockholder proposal asking that the company provide such
stockholder access. The proponents of this proposal do not own 1% of
Halliburton's stock, as required under the Rule to trigger access
automatically. Thus, adoption of this proposal would not require Halliburton
to include shareholder-nominated candidates.
We believe that Halliburton's corporate governance will benefit if
stockholders are empowered to nominate director candidates and that now is an
appropriate time to seek greater board accountability to stockholders.
Halliburton is confronting several serious compliance challenges. Its
Kellogg, Brown and Root subsidiary is facing charges that it overbilled the
Defense Department in Iraq. The Department of Justice and the SEC are
investigating whether payments to a consultant with ties to Nigerian officials
from a Halliburton affiliate were bribes that violated the U.S. Foreign
Corrupt Practices Act; a conviction under the FCPA would cause Halliburton to
be barred from bidding on federal contracts. A grand jury in Houston is
investigating Halliburton's use of a Cayman Islands subsidiary to do business
in Iran, which U.S. companies are prohibited to do.
In addition to these problems, Halliburton's financial performance has
been subpar. Halliburton's stock underperformed both the S&P 500 and an index
of peer group companies over the five-year period ending on December 31, 2003,
according to Halliburton's 2004 proxy statement. We believe a stockholder-
nominated director would be valuable as Halliburton addresses all of these
problems.
We urge stockholders to vote for this proposal.

Global Warming, the New Tobacco

CalPERS, CalSTRS, many pension fund members of the Investor Network on Climate Risk, and others are beginning to screen at least portions of their portfolios for environmental risks, such as global warming. According to WSJ, "this pressure raises the possibility that certain industry segments -- coal-burning utilities, for instance -- could be viewed as inherently risky because of their exposure to climate-change regulations." (State Pension Funds Press Firms to Review Climate-Change Risks, 10/28/04)

In July, eight states and other entities sued to require power companies to reduce their emissions of carbon dioxide. Last month California's Air Resources Control Board passed rules to govern future emissions of carbon dioxide. The Russian parliment voted to ratify the Kyoto Protocol and beginning next year, companies operating in Europe will be suject to new limits.

Is earning money by investings in companies that contribute to making the world less habitable consistent with fiduciary duty? Will "socially responsible" money around the world shift from Exxon Mobil and Chevron-Texaco (the new tobacco) to BP? Why invest in death, even if denied, when there are other options?

Blacklash!

The WSJ notes a growing backlash against SEC activism in "Back Off! Businesses Go Toe-to-Toe With SEC," 10/27/04. As large scale corporate scandals have slowed (with exceptions, such as Marsh & McLennan and Fannie Mae), business associations have grown bolder. Will their activism totally erupt if Bush is reelected?

For the first time in history, the U.S. Chamber of Commerce sued the SEC, alleging it lacks authority to require that 75% of mutual fund board members be independent, as well as having an independent chair. Other upsetting issues:

• Required registration of hedge-fund advisers
• Threat of requirement to expense stock options

Of course, the biggest threat of all is the SEC proposal to allow shareholders to place nominees on the corporate proxy. If enacted, the rule could put nonperforming CEOs out of business altogether. That's why the Chamber and the Roundtable sponsored a coalition to keep shareholders weak, atttempting to create the illusion of shareholder opposition to the rule. Shareholders for Growth collected anti-rule comments and ran newspaper ads opposing the rule but apparently has very few real shareholder members.

Public Citizen, a consumer-advocacy group, released a study outlining a massive lobbying campaign to pressure the Bush administration into killing the proposal or at least watering it down. Forty-nine executives from corporate members of the Roundtable, the Chamber's board of directors or both, each raised at least $100,000 for the 2000 and 2004 Bush campaigns or the Republican National Committee, and a few raised more than $300,000, according to Public Citizen. Federal disclosure forms show the Roundtable itself spent more than $12.8 million lobbying the federal government, including the White House, in 2003 and the first half of 2004.

The WSJ article ends with "Regardless of whether the Chamber is successful, the collective threats are already having some impact. While Mr. Donaldson moved ahead successfully with his plan to register hedge-fund advisers, the proxy proposal is at a standstill. Although Mr. Donaldson moved away from the original proposal in favor of a modified rule, so far, he has been unable to get consensus from his four fellow commissioners on how to proceed."

Let's take another look at that Public Citizen report, Corporate Cronies: How the Bush Administration Has Stalled a Major Corporate Reform and Placed the Interests of Donors over the Nation’s Investors. Highlights include the following:

• The 2002 corporate crime wave cost investors $7 trillion in market value.
• In October 2003, the SEC proposed the shareholder access rule.
• Multiple SEC officials told four separate reporters that the Bush administration dispatched Treasury Secretary John Snow, former chair of the Business Roundtable, to let it be known the White House does not want the rule to proceed.
• The 205 corporations opposed to the shareholder access rule, members of the Roundtable and Chamber, as well as 43 unaffiliated corporations and their employees contributed $55.5 million to Bush’s campaigns, the Bush-Cheney Inaugural Committee and the RNC during the past three election cycles. Many qualified as qualified as “Rangers,” “Pioneers” or “Super Rangers" rounding up at least another $8.3 million.
• Many of the corporations opposed to the shareholder access rule epitomize the types of corporate governance problems the rule is designed to address – such as questionable but lucrative financial relationships between top executives and the board of directors, exorbitant CEO pay packages, and a poor record of responding to shareholder concerns. In fact, 46% received a “D” or an “F” grade from the Corporate Library. The report expands greatly on why. This portion will make shareholders want to the check ratings before investing.
• The report documents millions of dollars in fees paid to lobby against the rule on several fronts.
• Departing from his earlier position that he would move forward without a unanimous vote, Donaldson now has said the SEC will not issue a final rule until it reaches “meaningful consensus” and that any further action is unlikely before Election Day. However, since Donaldson serves at the pleasure of the President, there is no guarantee that even a compromised rule will move forward if Bush is elected.

From the Executive Summary, "This is a classic case of money and access winning out over what is in the best interest of average citizens." This is an important report that should be supported. I urge readers to become members of Public Citizen.

Overgovernanced or Lacking a Turbocharger?

It is tough going when you only have a few clients and the only one going public with its rating is under investigation for accounting problems. That is the circumstances faced by Standard & Poor's corporate governance service after all the publicity given to its 9 out of 10 rating to Fannie Mae (FNM). "One possible explanation for the cool corporate response thus far is that the service exists amid a blur of rating and consulting services at a time when boards are 'overgovernanced,' when they least need it, said Raymond Troubh, who sits on nine boards. "To have a rating done by an outside agency doesn't make any sense. It's a waste of money and a waste of time." ( It's Slow Going For S&P's Flagship Governance Service, WSJ, 10/26/04) However, that's what investors need. Only an outside agency will have the proper objectivity to compare what they find with best industry practices.

Perhaps the more fundamental problem is letting the company disclose their score only if they want to. George Dallas, who manages S&P's global governance services, says that once Fannie Mae's accounting treatments are settled, S&P will revisit its rating. If they drop, will Fannie Mae announce its new score?

We encourage S&P to continue in the corporate governance ratings business but they may need to rethink their business model. One place to look would be to the innovative design Mark Latham has developed for shareholders to hire "infomediaries." See especially his most recent paper on "Turbo Democracy: Voting to Improve Voter Information." An evaluation of corporate governance by a firm hired by owners will carry much more weight than one hired by the managers and board being evaluated. The Corporate Monitoring Project clearly has the better model.

Better Analysts

Institutional Investor reports that brokerage firm research departments have experienced an unprecedented upheaval since Spitzer's $1.4 billion settlement over tainted securities research. "Budgets have been slashed, paychecks chopped, analyst ranks pruned." Analysts are now younger, move vigorous and more motivated to dig into work. Nearly one in five of the magazine's 2004 All-America Research Team members is new to the team. "Almost 70 percent of those responding to the supplemental survey sent with the All-America team questionnaire say that sell-side analysts today are more objective and accurate -- and less subject to conflicts -- than they were before the regulatory crackdown." (The 2004 All-America Research Team, October 2004)

Two Canadian Trends for Directors

Fairvest's Corporate Governance Review reports that 34 of the S&P TSX 60 Index companies provided disclosed details of individual director attendance at board meetings. "We can only hope that the more detailed disclosure will eventually be actionable on proxy ballots as more companies adopt individual director elections. The ratio of ballots only allowing voting of a single slate has fallen from 80% in 2002 to 66% in 2003 to 50% today. Another major trend in Canada is the move away from director stock options. Twenty-five companies have officially eliminated them but it appears that only 10 out of the 60 disclosed making grants this year. (Where to Draw the Line? September 2004)

Moskowitz Prize Awarded

A groundbreaking analysis of 52 studies looking at the link between corporate social responsibility and financial performance is the recipient of the Social Investment Forum's 2004 Moskowitz Prize for outstanding research in the field of socially responsible investing.

Entitled "Corporate Social and Financial Performance: A Meta-Analysis," the study by
Marc Orlitzky, Frank Schmidt and Sara Rynes scrutinizes more than 50 academic reports and concludes "there is a positive association between corporate social performance and financial performance across industries and across study contexts." The study authors note that this link "varies (from highly positive to modestly positive) because of contingencies, such as reputation effects, market measures of financial performance, or corporate social performance disclosures."  The study also found that corporate social performance was a better predictor of financial performance using accounting measures than market-based ones.

"This analysis provides strong evidence of what many people have suspected all along -- that corporate social responsibility does indeed have a measurable impact on the financial bottom line," said Social Investment Forum President Tim Smith. "That a survey of so many studies by so many respected individuals supports this view is a major finding that validates the core thinking of socially responsible investing."

Retirement Delayed

A new Gallup survey finds more than half (57%) of all investors expect to retire after the age of 62, compared with 47% a year ago, and just 36% in 1998. Nearly all (89%) of non-retired investors expect to do some kind of work after retirement, compared to 56% of currently retired investors who did so immediately after they retired. (Employees Rethinking Retirement: Survey, Plansponsor.com, 10/19/04)

Pay for Performance? Not

According to a compensation survey conducted by Mellon Financial Corp., while more than one-third of companies review board members' performance, only 6% tie pay to results. Most companies that evaluate directors' performance use both peer review and self-evaluation methods. The range of criteria includes overall contribution, business knowledge, industry awareness, committee work contribution, and board participation.

The median "total direct compensation" for directors is $130,120. The typical pay mix is 54% cash, 37% options (using Black-Scholes methodology), and 9% full value shares. (For much more and to read the full survey, see "Few Companies Tie Directors' Compensation To Performance," Compliance Week, 10/19/04)

Governance Awards in Kenya

Tainted by the Goldenberg and Euro Bank scandals, which resulted in disappearance of billions of taxpayer's money, Kenya has not enacted major corporate governance reforms but they are giving out awards for good governance. A joint effort of the Institute of Certified Public Accountants of Kenya (ICPAK), the Capital Markets Authority and Nairobi Stock Exchange aims at promoting excellence in financial reporting, sound corporate governance practices, corporate social responsibility and environmental reporting in the Kenyan corporate sector. It is known as the Financial Reporting (FiRe) Award and this year went to Imperial Bank Ltd.

UAP Insurance Company was second and Brooke Bond (K) Ltd placed third. Kenya Anti-Corruption Commission chief Aaron Ringera who was the chief guest during the award event, said financial reporting should be truthful for "confidence of those who rely on such information to remain steadfast." Corporate failures in the world, he said, were not as a result of incompetence, but lack of integrity, accountability and transparency. (Firms Honoured for Good Corporate Governance, The Nation, 10/19/04)

CalPERS on Chopping Block

Alarmed by the spiraling cost of public pensions, Assemblyman Keith Richman, R-Granada Hills, plans to propose 401(k)-style retirement plans for public employees in California.

The measure is unlikely to pass the Legislature, which is dominated by Democrats and is sure to be resisted by public employee unions and those favoring high quality public employees.

"Public pensions have been and are a very good deal," Richman acknowledged. "They're such a good deal that they're bankrupting lots of our governmental entities. "By moving to defined-contribution pension plans like private workers (have), governmental agencies can save money, increase their budgeting predictability and not incur any new unfunded liabilities."

The California Public Employees Retirement System (CalPERS), one of the largest single pools of investor money in the world, manages almost $168 billion in assets and pays out $6 billion in pension benefits every year. But in recent years, the system has been a growing drag on the taxpayers, as it has dipped into the state general fund to make up for investment shortfalls in a weak market. This year, the shortage is $2 billion.

A study by the state Legislative Analyst's Office as part of its budget analysis found that California's retirement benefits are far more generous than those of comparable states. A California employee who earned $60,000 in salary and retired at age 65 would receive a pension of $46,500. A comparable retiree in Texas would get less than $41,000, and less than $29,000 in Florida or Illinois. The study recommended the state explore a defined-contribution plan.

Not discussed in newspaper accounts is the fact that many public employees are paid substantially less than their counterparts in the private sectors, especially those with higher skills, such as scientists, engineers, and managers.

Richman intends to introduce a constitutional amendment when the Legislature convenes in December. The plan would be the only option for new public employees, while workers already in the CalPERS system would be given the option to stay or switch. If, as expected, lawmakers refuse to put it on the ballot, he said, he will start a signature-gathering effort to qualify it as an initiative. Richman is eyeing a run for state treasurer in 2006, a position with a seat on the board of CalPERS. (State pension face-off: Assemblyman aims to KO current CalPERS plan, set up 401(k)s, Los Angeles Daily News, 10/17/04)

A better option would be to examine the surge in the number of public safety employees who get a far more generous package, 3% times number of years in service at age 50. Safety employees should be limited to those who must carry a gun and pass stringent physical fitness tests. Another area for savings would be to crack down on the number of employees retiring on fraudulent disabilities, Many of whom then take other jobs.

CalPERS Fails to Disclose

CalPERS fails disclose the management and advisory fees it pays to private equity and hedge funds. They're being sued by the California First Amendment Coalition (a group of news organizations). Two years ago, CalPERS resisted a similar call for transparency but later settled and now discloses performance results for its 300-plus private equity funds quarterly.

The Wall Street Journal editorializes that what's been revealed seem to involve cronyism:

• Yucaipa Companies. Head, Ron Burkle, has been a generous political donor to two board members -- Willie Brown, and Phil Angelides. Another board member, Sidney Abrams, who has done actuarial consulting for Mr. Burkle. Returns have been negative.
• Grove Street Advisors. Fund managers have contributed to Angelides and California Comptroller Steve Westly. Returns are negative.
• Premier Pacific Vineyards. Co-chief executive, Richard Wollack, an Angelides supporter. Investments are under water.
• Progress Investment Management, a Willie Brown supporter with negative returns.
• CIM California Urban Real Estate Fund. Kurato Shimada, a board member, took two years off to work for the marketing firm and lobbied board members to invest $125 million in opposition to staff advice. After pocketing his placement fees, Shimada rejoined the board. WSJ reports that returns have been triple-digit positive.

WSJ argues that, "Perhaps all of these investments only look like conflicts of interest and they are all worthy on their merits...Given that most of these investments have so far been dogs, the question of fees is even more relevant." (Calpers and Cronyism, WSJ, 10/18/04) CalPERS should follow there own good corporate governance advice and fully disclose. Additionally, we need to close the revolving door and tighten campaign funding laws to discourage what too closely appears as pay to play.

O'Neil on Bush

Ron Suskind's The Price Of Loyalty relates former treasury secretary Paul O’Neill’s experience in George W. Bush's White House. At one meeting, Bush apparently advanced the view that the uncertainty then overshadowing the American economy was due to “SEC overreach.” Is it any wonder the SEC rulemaking to allow shareholders to place director nominees on the proxy continues on hold?

O'Neill presents a picture of the President as one who doesn't make decisions based on a sound discussion of ideas, doesn't like his own ideas challenged, and doesn't let inconvenient facts get in the way of what is politically expedient. According to O’Neill, the White House headed off attempts to tighten up regulations on CEOs following the Enron debacle because “the base was upset.” He isn't too kind to Dick Chaney either, quoting him as saying “Reagan proved deficits don’t matter.” Can we really afford four more years of the Bush Administration? (Ex-treasurer warns the madness of King George must be stopped, 10/17/04, The Sunday Herald)

Proposal to Test Disney Ballot

CalPERS, the New York State Common Retirement Fund, the American Federation of State, County, and Municipal Employees Pension Funds (AFSCME), and the Illinois State Board of Investment, which own more than 18 million shares of Disney stock, filed a shareholder proposal with the SEC to give shareowners the right to nominate directors at Walt Disney. It calls for a group of shareholders to be able to nominate up to two directors on Disney's 11-member board and have them included on the company's proxy. If it receives a majority of votes in 2005, they could nominate the two directors for the 2006 annual meeting.

The shareholder proposal filed at Disney is similar to one put forth by AFSCME and other public pension funds last year at Marsh McLennan, following news of scandals at its Putnam subsidiary. The funds withdrew the proposal after Marsh McLennan nominated Zachory Carter, a former federal prosecutor to its board. (see The Disneyland Report, Four Public Pension Funds File Shareowner Resolution to Name Disney Directors)

A copy of the Disney shareholder proposal follows:

RESOLVED, that shareholders of The Walt Disney Company ("Disney") ask that Disney become subject to the shareholder right of access to the company proxy statement afforded in the SEC's proposed Rule 14a-11 (the "Rule"), which would (a) allow a shareholder or group that has held over 5% of Disney's outstanding common shares for over two years ("Nominating Shareholder") to nominate up to a specified number of candidates ("Nominees") who are independent from both the Nominating Shareholder and Disney for election to Disney's board of directors and (b) require Disney to allow shareholders to vote for Nominees on Disney's proxy card and to make certain disclosures regarding Nominees in Disney's proxy statement.

In the case of Disney, the Rule would allow a Nominating Shareholder to nominate up to two Nominees, because Disney's board currently has 11 members. However, Disney's bylaws set the board size as a range from nine to 21. In the event that Disney's board is expanded to 20 or more directors, the Rule would allow nomination of up to three Nominees.

SUPPORTING STATEMENT

Currently, the process for nominating and electing directors is a closed system, with incumbent boards determining whom to nominate and shareholders ratifying those choices through their proxy ballots. Although shareholders may use their own proxy materials to advance director candidacies, the expense and difficulty of doing so means that such challenges are rare outside the hostile takeover context.

The SEC has proposed to provide shareholders with the opportunity to nominate director candidates to appear in the company proxy statement under certain circumstances. One circumstance is when holders of a majority of shares voting approve a shareholder proposal asking that the company provide such shareholder access. The proponents of this proposal do not own 1% of Disney's stock. Thus, adoption of this proposal would not automatically lead to the inclusion of candidates nominated by 5% of Disney's shareholders.

We believe that Disney's corporate governance will benefit if shareholders are empowered to nominate director candidates, and that now is an appropriate time to move in the direction of greater accountability to shareholders. Last year, holders of 45% of shares withheld their votes from CEO Michael Eisner for his reelection to Disney's board in a protest against Disney's unsatisfactory performance and the lack of independent leadership on the part of Disney's board. Subsequently, the board separated the positions of CEO and Chairman, and more recently, Mr. Eisner announced he would step down from his position as CEO, but not until 2006.

In our opinion, giving shareholders the ability to nominate director candidates on Disney's proxy statement will make Disney's board more responsive to shareholder interests. Such responsiveness is especially important now, in the context of a search for Mr. Eisner's successor. We also believe that allowing shareholders access to Disney's proxy materials may help strengthen the board's monitoring ability.

We urge shareholders to vote for this proposal.

SEC to Examine Exec Pay Reporting Requirements

The Washington Post reports that the SEC is considering "new rules that would require greater disclosure -- in plain English -- of the true costs of retirement packages and other forms of executive compensation." One change would be to require better disclosure of executive pensions and supplemental executive retirement plans, or SERPs. Currently, they aren't required to disclose the yearly increase in value of such plans in compensation tables.

In addition, although firms generally calculate pension plan payments based on an executive's years of service, they are often given credit for many extra years...something shareholders can't check without wading through fine print or reading executive biographies to determine how long an individual actually has worked at a company.

The Post points out that firms are not required to include pay to former executives in compensation tables and that retirement payouts generally are unrelated to performance measures. Even if a company collapses because of decisions the retired executive put into place. Another area needing reform is reporting the real value of non-cash perks to current and former executives, such as the use of corporate jets, limousines and apartments.

Paul Hodgson, a senior researcher at the Corporate Library, says boards are asking for the total value of compensation. "For those boards that have requested and been given the total cost, most have had what is being called a 'holy cow moment,' as in 'Holy cow, we're paying them that much?' " Hodgson said.

"Meanwhile, even as shareholder groups embrace the possibility of stronger compensation disclosure, many say the most significant change to address the pay issue is one the SEC is already struggling with: giving shareholders a stronger hand in selecting corporate directors." No regulatory reform can do more than giving shareholders the power to be their own watchdogs by holding directors accountable. (Donaldson Expects Rule Changes on Executive Pay, 10/12/04)

Council Updates Exec Compensation Policy

The Council Council of Institutional Investors updated its policy on executive pay on October 1, 2004. "The compensation philosophy should be clearly disclosed to shareowners in annual proxy statements...Best practices would include shareowner approval of the compensation philosophy...The compensation committee should establish performance measures for executive compensation that are agreed to ahead of time and publicly disclosed." The compensation guidance is the most modified component of its latest corporate governance policies, which also urges that boards by chaired by independent directors.

The world's most powerful shareholder watchdog is based in Washington, D.C., representing more than 145 corporate, public and union pension plans with more than $3 trillion in assets. Although its policies are influential, they are not binding on members. Under the new guidelines (see bottom of page), companies would provide a single table to detail all expected payments to executives under retirement and deferred compensation plans, with a dollar value of any additional perks or benefits payable after retirement, along with a full description of performance measures and benchmarks used to determine annual incentive compensation and disclosure about stock option dilution.

CalPERS, a prominent CII member has already made it known that inflated corporate salaries and proxy access are two of the main headline issues likely to give off most heat during the 2005 proxy season, which are likely to be a focus of the pension fund giant this coming Spring.

CII's new policy says that if benchmarking is used for executive compensation, peer group companies should be disclosed – and if the peer group is different from that used to compare overall performance, describe the differences between the groups and the rationale for choosing between them. Targets for each compensation element relative to the peer/benchmarking group and year-to-year changes in companies composing peer/benchmark groups should be disclosed. The rationale for paying salaries above median of the peer group should also be addressed.

Compensation committees should also set "appropriate limits on the size of long-term incentive awards," and generally steer clear of so called "mega-awards," as "they may result in rewards that are disproportionate to performance" the Council urged.

According to the Wall Street Journal, the Council's new polices are "being released at a time of growing concern by investors about excessive executive payouts and whether companies are being as transparent as they could be. In one recent example, public pension fund investors slammed Anthem Inc.'s (ATH) acquisition of Wellpoint Health Networks Inc. (WLP) because of what they said were vague disclosures about excessive golden parachutes. At the same time regulators are taking a closer look at compensation disclosures. The Securities and Exchange Commission is considering updating its own rules."

Broc Romanek, editor of CompensationStandards.com was quoted, saying the Council has "done a tremendous job advancing the ball regarding responsible compensation practices," perhaps because, as he reports on his own blog, "it includes many elements that we recommended in our 12 steps to responsible compensation practices." The former SEC staffer said there's an increased interest in "practical" advice, noting that more than 1,000 have signed up for an upcoming executive compensation conference to be broadcast on the site. Their October 20th Conference will also be available via video/audio webcast. (CII Updates Executive Compensation Policy, TheCorporateCounsel.net Blog, 10/7/04) (Institutional Investors Seek More Executive Pay Disclosure, Wall Street Journal,10/8/04)

China: Booming but Risky

The Economist reports that venture capitalists, who invest in very young companies, and private-equity firms, which specialise in buy-outs, are catching on in China. While total foreign direct investment grew only slightly, private-equity inflows doubled. Several partnership have done well but how do they get their money out? Stockmarket listings are generally limited to state firms. Investors typically have to hold their shares for for years. The realities of business in China continue to be corruption, poor corporate governance, a weak rule of law, and plain old fraud.

However, ChinaEquity, set up by Chao Wang, a former Morgan Stanley banker, and China Enterprise Capital, run by Peter Jeva Au, who made a fortune from his stake in Harbin Brewery, are helping to evolve a local industry. (Milking it, 10/7/04) For an analysis of possible reforms, see Corporate Governance in China: Then and Now by Cindy A. Schipani and Liu Junhai (part 2).

UK Women Blocked

A new survey by Deloitte shows that despite 70 per cent of FTSE 350 companies making changes to their board composition in the past 12 months, there has been no increase in the number of female board members.

The report shows that just 3 per cent of executive directors and 8 per cent of non-executive directors are women. (Gender two steps behind as corporate governance occupies boardrooms, Personnel Today, 10/6/04)

Shareholder Rights Index

Later this year, fund managers and pension plan sponsors will be able to plow their money into a custom-designed version of the Standard & Poor's 500, dubbed the Shareholder Rights Index. The creators of the index reckon that by leaning toward shareholder-friendly companies and lightening up on governance laggards, the returns should be better. The firm developed the index in collaboration with Harvard law and economics professor Lucian Bebchuk, director of the law school's corporate governance program. (Investors Can Make Governance Bet on S&P 500-Based Index, AP News, 10/07/04)

NAIC Under Investigation

The National Association of Investors Corp. (NAIC) is based outside Detroit and was founded 53 years ago with a mission: teaching investment clubs how to find companies with good management and good corporate governance. But do the leaders of the NAIC practice what they preach? Richard Holthaus, NAIC president and CEO, drives a Cadillac Escalade leased by the NAIC, which also pays his country club dues. His total compensation package is worth $404,367.54 a year, the same as the chief executive of the American Red Cross, an organization with about 200 times the NAIC's budget. In fact, all seven of NAIC's officers get cars and private club memberships.

According to CNBC, At least half the NAIC board members, or their friends, have some sort of outside relationship with NAIC. Board Secretary Lewis Rockwell, an attorney, collected $64,310.77 in legal fees from the NAIC last year on top of $209,089.69 the association paid to his law firm. CEO Holthaus came to the NAIC from the public relations firm Fleishman Hillard. Since he arrived, the fees paid to Fleishman Hillard have more than doubled to nearly $200,000 in fiscal 2004.

Ralph Seger joined the board in 1954 and wrote a column in the association's magazine, started a stock advisory service that members could buy, and began demanding information about where the NAIC's money was going and why. "I asked questions," he says. "I took my fiduciary responsibilities very seriously." In March, he became the only board member in the group's history to be removed.

Finance Committee Chairman Chuck Grassley is investigating "self-dealing, buying expensive cars, paying outrageously high salaries." (Did an advocate for investors turn on them?, MSN Money, 10/8/04) I certainly hope the organization can be cleaned up. If so, perhaps it could take on the role of "killer bees," once taken by United Shareholders Association. By coordinating shareholder action they could enhance shareholder value. (A Requiem for the USA (United Shareholders Association): Is Small Shareholder Monitoring Effective?)

Pay in Question

Average pay for top American CEOs and board chairmen has soared from $479,000 to $8.1 million in the last quarter century, as measured in annual surveys by Business Week magazine, the only source that goes back that far. The pay of average (non-management) workers over that time, as measured by the U.S. Bureau of Labor Statistics, hasn't even kept up with inflation. If average worker pay, which is now $26,899, had risen like CEO pay, it would exceed $184,000. If the minimum wage had risen at the same rate, it would now be almost $45 an hour.

In just one generation, the United States has gone through a virtual revolution in what is considered fair pay for top executives vs. workers. Jim Collins, author of "Good to Great," found no correlation between levels of executive compensation and company performance in a study of 1,435 corporations.

Even the Business Roundtable, an organization of the country's top 150 companies, said last year that it shares the public perception that "some executives have reaped substantial financial rewards in the face of declining stock prices and staggering losses to employees and stockholders." (In a generation, gap separating compensation of chiefs, others widens, Milwaukee Journal Sentinel, 10/9/04)

Goldschmid Condems Stall

SEC Commissioner Harvey J. Goldschmid says a lack of action on the Security Holder Director Nominations, S7-19-03 rulemaking has "made it a safer world for a small minority of lazy, inefficient, grossly overpaid, and wrongheaded CEOs." "The worst instincts of the CEO community have triumphed." Goldschmid told an audience at anInvestor Responsibility Research Center meeting on corporate governance that he remains "cautiously optimistic" that the commission can reach an agreement that would maintain the "integrity" of the original plan. (Commissioner Condemns SEC Inaction, Washington Post, 10/9/04)

93% Of IT Execs Unaware Of SOX Responsibilities

Chief information officers and other senior information technology executives surveyed are unaware of their IT control-assessment responsibilities under Section 404 of Sarbanes-Oxley Act, according to software developer Obian Inc. John Logan, president of Obian, said the survey of 286 IT executives “incorrectly think that by merely identifying and assessing the risk and control activities of their corporation’s financial reporting systems—just as they did to meet the Dec. 31, 2003, deadline for Sec. 302 compliance—that they’ll meet the requirements of Sec. 404.”

Logan blamed the lack of awareness to the “vast confusion” regarding what is required. While guidelines have been published, auditing firms are still interpreting them and building their own suite of even more detailed IT control tests, he said. Companies would be foolish, however, to use this uncertainty as an excuse for inaction. (Compliance Reporter, 10/5/04)

Spitzer Stumps for Kerry

Eliot Spitzer, headed to Florida to stump for presidential candidate John Kerry. Florida is a popular destination for New York retirees and Spitzer is especially popular with small investors because of his investigations of Wall Street corruption and mutual fund malfeasance.

"The irony is that the Bush administration claims to be the force for the 'ownership society' and yet they are the ones who failed repeatedly to respond to the breakdown in ethics and integrity in the marketplace," Spitzer told the AP. "They are the ones who repeatedly turned a blind eye when there were issues screaming out for attention," the attorney general added. Spitzer has been mentioned as a possible U.S. attorney general in a Kerry administration. (Spitzer heads to Fla. to stump for Kerry, Newsday.com, 10/7/04)

Business Professors Knock Bush

George Bush, the first president with an MBA, was sent an open letter 10/4/04 by 169 concerned business-school professors saying Bush's economic policies are taking the country in the wrong direction. The academics, including two Nobel laureates, are especially critical of the budget deficit, projected at more than $400 billion.

The idea for the letter began in the faculty offices of Harvard Business School, where Bush earned his diploma in 1975. The architects were Harvard professors of a required, first-year MBA course called Business, Government and the International Economy, which teaches the ins and outs of responsible fiscal and monetary policies and the ways in which politicians' decisions can impact society. (For Bush, a Blast from the Ivory Tower, MSNBC.com, 10/8/04)

Fannie Mae Keeps Reform in Spotlight

The unfolding government investigation into Fannie Mae's accounting may have destroyed the hopes some business leaders had of watering down the corporate reforms. CEOs had complained about the cost in money and time of complying with recent reforms. However, continuing scandals may make a rollback more difficult, even if President Bush is reelected.

Fannie Mae, one of the largest financial institutions in the United States, faces investigations by the SEC and U.S. Justice Department, as well as class-action shareholder lawsuits. "The papers are full of reasons for continuing concern. It does not seem to go away, does it?" said Richard Koppes, an attorney with Jones Day in San Francisco and an elder statesman in corporate governance circles.

Joining Fannie Mae under a cloud in recent weeks are American International Group Inc., Citigroup, Tommy Hilfiger Corp., Cardinal Health Inc. and Krispy Kreme Doughnuts Inc., among others. "Any time you see allegations at large-cap companies, it only spurs on the drive for general governance reform, and makes it more difficult to argue that the system as it currently stands works correctly," said Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware.

Sensing the rising discontent over the summer, one of the country's top regulators went on the offensive at a gathering of corporate secretaries. "Should we really forego these benefits?" asked Alan Beller, SEC's director of corporate finance. "And does anyone really believe that corporate America would have obtained and provided these benefits without the legislative and regulatory reaction of 2003 and 2004? I, for one, do not." (Fresh Scandals Could Thwart Reform Backlash, Reuters.com, 10/2/04)

Corporate America as Defendant: What Happened?

That was the title of a talk by William McLucas, former director of enforcement for the U.S. Securities and Exchange Commission and Penn State alumnus. "The question in the minds of most people is 'What's going on in the marketplace? Is the whole system broke, is it corrupt, or is it both?' ... One thing I think is true is that we didn't go to bed three years ago with a marketplace in corporate America that was transparent, well-run and ethical and perfectly fine and then wake up the next morning with a system that was broken and corrupt and flawed and populated by greedy people. These problems really evolved over a period of time." (William McLucas at the Forum, the Faculty/Staff Club at the University Park campus).

"These were not bad people," McLucas said. "They looked in the mirror and saw themselves as creative, innovative, bright ... and, at some point, entitled." He offered no hope of a permanent end to corporate scandals, though he said the Sarbanes-Oxley Act was the most dramatic piece of securities legislation since 1934. "These problems did not evolve overnight," he said, and aren't likely to go away anytime soon.

McLucas, who led investigations at Enron Corp. and WorldCom Inc., now defends companies against SEC actions. He is also often hired to advise companies on how they can improve ethical standards. (The Friday Report, ISS, 10/08/04)

ISS Makes Data Available

Institutional Shareholder Services, the world leader in corporate governance research and data provides academics the Corporate Governance Quotient (CGQ) database for U.S. and International companies. Academics worldwide are studying corporate governance of corporations to understand its importance and relationship with financial measures. Corporate Governance research is the fastest growing topic being researched today.

Board Service More Attractive

Half of the corporate directors who attended a program offered by Columbia Business School Executive Education say that serving on a corporate board is more attractive now, as compared to five years ago. Among the reasons cited are greater responsibilities and challenges plus an enhanced sense of professionalism, according to Ethan Hanabury, Associate Dean of Executive Education at Columbia Business School. Most directors say 8-12 is the ideal board size. (more) Also reported in Sept./Oct. edition of The Corporate Board.

The next "Accounting Essentials for Corporate Directors" course will be held October 18-20, 2004 in New York City. For further program details, please contact Ms. Liz Schultz , 212 - 854 - 7613.

Asia Watch

The Asian Corporate Governance Association recently released the latest version of "CG Watch," their annual survey of corporate governance in Asia. Titled "Spreading the word: Changing rules in Asia," the report covers corporate governance standards in 10 Asian markets and 450 large listed companies.

The correlation between good corporate governance and share-price outperformance continues to hold for the medium term (three to five years), but is not particularly strong over the short term (12 months) for a variety of cyclical and sectoral factors.

The top three markets this year were, once again, Singapore, Hong Kong and India. The top ten companies in Asia scored an average of 81%. They were: Infosys (India), CLP Holdings (Hong Kong), Esprit (Hong Kong), HSBC (Hong Kong), Wipro (India), Public Bank (Malaysia), Kookmin Bank (Korea), KT Corp (Korea), TSMC (Taiwan) and Siam Cement (Thailand). The highest score went to Infosys--87%. (ACGA News) Disclosure: James McRitchie, the publisher of CorpGov.Net has investment in Infosys and Wipro.

On October 23, 2004, the Hong Kong Society of Financial Analysts will hold a seminar titled: "Does Investor Relations Add Value?"

Amalgamated Bank Wins at Massey Energy

Its shareholder proposal on executive compensation has been adopted by Massey Energy Company. The new policy requires shareholder approval for severance agreements that provide benefits in an amount at least three times an executive's annual salary plus bonus. Such generous severance packages are commonly referred to as "golden parachutes."

Amalgamated Bank's LongView Collective Investment Fund filed shareholder proposals urging a shareholder vote on golden parachutes in 2002 and 2003, with the latter proposal receiving a 72.5% "yes" vote. Despite this support, Massey's board was unwilling to permit a shareholder vote on all pay packages that met the Fund's criteria, but carved out a loophole for pay packages deemed "in the best interest of the company."

The Fund objected to this loophole as vague and likely to undercut the principle of a shareholder vote. For the 2004 shareholder meeting, LongView submitted the proposal as a binding bylaw amendment. Although the bylaw proposal received 70% of the votes cast, it was not formally adopted because Massey requires shareholder-proposed bylaws to receive support from 80% of the outstanding shares. Nonetheless, in response to a follow-up request from the Fund, Massey's board recently advised Amalgamated Bank that the board had decided to adopt the Fund's proposal in response to the "expressed wishes of a majority of the shareholders."

This is the third golden parachute policy that has been implemented this year following action by the LongView Funds. Earlier, NSTAR adopted the reform prior to its annual shareholder meeting, prompting the Funds to withdraw the resolution. Corning, Inc. implemented the reform over the summer following a majority vote by its shareholders at the annual meeting. In 2003, Union Pacific, Sprint Corporation, and AK Steel adopted similar LongView proposals.

Founded in 1923, Amalgamated Bank invests workers' retirement savings through its LongView Funds. With $9 billion in assets under management, LongView works to enhance shareholder value through corporate governance reforms at portfolio companies.

CorpGov Bits

A survey by Moody's Investors Service of more than 160 of the largest US and Canadian corporations finds that one out of four companies still offer executive compensation based on formulas that promote a short-term focus or an unhealthy appetite for risk from a creditor perspective. Moody's cited oversight challenges, ranging from the independence and effectiveness of the internal audit function, to lack of enterprise risk-management systems, at approximately one out of three companies it has reviewed.

According to a report in the Wall Street Journal, only 76% of eligible workers participated in 401(k) plans this year, compared to 80% last year. Apparently, the market decline of recent years, allegations of improper trading practices and fund fees may be scaring young employees away. (Employee 401(k) Participation Slip, 10/6/04)

In Hill & Knowlton's annual Corporate Reputation Watch study, only 8 percent of senior executives surveyed believe the task of complying with the new financial disclosure and corporate governance standards poses a real challenge. During the past two years 59 percent reviewed and enhanced compliance and disclosure standards and procedures; 40 percent put processes in place to ensure greater independence and accountability of their board; 35 percent introduced ethics-related employees training; and 28 percent reviewed and changed their auditor relationship. In addition, 25 percent restructured executive compensation, 24 percent separated the role of chief executive and chairman, and 10 percent created a chief ethics officer or similar role. (Poll: Complying with Corporate Governance Reforms Not That Tough, WebCPA, 10/1/04)

Institutional Shareholder Services named Randall S. Hancock Executive Vice President and General Manager of its Global Research business unit. (Institutional Shareholder Services Names Head of Worldwide Research, press release,10/5/04)

All EU listed firms should publish full details of individual directors' pay and give shareholders a say over executive pay packages, the European Commission recommended. Shareholders should give prior approval to companies' share-based pay schemes, such as share options, and called on firms to include a "sufficient" number of independent board members, without specifying what that entails. (EU Urges Firms to Fully Disclose Executive Pay, Reuters, 10/6/04)

The Roadmap for Compensation Committees

CompensationStandards.com offers a free twelve step approach to responsible compensation practices. Worth checking out. While you're there, you'll see a “one stop” resource for responsible executive compensation guidance withe practice pointers, model language, etc. compiled with the help of 90 thought leaders.

• Step One: True Independence—When a Director’s Pocketbook and Reputation are "On The Line”
• Step Two: The Role of the Compensation Consultant—The Need to Tell It Like It Is—And Like It Should Be
• Step Three: Calculate—and Tally Up—Each Component of Executive Compensation
• Step Four: Deferred Compensation—Problems with Annual “Interest”and Total Accumulated Amounts
• Step Five: SERPs—A Four Letter Acronym?
• Step Six: Perks—Trouble Is Brewing on Multiple Fronts
• Step Eight: Surveys, Benchmarking and Peer Groups—Misleading the Compensation Committee (and Shareholders)
• Step Nine: Directors Must Take Charge and Reassess, Modify, And Even Roll Back Years of Built-In Excesses
• Step Ten: And So Many Other Things To Address - Correcting the Past
• Step Eleven: The Art of Minute-Taking—The Plaintiffs' Bar is Watching
• Step Twelve: The Importance of Your Proxy Disclosures—and the Need to Go Beyond S-K

October 20th Conference, ISS accredited, at the San Francisco Marriott and via video/audio webcast to desktops, boardrooms and conference rooms around the nation. Who Should Attend: Every Compensation Committee member (and every advisor)—including Directors, CEOs, CFOs, HR heads, lawyers, corporate secretaries, accountants, stock plan administrators and consultants. Every person responsible for implementing executive and equity compensation plans or who counsels or advises boards, audits records, prepares minutes or prepares proxy statement disclosures.

UCLA Anderson School of Management: Director Training and Certification Program

Held October 20 – 22, 2004 at the UCLA Anderson School of Management, the Eighth Director Training and Certification Program is designed to rapidly educate corporate directors and officers of pre-public and newly public companies on SEC regulations, FASB considerations, Exchange rules, auditing issues, financial disclosure, and current best practices in corporate governance. The program features more than a dozen world-class experts who cover every aspect of being a successful director. ISS accredited.

The program also features three stand-alone board committee modules on Audit, Compensation, and Governance & Nominating, which may be taken separately or with the UCLA Director Training and Certification Program.

Too Late to Advise Bush?

“Incomplete Agenda, an editorial in the 9/20/04 edition of Pensions&Investments calls on President Bush to do two things:

• Push for immediate adoption of the SEC proxy access proposal. In keeping with Bush’s “ownership society,” which would allow individuals more control over retirement assets, “he has to provide a way for shareholders to hold corporations – namely, directors – more accountable.” Bush should tell SEC commissioners that ownership “means allowing investors a direct say in the nomination of at least some directors, as called for under the SEC proposal.”
  
  
• Require a review of fiduciary issues concerning proxy voting at pension plans and come up with an appropriate solution, such as disclosure of votes, that will guard against conflicts of interest and ensure voting is done in the beneficiaries’ interest.
  

The editorial also suggests that we hear from Senator Kerry. Bush has not publicly weighed in on the access issue. However, Kerry has. In a statement submitted to the AFL-CIO he said, “I believe that additional actions are necessary to ensure that corporate boards of directors are accountable to investors. For example, I strongly support the recent U.S. Securities and Exchange Commission (SEC) action to increase the shareholder voice in executive compensation practices. I also believe that the SEC should allow long-term significant investors to have a voice in the selection of a portion of a company's board of directors.”

P&I also reports that a survey of its readers shows Bush with 58.6% support and Kerry with 33.6%. Maybe it is time P&I’s editorial stand set its readers straight. Instead of offering advice to Bush, maybe they should endorse Kerry. Since direct access is the keystone reform needed to protect shareholder interests, P&I would be continuing its strong tradition of informing its readers what action is required to meet their fiduciary responsibilities.

Throughout the summer, Donaldson kept announcing he would push forward: "The need for action," he says, "can't stop for partisan politics.” (Fortune, September 20, 2004) Yet, during President Bush’s innately appealing discussions of an “ownership society,” he has consistently failed the perfect opportunity to signal to shareholders that he endorses the idea of giving them a greater stake in selecting corporate directors. Can we really expect him to now focus on this issue in the final weeks of his campaign when he has failed to do so for almost four years?

Absent real accountability to long-term investors, directors will never be independent of management. No matter what bright line rules are adopted, boardroom politics and information flows will lead directors to inevitable psychological dependence on management…unless there is real accountability to shareholders. The SEC’s modest access rule would at least push in that direction.

Stephen Davis, of Davis Global Advisors, recently called on shareowners to form “an investor-class version of MoveOn.org, the powerful, web-based mobiliser of grassroots political activism. Without it, director election reform is jammed at the SEC.” (Politics and money: a volatile mix, Financial Times 8/9/04)

According to Davis, “the only meaningful currency of federal politics, as any K Street lobbyist knows, is the ability to deliver one or both of two staples: votes or campaign contributions.” If Kerry gets elected, look for passage of the SEC proposal. If Bush is reelected and the SEC fails to act, we will mobilize for the next election cycle. Discussions are already underway to form a MoveOn.org type organization to push for the rights of shareholders in the nomination and election process. There's no going back.