June 2005

Chevedden Proposal to Boeing

Shareholder proposal (under Rule 14a-8) submitted to Boeing today in response to Boeing announcing that Mr. James McNerney will be Boeing’s new everything – chief executive, chairman and president.

[June 30, 2005]
3 –Chairman of Our Board to Have Oversight Responsibilities Only

Stockholders request that our Board of Directors change our governing documents to require that the Chairman of our Board serve in that capacity only and have no management duties, titles, or responsibilities.

When a person acts both as a corporation’s Chairman and its CEO, a vital separation of power and responsibility is eliminated – and we as the owners of the corporation are deprived not only of a crucial protection against conflicts of interest, but also of a clear and direct channel of communication to the corporation through our Chairman.

What stockholder-damaging conflicts of interest can be more serious than those that so often occur when overseers are allowed to oversee themselves? When a corporation’s Chairman is also its CEO, such conflicts can and do happen.

It is well to remember that at Enron, WorldCom, Tyco, and other legends of mis-management and/or corruption, the Chairman also served as CEO. And these dual roles helped those individuals to achieve virtually total control of the companies.

Clearly, when a Chairman runs a company as Chairman and CEO, the information received by directors and others may or may not be accurate. If a CEO wants to cover up corporate improprieties, how difficult is it to convince subordinates to go along? If they disagree, with whom do they lodge complaints? The Chairman?

Thus this proposal is consistent with our company’s prodigious effort to improve company ethics.

Stockholders must continue to expect the unexpected unless and until they help cause company boards to be composed of substantial majorities of independent and objective outside directors – and until those directors select a chairman those who is similarly independent of management.

Chairman of Our Board to Have Oversight Responsibilities Only
Yes on 3

Submitted by shareholder John Chevedden of Redondo Beach, Calif.

SEC Affirms Independent Chair Rule

As expected, the SEC voted to affirm a controversial rule that requires mutual fund companies to appoint independent chairmen for their funds. Reconsideration was required after the U.S. Court of Appeals for the District of Columbia questioned the high costs that would be incurred by fund companies and also ordered the SEC to consider alternatives to rule. A new study that concludes the financial burden would be minimal was presented at the hearing.

The U.S. Chamber of Commerce, which brought the suit against the SEC that put the mutual fund rule before the U.S. Court of Appeals for the District of Columbia Circuit, threatened to sue the agency again. (SEC requires independent mutual fund chairmen, USA Today, 6/29/05)

A Wall Street Journal editorial said Donaldson was flouting the law. The editorial questioned an SEC investigation of Fidelity Chairman and CEO Edward Johnson "for the oh-so-grave sin of possibly having accepted free tickets to an Olympic event from a Wall Street firm. Mr. Johnson -- who has run Fidelity scandal-free for some 30 years -- happens to be among the most vocal critics of the mutual fund rule. Could the leak have been an act of SEC vindictiveness?" (A Lawless SEC, 6/29/05)

Scrushy Wants Back

Acquitted on all counts of directing the HealthSouth accounting fraud, Richard Scrushy is seeking a return to his former job. His name won't be among nominees to the board, said HealthSouth spokesman Andy Brimmer in an e-mailed statement.

Scrushy may find it difficult to mount a challenge to management's slate of directors, said Ben Nahum, portfolio manager at David J. Greene & Co., which owned about 844,000 shares of HealthSouth. ''No one will vote for him,'' Nahum said in a telephone interview. "Trust me, he has no support outside of those 12 idiots they found to sit on the jury. The man's a criminal.'' (Scrushy seeks a return to glory, Miami Herald, 6/30/05)

On Scrushy's acquittal, "I think it's a huge disappointment for everyone who was counting on Sarbanes-Oxley to rein in excesses in the corporate suite," said Thomas Donaldson, professor of business ethics at the Wharton School of the University of Pennsylvania. "It proves once again how easy it is for people at the very top to isolate themselves from both knowledge and responsibility," said Donaldson, who testified before Congress during deliberations on the Sarbanes-Oxley law and pressed for tougher criminal penalties.

Prosecutors may have made a tactical error by bringing the case on Scrushy's home turf in Alabama, where the former executive was a popular figure for his outspoken religious views and generous philanthropy. (Scrushy acquittal a setback for US corporate crimes clampdown, 6/29/05)

Cure for CEO Psychopaths

Alan Deutschman has an interesting article in July's Fast Company. “Is Your Boss a Psychopath?” starts out discussing Robert Hare's “Pschopathy Checklist” and his contention that many recent corporate scandals could have been prevented if CEOs were screened for psychopathic behavior. “We screen police officers, teachers. Why not people who are going to handle billions of dollars,” says Hare. This summer, Hare and Paul Babiak began marketing B-Scan, a personality test that companies can use to spot job candidates who may have an MBA but no conscience. I'll be interested to learn if it catches on.

Babiak says organizational shake-ups create a welcoming environment. “The psychopath has no difficulty dealing with the consequences of rapid change; in fact, he or she thrives on it. Organizational chaos provides both the necessary stimulation for psychopathic thrill seeking and sufficient cover for psychopathic manipulation and abusive behavior.”

Corporate psychopaths score high on factor 1, the “selfish, callous, and remorseless use of others” category, which includes eight traits:

• Glibness and superficial charm
• Grandiose sense of self-worth;
• Pathological lying
• Conning and manipulative;
• Lack of remorse or guilt;
• Shallow affect;
• Callous lack of empathy;
• Failure to accept responsibility for one's own actions.

On factor 2, which pinpoints “chronically unstable, antisocial, and socially deviant lifestyle,” corporate psychopaths score only low to moderate. It appears that business executives are more likely to be “successful psychopaths,” in contrast to criminals who are too impulsive and physically aggressive, making them more likely to wind up in jail.

Bosses from hell listed in the article's margins include John D. Rockefeller, the most corrupt mogul of the most corrupt era; Henry Ford, with his secret police; Walt Disney, a suspicious control freak; and Ivan Boesky, who routinely screamed at his staffers and never said he was sorry.

Deutschman then compares corporate psychopaths to "productive narcissists," who include people like Steve Jobs, Jack Welsh, and Bill Gates. Narcissists also see people as a means toward their ends, are poor listeners, and can be touchy about criticism but in their eyes they are improving the world. In contrast, psychopaths, we are informed, are only interested in themselves and enjoy hurting others.

Europe and Asia are far ahead of the US, according to Deutschman. Europe has a growing “antibullying” movement and new laws in France and Sweden. Asian countries have long emphasized community bonds rather than individual glory. Deutschman concludes, “Unless business makes a dramatic shift, we'll get more Enrons - and deserve them.”

But are such issues likely to be resolved by administering B-Scan or any other test to prospective CEOs? I think not. The solution isn't picking a benign dictator.

T T Rammohan's editorial in The Economic Times of India, Only first among equals, addresses the core issues. Rammohan discusses Morgan Stanley and their recent decision to ask its CEO, Philip Purcell, to leave. There are more detailed accounts in the Wall Street Journal but Rammohan makes the important point that "Mr Purcell’s departure was forced by a systematic campaign carried out by former executives of the firm."

The board, "mostly handpicked by Mr Purcell, initially did what most boards tend to do. They reflexively sided with the CEO." Then, under the threat of a proxy battle, "both the board and Mr Purcell threw in the towel." Rammohan argues, "the Morgan Stanley board may have unwittingly underlined a hitherto neglected principle, namely, that the CEO is not everything in a firm, he is merely the most important face of the firm."

Rammohan credits Rakesh Khurana popular book, Searching for a Corporate Savior, as highlighting the idea that the cult of the charismatic CEO is a recipe for corporate disaster. "This is because charismatic authority tends to discourage criticism, concentrate authority and pursue grandiose visions in disregard of legal or ethical norms. Such leadership thus carries within itself the seeds of future disaster."

The remedy, according to Rammohan, is to ensure there is a "chain of succession and that power is widely dispersed." "Boards must recognise that they cannot be guided by the CEO alone in matters relating to the corporation." He praises the corporate governance reform that has led boards at more companies to have regular meetings without the CEO.

The success of the democratic ideal rests on the belief that the pooled wisdom of many is superior to that of any one individual. If this applies to nations, it applies to corporations as well. Ensuring that the CEO is only first among equals, not an absolute monarch, is crucial to the health of corporations.

We need more mechanisms that push corporate structures toward democracy such as:

• Independent boards who are accountable to shareholders,
• Audits that provide information necessary for shareholders to hold management accountable, instead of focusing on hypothetical future owners,
• Split chairs and CEOs,
• Majority voting requirements for electing directors, and
• Shareholder access to the corporate proxy for nominating directors.

We can't afford to pay an Elliot Spitzer clone to watch every corporation and we can't depend on a rare pool of former employees being ready to fund a proxy fight. Give shareholders the proper tools and corporations are less likely to be dominated by psychopaths. Power, if widely dispersed, will facilitate the important contributions of all employees, shareholders, and other stakeholders. Pooling our wisdom is a more effective long-term strategy than blindly following a leader, even if we are able to screen out the psychopaths with B-Scan.

DB Plans Down

The rate at which large companies froze or terminated their defined benefit pension plans accelerated sharply last year even as the average funding level for plans continued to increase, according to a new analysis by Watson Wyatt Worldwide, a leading human capital consulting firm.

Watson Wyatt found that 11% of companies in the Fortune 1000 that sponsor defined benefit plans had a frozen or terminated plan in 2004. The 11% represents 71 companies and is an increase from 7% (45 companies) in 2003 and 6% (39 companies) in 2002. Additionally, 4% of employers (25 companies) had pension plans that were closed to new hires in 2004. Still, two-thirds of the Fortune 1000 companies (63%) currently sponsor a defined benefit plan.

The analysis also found that about half of the companies that terminate their plans drop off the Fortune 1000 list the following year, indicating that the decision may often be driven by weak financial performance. About one- half of the companies that froze or terminated their plans in 2004 had credit ratings below investment grade, compared with 25 percent of firms with active pension plans.

Improved returns in equity markets and sizable cash contributions by employers helped boost the average pension plan funding ratio to 83 percent in 2004. The average funding ratio was 81 percent in 2003 and 76 percent in 2002. (Press Release, 6/22/05)

Milberg Weiss Under Investigation

Milberg, Weiss, Bershad, and Schulman, the class-action law firm, is being investigated for alleged fraud, conspiracy, and kickbacks in dozens of securities lawsuits, according to The Wall Street Journal. A grand jury in Los Angeles that was convened last October has been hearing evidence of alleged illegal payments to plaintiffs who appeared on dozens of securities class-action lawsuits brought by the firm during the past 20 years.

Michael Hausfeld, a prominent Washington plaintiffs' lawyer, is quoted saying such a case "could taint private civil enforcement of securities law" and deflect attention from "the egregious corporate misconduct at issue in these suits." For names, kickback amounts and the gory details, see "U.S. Pushes Broad Investigation Into Milberg Weiss Law Firm," 6/27/05)

Cooperative Leads the Way

Co-operative Insurance Society became the first insurer to launch an ethical engagement policy based on the views of its members. The policy is the result of an extensive consultation with its five million policyholders and will govern the way the firm interacts with the companies it invests in. The new policy, which is backed by 98% of customers, will guide the group on such issues as human rights, the arms trade, environmental impact, labour standards, animal welfare and corporate governance.

The group said it would use its power as a major shareholder to make its views known at annual general meetings and to put pressure on companies. Its stance is similar to one already adopted by the Co-operative Bank, which refuses to do business with companies it deems to be unethical. (Ethics priority at insurance giant, icCoventry, 6/27/05)

Barron's Review

In an article titled "The Governing Class" Theresa W. Carey and Kathy Yakalwith offer a "refresher course in corporate governance." Lead mention went to Corporate Governance, "a straightforward, informative site that tracks the important developments in the field." Of Encycogov.com, "the serious student of the field will find plenty of theory and examples here."

Among the others, ShareholderProposals.com is a "plain, just-the-facts site that helps investors take advantage of a decades-old Securities and Exchange Commission rule that allows shareholders to include proposals in a company's proxy materials. It takes you step-by-step through the process and provides concrete examples of good corporate governance policy statements."

GuruFocus.com "isolated 21 investment gurus who have racked up an average annual total return of more than 15% in at least the last 15 years...Tables highlight buy and sell recommendations or actual actions over the last year or so, and recent commentaries written by each are printed or linked." NetSteering is a terrific resource for keen watchers of insider trading.

India Inc Will Need 3,000 Directors

The government estimates corporate India will need 3,000-4,000 “independent directors” within the next six months to comply with the Securities and Exchange Board of India's (Sebi) listing requirements.

To ensure that corporates are able to find qualified people, the company affairs ministry is facilitating the formation of databases of potential “independent directors” through professional bodies and industry chambers. (Business Standard, 6/23/2005)

AFP Calls for Greater Disclosure of Governance Rating Methods

Companies with poor governance practices may see an increase in their cost of funds and access to credit.

Association for Financial Professionals (AFP) president Jim Kaitz urged the SEC and the nationally recognized statistical rating organizations to bring more sunshine into the scoring process when he testified before the US House Financial Services Committee Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises last September.

Moody's, Standard & Poor's and Fitch Ratings have publicly outlined their governance rating methods. Moody's wraps corporate governance into its risk management overview, according to Ken Bertsch, senior vice president and director, corporate governance. "We're not scoring on corporate governance at this time. We're doing a very in-depth risk management review," Bertsch said.

Moody's corporate governance assessment emphasizes board independence and management accountability to the board, board and executive compensation arrangements, management succession plans, public disclosures, legal and regulatory structures, ownership structures, governance transparency, and shareholder voting rights.

S&P assigns scores from 10 (very strong practices) to one (very weak practices) to the four individual components that contribute to overall sound governance. According to 2002 and 2004 reports, these elements include: ownership structure and influence of external stakeholders, investor rights and relations, financial transparency and information disclosure, and board structure and process.

Fitch uses a rating tool that ranks companies based on criteria such as board independence and quality, presence of related-party transactions, integrity of the audit process, executive compensation, and different ownership structures (in particular majority-controlled and family-owned companies).

Dominion has no written policy, but the company has included corporate governance factors in its rating process for nearly 30 years. As the newest nationally recognized statistical rating organization approved by the SEC, Dominion has been rating US companies for less than one year. (Looking Beyond the Numbers - Governance Concerns in Scoring Process, AFP, 6/20/2005)

ABA Seeks Comment on Majority Elections

The American Bar Association (ABA) Committee of Corporate Laws has issued a 32-page discussion paper on majority elections for corporate directors and invites public comment. Resolutions have been voted at more than 50 companies so far this year. The average level of support has been around 45% of votes cast, according to the The ISS Friday Report.

The ABA paper outlines four options and discusses their potential benefits and problems:

• Retain the current plurality vote default rule.
• Change to a majority vote default rule.
• Adopt a default plurality rule requiring that a director must be elected by at least a “minimum” plurality vote, such as one-third.
• Leave the plurality vote default rule in place but specifically authorize against votes with consequences where a director achieves a plurality vote but more against than for votes. These consequences could include, for example, shortening the term of that director, unless the board acted within a specified time frame to confirm the director's election, or giving the board the authority to remove that director.

Comments should be sent by Aug. 15 to: E. Norman Veasey, Chair, ABA Committee on Corporate Laws, or by snail mail to 1201 N. Market Street, Suite 1402, Wilmington, Delaware 19801. We urge readers to cc the publisher of Corpgov.net: James McRitchie.

Pfizer announced that it would require any director who receives a majority of “withheld” votes at the annual election of company directors to offer to resign. The company's shareholders can vote “yes” or “withhold” when they vote on a director. The company has said that investors were concerned that some directors could be elected with only a few positive votes from a handful of shareholders.

Pfizer officials said the company has been a leader in corporate governance issues, such as the election of directors and anti-takeover provisions. Pfizer was one of the first companies to dump its “poison pill” takeover defense, which would have made a takeover unattractive because of special “poison” provisions that would have greatly added to the cost of such a takeover. In addition, Pfizer now requires that all directors be elected to one-year terms.

The selection of a replacement Director would still be within the power of those who selected the Director found to be unacceptable to Shareholders.  "Under the amendment to Pfizer's corporate governance principles, any director who receives a majority of withheld votes must submit his or her resignation to the board. The board will in turn consider the resignation and make a recommendation."

Governance Premium in Hong Kong

Researchers studying the corporate governance of 168 of Hong Kong's largest listed companies have found a positive and significant correlation between corporate governance scores and price-to-book ratio. (see Webb-site.com for details and links) Here is a highlight:

A significant and positive relationship is found between CGI and MTBV after taking account of a comprehensive set of control variables. Results show that a worst-to-best change in CGI, from 32.86 to 76.34, implies a 147% increase in MTBV. The transparency-related performance is significant in explaining variations in firm value as well. After comparing the regression results between China-related firms and Hong Kong firms, we find that corporate governance practice matters more for China-related firms.

Chevedden Report

Caterpillar finally pastures its poison pill on June 30, about 17 months ahead of its scheduled termination date of Dec. 11, 2006. This topic won an impressive level of shareholder support at Caterpillar – a 59% yes-vote at the 2005 annual meeting. Additionally the Caterpillar shareholder level of support ranged from 48% to 55% in each year from 2000 to 2004 based on yes and no votes. Each of these proposals was sponsored by John Chevedden.

Corpgov Bits

Managing ERISA Risk; Denali FM offers an online fiduciary training course re Risk Management in 401k Plans. Minority owners acquire more rights in Hong Kong.

Corporate governance costs climb 33%. The cost of being a public company in 2004 was a third higher than it had been a year earlier, shows a study by a national law firm. Average audit fees for companies with fewer than $1 billion in annual revenue climbed 96 percent to $1 million in 2004. Costs of corporate governance have gone up 223 percent since the government enacted Sarbanes-Oxley in 2002.

Conference Board Issues a "Definitive" Report on Corporate Governance Practices. It calls on corporate directors to redefine their roles with management, strengthen their independence, and improve practices and processes in their companies' key audit, compensation, and governance committees. The report focuses on best practices covering legal, regulatory, and stock exchange requirements and precedents established by the influential Delaware courts.

Russian state companies are not transparent, according The Standard & Poor's international rating agency survey. Their average level of information provision is 47%. This means that they fail to disclose information as readily as Russia's private companies of the same level do (52%) and considerably worse than their overseas counterparts (63%). However, this is not a bad result for a country where norms of corporate governance were only introduced recently and the Code of Corporate Conduct appeared only a couple of years ago.

Oregon to Go DC?

Kevin Mannix, the GOP candidate for governor of Oregon, has proposed moving new public employees to a 401(k) plan style retirement program. The 2003 Legislature enacted a hybrid pension plan for newly hired public employees that offered a scaled-down guaranteed pension plus a 401(k)-style plan.

Mannix said he wouldn't take away current employees' guaranteed pensions under the Public Employees Retirement System. Instead, he would encourage them to switch to the 401(k)-style plan through incentives. Mannix's comments came after chief GOP rival Ron Saxton co-wrote an article suggesting that all Oregon public employees could be temporarily fired to terminate their contractual right to PERS benefits, then rehired under a less-costly retirement plan. (Mannix endorses 401(k)-style plan, Statesman Journal, 6/17/2005)

Undermining the Statutory Audit

In “Undermining the Statutory Audit: The Damaging Effects of Adopting IFAC-IAASB Standards on Auditing (ISAs), June 2005, UK's Morley Fund Management argues the move to create international standards should not be pursued by means of US derived ISA since the approach will undermine the “true and fair view” basis of audits established under the Companies Act. The shift away from public interest/shareholder audits to a process driven by a technical compliance assurance more limited in scope will have the principal effect of reducing the scope of the auditor's role and exposure to risk. The Morley paper argues strongly against making the directors/management the “client” instead of shareholders.

It appears the Audit Practices Board is moving forward with this ill-advised shift in without proper consultation or regulatory impact assessment. Again, the impact of US standards is being obfuscated by denying words their normal meaning. While the words “true and fair view” are retained, they now simply mean compliance with IFAC-IAASB. Enron would have been a clear audit failure under the current regime but not under the US standards. The paper contains an excellent appendix, which highlights the differences between the frameworks. One of the most important, from our standpoint, is that fundamental notion that UK audits are conducted for current shareholders and in the “interest and protection of the public,” instead of with the board or appropriate representatives of senior management, with whom the auditors agrees on the terms of engagement and any variation.

CalPERS Sets Standards for Consultants

On May 16th the SEC's released its Staff Report Concerning Examinations of Select Pension Consultants. Effective June 13th, CalPERS established a new protocol to:

(1) assure that the information and advice CalPERS receives from its Consultants is impartial;
(2) to outline a system whereby Consultants disclose to CalPERS those circumstances that may create actual, potential or perceived Conflicts of Interest; and
(3) to set forth a process for CalPERS to evaluate the disclosures to determine whether assignments should be precluded.

To read more about the policy, see their June 13 press release and a pdf version of the policy.

Chevedden Report

Pep Boys (PBY), redeem or vote poison pill, 75% yes-vote, proponent John Chevedden. This is the 3rd consecutive year that this proposal topic has won more than 60% support.

General Motors, cumulative voting shareholder proposal, at least 48.8% yes-vote, proponent John Chevedden. GM continues to refuse to state the no-vote which may be less than 48%. In any event the GM Chairman, Richard Wagoner said at the annual meeting that this was an all-time record high voting percentage for a GM shareholder proposal.

Morningstar's Innovation

The Wall Street Journal reports the investment-research firm says it will hold monthly "forums" to answer questions about its business from any investor or prospective investor. Investors submit written questions by email, fax or mail. Morningstar's director of investor relations digs up the answers and reports to shareholders and the SEC. The first forum, released June 3, featured 21 questions about Morningstar's estimates for long-term growth, hiring plans, potential for acquisitions, stock-option expensing, corporate governance and other matters.

Joseph Carcello, University of Tennessee's Corporate Governance Center, praised Morningstar's first effort, saying its responses were candid and specific, including providing a breakdown of its revenue by new and renewal business, information that many companies prefer not to disclose for competitive reasons. Alyssa Machold Ellsworth, Council of Institutional Investors, agreed, "this a really good example of proactive shareholder communications."

WSJ terms the move "Democracy in Action." It certainly is something of an innovation in reporting but if it wanted to be a true leader in democracy, Morningstar would take measures which actually allow shareholder to act like owners. For example, they could allow potential auditors to place their proposals in the proxy and allow selection by shareholders. They could allow shareholders to place the names on director nominees on the proxy. Steps such as those would truly be democracy in action. (Morningstar Shines Light on Itself, 6/15/05)

Are You in the TIAA-CREF Retirement System?

If not, you can still help. Do you want our money to help build housing and businesses in low-income communities? To support socially and environmentally responsible products and services?
 
Spend five minutes to support Social Choice for Social Change. In the 1980s, Campaign for a New TIAA-CREF lobbied the pension giant TIAA-CREF (TC) for five years to set up a socially responsible fund, the Social Choice Account. Now Campaign for a New TIAA-CREF is pushing for an improved fund with practices that are becoming standard in socially responsible investing. Their effort has been endorsed by many academic and activist groups, and individuals like Noam Chomsky and Howard Zinn. Here's how you can help:

• Contact TC and ask them to modify the Social Choice Account by investing in low-income area community development and in social venture capital for companies pioneering socially responsible products/services. Thank them for agreeing to vote their shares in corporate stock in a socially responsible manner, and ask them to otherwise lobby those companies to be socially responsible. If you are a participant, let them know that. Call CEO Herbert Allison at 800-842-2733; 212-490-9000 (monthly, if you can) or email him at HAllison@tiaa-cref.org (but calls are preferable. You will be asked to leave a message with an assistant.)   
• Receive Campaign Updates (every two to four weeks). Contact njwollman@manchester.edu to be added to the list.
• Forward this message with a short personal endorsement to listserves, organizations, and your colleagues and friends nationally.

Campaign for a New TIAA-CREF is also part of a national coalition of activist groups, Make TIAA-CREF Ethical, that is pushing for TC to be more socially and environmentally responsible in its various investments. For further information, contact Neil Wollman, Ph.D.; Senior Fellow, Peace Studies Institute; Professor of Psychology; Manchester College, North Manchester, IN 46962.

Audit Independence

Robert Monks graciously sent me a copy of Tim Bush's recent paper, Divided by Common Language, which I found very helpful in explaining the origins and differences between financial reporting in the UK and the US. For years I've been told the UK approach is more principles-based and ours is more rules or check-box based. However, after reading this paper I am finally beginning to grasp what this means and how the differences shape corporate governance in each country. Fundamentally, the problem may be that the duty of care for auditors in the US is not to shareholders but is to buyers and sellers in the market. Our audits are better designed for day-traders than long-term owners.

Bush points out the UK Companies Act “requires that auditors are appointed by and report to shareholders as a obligation of the privilege of incorporation,” although it appears that in actual practice they are selected by the board. However, at least the accounting goal is to ensure that financial statements are relevant and as free of self-serving bias as possible for shareholders. In contrast, under the US 1933 Securities Act, US audits are primarily concerned with market-pricing. The objectives are to ensure an efficient secondary market and an efficient primary issue market.

Bush points out, a company that is incurring expenditure beyond the economic needs of the business may not be defrauding the secondary market by strict federal legal definition. If earnings are depressed due to operational inefficiency the market price may reflect this but the interests of shareholders are not well served, nor are they given access to information needed to remedy the problem. “Efficient markets and efficient companies are not the same thing.”

He provides an example of an insurance company disclosing the company is exposed to asbestos-related liabilities. In the US, they could leave it at that. In the UK the auditor would have to include other relevant facts, such as that liabilities arose as a result of a relatively recent acquisition by the current board. The UK model does not insulate investors from risk, but it does appear to give owners better information to allow them to hold directors accountable. The US model encourages owners to sell or sue when audits find problems.

Bush notes, “shareholder value is created from serving the prime objective of earning a surplus in excess of the cost of capital, not setting one's prime objective as ensuring accurate reporting for market regulators.” The US scheme is particularly ineffective when companies generate most of their capital from profits, rather than from new issues, which may have been the presumption in the early 1930s when the legal framework was set.

Anyone who truly wants to address the issues surrounding audit independence would do well to read Bush's paper, along with How US and UK Auditing Practices Became Muddled to Muddle Corporate Governance Principles by Shann Turnbull. Turnbull argues that establishment of an audit committee with “independent directors” cannot remove the conflicts of interest which are only exacerbated by the US Sarbanes-Oxley (SOX) and the UK Combined Code. Along with Roberta Romano, he believes SOX has enshrined in its statute the cause of the problem it was supposed to eliminate, since “audit committees provide a more intimate and frequent basis for bonding the external auditor to the directors rather than to the shareholders who use the information.” Some European countries avoid these conflicts by having the auditor controlled by a shareholder committee or “watchdog board.”

Turnbull's paper provides a history of how we got here, as well as a compilation of several alternatives. Like him, I am “overwhelmed with the plethora of codes of conduct, ethics, and professional behavior and so called “best practices.'” “They represent intrusive prescriptive complex band-aids that do not address the fundamental flaws of the dominant governance systems.” What is required are self-governing mechanisms of the type found in natural systems and simple thermostats.

That is where I believe Mark Latham's work comes into play. Although he doesn't address the fundamental purpose of audits, such as informing shareholders rather than protecting secondary markets by calling for a change in statutes, his proposals would address even those fundamental questions in practice. If shareholders could select the auditor, as he proposes, it is likely they would choose one which places a high priority on informing shareholders about corporate inefficiencies.

Latham introduced his “Auditor Independence” proposal for inclusion in the proxy at several US firms. However, the SEC has consistently allowed management to omit them from the proxy. One of the primary arguments is that selection of the auditor is part of “ordinary business” operations. How this can be held out year after year in light of Enron and the demise of Authur Andersen is beyond me. I can only conclude that Latham needs the help of an attorney familiar with all the recent case law and we need SEC commission members who believe in guarding the interests of shareholders. Arguments on both sides of the proxy inclusion debate are linked at corpmon.com/ProposalSubmissions.htm for the companies Fleetwood Enterprises and SONICblue.

Bush, Turnbull, and Latham present the problem, as well as offering reasonable solutions. Meanwhile, as Turnbull notes, “every effort should be taken by countries around the world to resist the hegemony of the fundamentally flawed US auditing practices.” Don't let the contagion spread!

Pension Plan Advisors Conflicted

With the resignation of Donaldson, and Cox being named to head the SEC, many seem to have missed the SEC's May 16th Staff Report Concerning Examinations of Select Pension Consultants. Investment advisers owe their advisory clients a fiduciary duty and are required to “eliminate, or at least expose, all conflicts of interest.” Investment advisers registered with the SEC typically make such disclosures to advisory clients in their Form ADVs. Additionally, advisors registered with the SEC are required to designate a Chief Compliance Officer and to maintain written procedures designed to assure compliance with the Advisers Act.

The SEC conducted focused examinations of a representative sample of 24 pension consultants who are registered investment advisers to determine their level of compliance. Conflicts of interest among pension consultant are worse than even cynics assumed. Here are a few highlights of those they reviewed:

• Many pension consultants do not consider themselves to be fiduciaries to their clients.
• More than half the pension consultants provided products and services to both pension plan advisory clients and money managers on an ongoing basis. For some of these consulting firms, the compensation received from money managers comprised a significant part of their annual revenue.
• More than half have affiliated broker-dealers or relationships with unaffiliated broker-dealers, allows the pension consultant to obtain payment for its services with brokerage “commission recapture” programs. Two failed to disclose these compensating relationships, although the SEC was unable to “fully analyze whether pension consultants 'skewed' their recommendations to favor certain money managers.
• Many have affiliates that also provide services to pension plan clients. These relationships create disclosure and conflict of interest issues that have not been addressed by pension consultants.
• More than a third employ advisory representatives that are also registered representatives of a broker-dealer.
• Based on the recommendation of their pension consultant, many pension plan clients choose to utilize an affiliate of the consultant to provide various services, including investment management, brokerage execution, and transition management. Of the 19 consultants or their affiliates that provided products/services to money managers, three (or 16%) provided no disclosure of these other services, and 16 (or 84%) provided limited disclosure.

Here is the closest the SEC comes to enforcement. “We conclude that consultants should enhance their compliance policies and procedures to include those policies and procedures that will ensure that the adviser is fulfilling its fiduciary obligations to its advisory clients.” What would Elliot Spitzer have done? What the SEC does is provide a list of good tips for plan sponsors.

Alternative Structures

PricewaterhouseCoopers is running a series on corporate governance. Part 1 is entitled Emerging Companies and Boards of Directors: What Works Best? and it includes a good discussion of alternative structures, including an advisory board and a two board structure.

So Yesterday

Corporate governance reforms are "soooo yesterday, dude," according to a report in the Toronto Globe and Mail. First, the U.S. Supreme Court overturned the 2002 conviction of Arthur Andersen on obstruction of justice. Second, President George W. Bush nominated pro-business congressman Christopher Cox as new chairman of the SEC. (U.S. corporate governance is yesterday's news, 6/4/05)

In other words, the official charged with cracking down on corporate shenanigans will be the same guy who has repeatedly opposed tougher enforcement of boardroom antics, including abuse of stock options, and vigorously pushed for a law making it harder for shareholders to sue companies.

One has to admit, there is a certain logic to Mr. Bush's recent nominations: Iraq-war champion Paul Wolfowitz as boss of the nice-roads-for-poor-people institution, the World Bank; sabre-rattling unilateralist John Bolton as U.S. ambassador to the United Nations; and now the poacher Mr. Cox to be Wall Street gatekeeper.

Duffy is Back

The Turnaround Tactician is Maureen Nevin Duffy's new vehicle to report on activist or relational investors.  These are typically "value" investors who don't buy and wait. They buy and use their governance know-how to turn companies around by unlocking that value, sometimes working with management, sometimes pushing back.  Want to know what Relational Investors, Providence Capital, and others are up to?  Duffy is the closest we have to a journalist on the front lines of corporate governance investing.  She gives you the straight scoop and we can't wait to see her latest venture take off. Click here to see a sample issue. Then click on Buy Now; you won't be dissapointed.

Donaldson Steps Down:
Expecte Rollbacks Under Cox

SEC Chair William H. Donaldson, who took office in the wake of massive corporate scandals and the resignation of securities lawyer Harvey Pitt and aggressively stepped up the agency's focus on fraud and good governance, announced he's resigning at the end of the month. Pitt initiated serious reforms, including requiring that mutual funds report on the voting policies and votes. Donaldson went a step further but failed on the most important reform to open up the corporate proxy, if even in a token way, to shareholder nominees.

He was a much more strident reformer than many expected. US Chamber of Commerce President and CEO Thomas Donohue is suing the SEC over a rule pushed by Donaldson that requires 75% of mutual fund board directors to be independent. He noted that the chairman "came to the SEC at a critical time -- his job was to restore trust and confidence in our capital markets. "His successor will need to focus on ensuring the future competitiveness of our markets."

President Bush named Rep. Christopher Cox, R-Calif., a conservative veteran of 16 years in Congress, to succeed Donaldson. Cox has long been an ally of business groups and who helped rewrite securities laws to make investor lawsuits more difficult to file. He supported efforts to repeal the estate tax, the capital gains tax on savings and investment, and taxes on dividends.

Harvey J. Goldschmid, is expected to leave in the coming weeks to return to a teaching position at Columbia University. Senate Democrats have proposed that his seat be filled by Annette L. Nazareth, a senior staff official. The term of another Democratic member, Roel C. Campos, expires this month, although he hopes to be nominated for a second term. (Bush Nominates Congressman to Replace Donaldson at S.E.C., NYTimes, 6/2/05)

“This likely portends a very dramatic shift in the direction of the SEC," Joel Seligman, dean of the Washington University Law School in St. Louis, told Reuters. "You're more likely to see an SEC that the Chamber of Commerce and the Business Roundtable are more comfortable with." “He'll be a formidable chairman, but it will be a major change in direction," Columbia University Law School Professor John Coffee told Reuters. "If Cox had written our securities laws, the executives at WorldCom and Enron wouldn't have any legal troubles," Damon Silvers, general counsel of the AFL-CIO, told Bloomberg News.

The first rollback? Earlier this year, Cox co-sponsored a House bill, H.R. 913, that would delay implementation of the Financial Accounting Standards Board's expensing rule by at least three years. Instead of expensing options, the bill calls on the companies to disclose additional information on their option plans and directs the SEC to study the issue for three years. (The ISS Friday Report, 6/3/05) We expect the period of reform at the SEC has come to an end for the duration of the Bush Administration.

Review: Governance and Ownership

Governance and Ownership, Robert Watson, editor (Edward Elgar, 2005). This is an excellent collection of 20 papers, most published in the late 1990s, enhances our understanding of the relationships between ownership corporate ownership governance. Issues investigated include:

• diversity of ownership forms and corporate control implications
• effectiveness of such forms in influencing executives to enhance corporate value
• role of owners in appointing and removing executives
• influence of ownership structures on corporate restructuring, mergers and acquisitions
• motivation of various classes of owners - their ability and willingness to influence corporate decisions

Many of the findings are interesting and run counter to common assumptions in the field. For example, the La Porta et al. (1999) study found that contrary to Berle and Means, companies in most countries (the US included) have “controlling” (10%) shareholders (generally the State or families). Families control about 35% of the largest firms in the richest economies, compared to 24% held by the State. Monitoring and protection of minority shareholder rights take on new meaning.

Wahal (1996) examines pension fund activism in the US and finds, contrary to other studies, no evidence of long term performance improvements. Wahal concludes pension fund activism is no substitute for an active market for corporate control.

Holland (1998) examined fund managers in the UK and finds that institutional voice is typically highly constrained by relative powerlessness and a general unwillingness to interfere, especially during times of good corporate performance. Quasi insider knowledge was typically held “in reserve” until performance took a downturn. Are the costs of monitoring justified if they are only going to be used to accelerate sacking the CEO in times of financial crisis?

David et al. (1998) views the struggle between CEOs and owners over pay. They find that institutional owners that have only an investment relationship with the firm are able to influence CEO compensation, whereas those that also depend on the firm for business are not. (No surprise there, but considers factors not always taken into account by other studies.)

In general, this book has much to recommend it, especially to complacent investors and over-confident executives. Governance and Ownership provides a ready reference to studies that will continue to influence scholarship and practice over the next decade.

May 2005

Enhancing Decision-Making Symmetry by Endorsing All Powers to the Full Board
by Dr. Darlene M. Andert CMC CFM

The theme of the 6th International Conference for Corporate Governance was “Making Corporate Governance Decisions that Work,” which is an important topic the future of corporate governance. Clearly the Disney case, as well as other recent cases, indicates that the same volume and timing of information may vary between non-independent and independent Board members. Yet, to rebalance corporate governance practices, the US Sarbanes-Oxley Act granted autonomy to the Audit Committee. Although this directive may elevate the independent Director's knowledge and control, an unintended side-effect is information asymmetry between Board members and the dilution of full-Board decision-making synergies.

In contrast, Section 8.01(b) of the United States Model Business Corporation Act (the unifying construct for various state-authored statutes) provides that “all corporate powers shall be exercised by and under the authority of, and the business and affairs of the corporation managed under the direction of, the board of directors” (p. 8-5). This Act structures ALL POWERS as the domain of the “board of directors” as a whole body and not the domain of an individual member or an autonomous committee. The Act further describes “actions without meetings” (8-24) and the “voting and quorum” (8-27) rights which when applied equally to ALL Board members result in a non-hierarchical, one-vote-for-one-member collective body. It can easily be concluded that exercising all powers by the full Board supports information fluidity and enhances collective decision-making synergies.

The needed paradigm of corporate governance re-structuring should provide for a rebalancing between the three distinct powers: the Board providing oversight and representing shareholders, Administration providing operations and serving customers and stakeholders, and Regulatory agencies providing legislative enactment and serving society as a whole. This structural schema, challenges the wisdom of dual roles for members of the Board (i.e. CEO/Chairperson) as well as the use of private-autonomous Board committees. The compelling question is “Will future paradigms of corporate governance complete the separation of powers between operational roles and oversight roles that are currently causing two-tier-Board-syndrome and information asymmetry”?

Most people know the quote from Lord Acton that "power tends to corrupt, and absolute power corrupts absolutely." As democracy divides power and control between the Judicial, Legislative, and Executive branches -- with each having separated and distinct autonomy, shouldn't future restructuring efforts divide the distinct bodies but unite the full Board and provide for the symmetry of information and the maximization of decision-making synergies in the Boardroom? After all, knowledge is power and the key asset to any decision-making body.

Dr. Darlene Andert serves as the Director for the International Center for Responsible Corporate Governance at Florida Gulf Coast University [ (239)590-7322] and President of Andert Governance Corporation [(239)549-7766].

Alaska to Move From DB to DC: Kennedy Has Better Strategy

The Alaska State House approved a bill that would create a defined contribution plan for new employees to the Public Employees' Retirement System and Teachers' Retirement System, which has been reported to face a $5.7 billion underfunded liability that threatens the benefits of those currently in the system.

When the Senate introduced the retirement bill, it immediately put the House on the defensive by taking a priority House bill hostage: They slapped a contingency clause on the House's $70 million increase to K-12 education, saying if the House doesn't approve the Senate's retirement bill, the education money gets cut by $38 million.

The final compromise added death and disability benefits, increased health benefits and increased the employer's contributions to individuals' retirement accounts. In addition, it creates a new Alaska Retirement Management Board that will advise policymakers on solutions to the underfunded status of the retirement systems. Lawmakers handily ignored a state law requiring analysis of the long-term and short-term costs to the state and effect on the state's retirement funds of any changes to the retirement system. (Tweaks to retirement plan underscore flawed process, Juneau Empire, 5/25/05)

Will California take the same route next June? A far better strategy is one advocated by Joseph P. Kennedy II; give average working people access to the investment expertise of public pension funds. Only the rich can legally participate in many of the best-performing funds. But when these alternative investments are part of a diversified portfolio, they can significantly boost performance and actually protect investors from downswings in more traditional asset classes. CalPERS has earned an average of 9.1% for the 3 year period that ended 2/28/05.

Mutual funds won't like the competition and CalPERS would have to explore the cost of additional accounting and oversight duties but it would likely be able to provide Californians superior and stable long-term results. Giving everyone a greater stake in the fund may also protect it against attempts to destroy it. (A populist approach to pension funds, Boston Globe, 5/23/05)

Pressure Builds on ExxonMobil

Shareholders gave record high voting support today to a shareholder resolution seeking greater analysis and disclosure from ExxonMobil about the financial impacts posed by global climate change. A resolution requesting that the company’s board of directors undertake a comprehensive review on how it will meet the greenhouse gas reductions targets in countries participating in the Kyoto Protocol won support from 28.3% of shares voted.

The measure was backed by CalPERS and CalSTRS, as well as Institutional Shareholder Services (ISS). The highest previous vote on a climate change resolution with ExxonMobil was 22.2% at the company’s 2003 annual meeting.

Other oil and gas companies are taking a wide range of actions to reduce their financial exposure and improve their competitive positioning on the climate change issue. Anadarko Petroleum, Apache, ChevronTexaco and several other leading U.S. oil and gas companies have agreed to such steps as: measuring and disclosing greenhouse gas emissions and setting reduction targets; increasing investments in low- and no-carbon energy technologies, integrating climate risk and carbon costs into capital allocation decision making; and assigning boards direct responsibility to oversee climate change corporate strategies.

Two other climate change resolutions were voted on at today’s meeting. A resolution requesting that the company explain the scientific basis for its ongoing denial about human activities contributing to global warming received 10.3% of the vote. A resolution calling for more energy and oil industry expertise among independent members of the board of directors received 4.1% support. (ExxonMobil Investors Give Record High Support to Climate Change Resolution, 05/25/2005, CSRwire)

Chevedden Report

58% vote at Edison International (EIX)
Subjecting golden parachutes to a shareholder vote passed at EIX with 58% of the vote as reported at the annual meeting.

60% vote at Mattel
Subjecting golden parachutes to a shareholder vote passed at Mattel with approximately 60% of the vote. John Chevedden was the proponent for both of these proposals.

Enforcement Action

EBSA, which enforces the Employee Retirement Income Security Act (ERISA), closed 4,399 civil investigations in FY 2004, with nearly 7 in 10 of those producing corrected ERISA violations. Criminal investigations led to the indictment of 121 people in 205 cases and the recovery of $5.6 million. The agency prosecuted wrongdoers under criminal statutes governing theft or embezzlement from employee benefit plans, lying on ERISA-required documents, as well as offering, accepting, or soliciting a bribe in order to influence the operations of an employee benefit plan. EBSA listed six key fiduciary violations:

• failing to operate a plan prudently and for the exclusive benefit of participants;
• using plan assets to benefit certain related parties;
• failing to value plan assets properly at their current fair market value or to hold assets in trust;
• failing to make benefit payments due under the terms of the plan;
• taking adverse action against an individual for exercising his or her rights against the plan;
• failing to offer continuing group health-care coverage for at least 18 months after a worker leaves the company. (Compliance Reporting: Staying inside the Lines, PlanSponsor.com)

ISS Acquires Deminor

Institutional Shareholder Services (ISS), the world's leading provider of proxy voting and corporate governance solutions, today announced that Deminor International, the well-known minority shareholder advocacy firm based in Brussels has sold its corporate governance unit to ISS. The combined company will form the foundation of ISS Europe, headquartered in Brussels with offices in Paris and Amsterdam. The firm estimates the market size for corporate governance and proxy voting services in Europe to be almost $100 million, about 26% of the world's total. (PRNewswire, 5/25/05)

Shareholders get another Tool Via Yahoo! and ISS

Institutional investors, who are required to vote their shares in the best interest of investors or plan beneficiaries often subscribe to services, such as those provided by The Corporate Library, Glass Lewis, and Institutional Shareholder Services for proxy advice. Mark Latham's Corporate Monitoring Project argues that many individual shareholders don't take the time necessary to review proxy materials and should request that boards hire a proxy advisor, chosen by shareowner vote. (see his current proposal at Metro One Telecommunications) Alternatively, Latham argues, systems are needed which facilitate their ability to vote by brand reputation. (see Vote Your Stock)

The Project's recent newsletter announced that MyProxyAdvisor.com will soon offer individuals free email notification of voting decisions by their preferred institutions. Directed by Andrew Eggers, a PhD student in Harvard's Department of Government who was inspired by Latham's writings, it will enable individual investors to conveniently piggyback their stock voting decisions on those of institutional investors with trusted reputations. If you're interested in being a Beta tester, send an email to Andrew Eggers.

In the meantime a joint project of Yahoo! and ISS has taken a small step in the direction advocated by Latham. It won't provide advice on how to vote but it may influence how shareholders buy or sell stocks. It might also provoke shareholders to pay more attention to director elections and proxy resolutions because they will now have free access to a company's Corporate Governance Quotient (CGQ®) or score in terms of governance and best practices in comparison with both its peers and the broad market.

A significant correlation between poor corporate governance practices and poor stock performance has been recognized for several years. For example, as reported by BusinessWeek (The Big Picture, 5/23/05, page 13), “poorly governed companies are far more likely than highly ranked ones to be sued by investors within 6 to 18 months of being rated.” Whereas only 5.7% and 6% of those rated A or B were sued, 14.5% ranked C, 24.7% ranked D and 51.2% of those ranked F were sued.

Now we have a tool at Yahoo Finance to look up ratings before we invest and to research stocks already in our portfolios. Apple Computer is one of my better performing stocks, so I type in AAPL as the company symbol, hit “go,” scroll down toward the bottom, and click on the "Company Profile" link. That brings up a "Corporate Governance" section that reports the following:

Apple Computer Inc's Corporate Governance Quotient (CGQ®) as of 1-May-05 is better than 60.1% of S&P 500 companies and 92.7% of Technology Hardware & Equipment companies.

One of my less stellar stocks is ThermoGenesis (KOOL). Using the same process I found the following:

Thermogenesis' Corporate Governance Quotient (CGQ®) as of 1-May-05 is better than 56.4% of CGQ Universe companies and 41.8% of Technology Hardware & Equipment companies.

Knowing a little more about Thermogenisis might now prompt me to sell the stock, make suggestions on how they can improve their corporate governance, or just review their next proxy more carefully. It is certainly a step in the right direction and should be a welcome addition to the shareholder's toolbox.

Stybel Joins Newtwork

Dr. Laurence J. Stybel joined the Corporate Governance Network. We encourage readers to consider his services. On May 23, 2005, he will address 115 governance thought leaders from around the world at the Bentley College Conference on Ethics and Risk Management in a Global Environment.  His topic is "Strategic Options When Boards Select Board Self Evaluation Programs."  Dr. Stybel is co-founder of Board Options, Inc.  For a copy of his speech, email lstybel@boardoptions.com.

From a Whisper to a Firestorm

That's the title of an article by Mike McCurry and Randy Tatein in the current edition of Directors & Boards. The article asks, "How ready are you as a board to respond to the revenge-laced rhetoric promoted by activist organizations and shareholder-revolt leaders?" Interest groups are partnering with public pension funds and, working together, are gaining traction. Why?

With few openings on the political front (Republican lock on Congress), liberal activists have shifted focus from K Street to Wall Street. Epic corporate scandals have made it easier to win over skeptical investors. Finally, the internet enables activists to organize quickly. Their advice?

• Monitor the internet, so that you can respond quickly.
• Build relationships with your shareholders (and, I would add, those non-governmental organizations they are teaming up with)
• Speak bilingually. You need specifics to address both financial and ethical issues; "shareholder value as well as shareholder values."

In addition to subscribing to their excellent print publication, we recommend signing up for e-Briefing, "a free monthly update for corporate board directors, delivered directly to your email box."

Petition Seeks to Improve Arbitration Process

Public customers of securities brokerage firms are required to agree to arbitrate disputes using specified forums. Drawing on 30 years of experience serving as an NASD arbitrator and as legal counsel for either claimants or respondents, Les Greenberg recently filed a Petition for Rulemaking (File No. 4-502) that seeks to level the playing field. The Petition requests the creation of rules designed to:

1. specifically permit arbitration panel members, should they elect to do so, to conduct legal research, or, in the alternative, forbid Self-Regulatory Organization (“SRO”) sponsored arbitration forums from restricting arbitrators from conducting legal research;
2. abolish the requirement that a securities industry arbitrator be assigned to each three person panel hearing customer disputes or, in the alternative, require that information presented to a panel of arbitrators by a securities industry arbitrator be revealed to the parties during open hearing;
3. require SROs to conduct continuing evaluations of the ability of every arbitrator on their panels to perform his/her duties, including, but not limited to mandatory peer evaluations;
4. require SROs to train arbitrators in applicable law;
5. require SROs to reveal in pre-dispute arbitration agreements whether their arbitrators are required to follow the law in their decision-making process, the training of their arbitrators in the law, and their process, if any, to evaluate their arbitrators on a continuing basis; and,
6. require the SEC’s Division of Market Regulation to specifically oversee SROs to determine whether they are in compliance with rules adopted pursuant to items (1) through (5), inclusive.

We hope to be able to report the SEC has introduced such a rule within the next few months. However, that is unlikely to happen unless dozens of comments are sent to the SEC supporting the petition. Email your comments directly to the SEC at: Rule-Comments@SEC.gov.  The subject line of the email must include “SEC File No. 4-502.”  Your comments will be posted to the SEC site.

Metro One to Vote on Proxy Advisor Proposal

Shareowners of Metro One Telecommunications [ticker: INFO] are now voting on Mark Latham's Proxy Advisor proposal, which would let shareowners vote to choose a proxy advisory firm paid with company funds. The SEC did not concur with management's arguments for excluding the proposal from the company proxy. Latham will attend the Metro One annual general meeting near Portland Oregon on June 16 to present this resolution. The same proposal was supported by over 20% of shareowners voting on Oregon Steel's proxy in April 2004.

Along with majority vote requirements for electing directors, this is one of the most important types of proposals to strengthen shareholder rights. For more information, subscribe to the Corporate Monitoring Project Newsletter. Also read Latham's innovative paper, Turbo Democracy: A New Business Model for Public-Interest Journalism.

US to Lag in Future SRI

Mercer Investment Consulting recently conducted a study which shows that US investment managers lag behind those in Asia, Australia, Europe and Canada in their belief that socially responsible investing will become the norm within a decade. Of the 195 managers questioned, 28% of those from Asia, 44% from Australia and 42% from Europe feel social and economic performance indicators will be mainstream in five years, compared with 11% of US investment managers. 

Alyson Slater, associate director of the Global Reporting Initiative, says that most US investment managers consider positive returns their only social responsibility, an idea that is fueled by corporate America's preference for prescribed, regulated and mandated reporting. Conversely, "the business culture [in Europe], in terms of sustainability reporting, favors principles-based reporting and the voluntary, flexible approach," he says. According to GRI, which provides sustainability guidelines for companies active in the global marketplace, of the 661 registered participants, almost half are European while only 70 are U.S.-based.

WCFCG Conference Success

Making Corporate Governance Decisions That Work was the theme of the May 12-13, 2005 conference organized by the World Council for Corporate Governance (London) in association with the Centre for Corporate Governance (New Delhi). James McRitchie, publisher of CorpGov.Net, was among the many featured speakers and presented a paper reflecting the conference's main theme, Making Corporate Governance Decisions That Work for Whom? A book containing most of the papers presented is available by contacting info@wcfcg.net.

Indian companies won five of the eight Golden Peacock Awards from the World Council for Corporate Governance for their outstanding performance. Announcing the awards, Robert Hiscox, the Council's Director Communications, said the seven companies were chosen from out of 225 nominated. The global award for corporate governance went to Scottish Power, a UK company ranked 3rd by the FTSE / ISS corporate governance index.

The global award for Emerging Economies went to the Hong Kong Exchange. The global award for Corporate Social Responsibility was received by BT Group, based in the UK. Pritish Nandy Communications PTV, the first publicly traded motion picture company in India, received the award in the category of emerging economy in the private sector while the Oil and Natural Gas Company (ONGC), one of the largest in the world, was selected for the award for the public sector in India. The National Thermal Power Corporation, the largest power company in India, received the Public Sector award for an emerging economy.

ITC, one of India's foremost private sector companies and is moving from tobacco to paper, food, hotel, agricultural exports and forestry to apparel and LIC were chosen for the Golden Peacock Awards in the category of Corporate Social Responsibility in Emerging Economies. Ola Ullsten, former prime minister of Sweden and Chairman of the World Council for Corporate Governance and Madhav Mehra, President of World Council for Corporate Governance jointly presented the awards to the winners at the end of the conference.

I expect even more applicants for the Golden Peacock awards at next year's conference, along with greater attendance by corporations and institutional investors who share WCFCG's goals of improving the quality of corporate governance practices worldwide by promoting greater transparency, integrity, probity, accountability, and responsibility.

Majority Election Proposals Gaining

The Friday Report by ISS (5/20) notes that as this year's proxy season approaches its midway point, "the two issues driving the agenda this season are board-related: changing from a plurality to a majority standard for electing directors, and declassifying boards to provide for annual elections." With results available for 36 firms, the average proposal has won the support of 42% of votes cast, compared with an average support level of 12% for 12 proposals last year.

The highest support levels were posted at Altera (59%) and Advanced Micro Devices (58%), and the lowest (19%) at Amazon.com and Ecolab (22%). The issue is on the agenda at Safeway (on 5/25), and at Home Depot and Hilton Hotels (5/26). In the first half of June, majority elections proposals are slated to be voted on at Albertson's, Wal-Mart, General Motors, TJX, and Supervalu.

Chevedden Report

Votes this week:

• Northrop (NOC), simple majority vote, Fred Barthel, 68%.
• FirstEnergy, simple majority vote, Ray T. Chevedden, 71%.
• JPMorgan, recoup unearned management bonuses, Ray T. Chevedden, 37%.
• Alaska Air. We are having trouble getting results for proposals, one of which is sponsored by John Chevedden. Annual election and simple majority vote are expected to exceed 50%.

Votes this month:

The following are Chevedden-affiliated proposals which were taken over by companies and adopted at May 2005 annual meetings:

• Bristol-Meyers, simple majority vote, Charles Miller's '05 proposal superceded by BMY proposal, 85%.
• Northrop (NOC), declassify, John Chevedden, 97%.
• Raytheon, declassify, John Chevedden, 85%.
• Maytag, declassify, Ray T. Chevedden, 86%.
• The Sabre Group (TSG), declassify, John Chevedden – TSG said it obtained the required votes.
• Maytag, poison pill, Nick Rossi – The Maytag pill expiration date was brought forward to 12-05.
  

Top 50 Plaintiffs' Law Firms

Securities Class Action Services (SCAS), owned by ISS, released its annual list of the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2004 in which the law firms served as lead or co-lead counsel.

The top five law firms on this year's "SCAS 50" list include Bernstein Litowitz Berger & Grossman, Barrack, Rodos & Bacine, Milberg Weiss Bershad & Schulman, Chitwood & Harley and Berman DeValerio Pease Tabacco Burt & Pucillo. …"Securities class action settlement amounts reached record highs in 2004, at more than $5.98 billion," said Bruce Carton, Vice President of ISS's Securities Class Action Services.

"The firms on our 'SCAS 50' list were the leaders in obtaining these recoveries, with one firm, Bernstein Litowitz Berger & Grossman, having a hand in more than one-half of last year's settlement dollars." Bernstein Litowitz Berger & Grossman also achieved the highest average settlement amount among law firms with at least 5 settlements, at $288 million per suit. "The average settlement amount is an important measure because it is an indicator of which law firms are consistently bringing and settling high-impact cases," said Carton. Carton added that the law firm of Milberg Weiss Bershad & Schulman led all firms with respect to the total number of final settlements, with 43 settlements.

Donohue's End May Be Near

Without a true coordinated campaign, Union Pacific shareholders withheld 15% of shares voted from Donohue (204 million for v 36 million withheld). Clearly a sign. Will we see shareholder proposals next year asking companies to drop their membership with the US Chamber of Commerce?

The past work of the compensation committee at Union Pacific raises questions about the committees role in setting fair pay rewards. In 2001, Union Pacific's board approved an incentive pay program that would grant cash and stock at the end of a three-year period. The awards would be granted, the program stated, if the company's stock traded above $70 for 20 days in a row or if company earnings for the period totaled at least $13.50 a share. In late 2003, it became clear that the company might miss both targets. The compensation committee chose to include the sale proceeds from spinning off the Overnite Corporation in the earnings computation, which in turn put the executives over the top for the cash and stock awards.

What makes this maneuver unusual is that proceeds from a sale are not typically included in earnings. For 2003, Chairman and CEO Richard Davidson, Union Pacific's chief executive, received $9.5 million in salary, long-term incentive pay and other compensation as well as $4.5 million in restricted stock and 325,000 options. Because the members of the compensation committee have failed in their duty to Union Pacific stockholders as a result of the questionable earnings computation, we will withhold votes from long time directors and compensation committee members Thomas Donohue, Spencer Eccles, and Stephen Rogel. (Recommendation of AFSCME Employees Pension Plan, for more information contact Cheryl Kelly or Tiffany Ricci at 202-429-1145)

Proxy Advisor Proposal at Metro One Telecommunications (INFO) 6/16/05 

“WHEREAS many shareowners lack the time and expertise to make the best voting decisions, yet prefer not to always follow directors’ recommendations, because of possible conflicts of interest;
 
WHEREAS shareowners have a common interest in obtaining sound independent advice, but often insufficient private interest to justify paying for it individually (the “free-rider” problem);
 
THEREFORE BE IT RESOLVED that Metro One Telecommunications, Inc. shareowners request the Board of Directors to hire a proxy advisory firm for one year, to be chosen by shareowner vote. Shareowners request the Board to take all necessary steps to enact this resolution in time to hold the vote at the year-2006 shareowner meeting, with the following features:

• To insulate advisor selection from influence by Company’s management, any proxy advisory firm could put itself on the ballot by paying an entry fee, declaring the price (no more than $8,000) for advisory services for the coming year, and providing the address of a website describing their proposed services and qualifications.
• The winning candidate would be paid its declared price by the Company, and make advice freely available to all Company shareowners for the subsequent year, on all matters put to a shareowner vote except director elections.  (Advice on director elections is excluded to satisfy SEC rule 14a-8(i)(8)).
• Performance of the advisory firm would not be policed by Company’s management, but rather by gain or loss of the advisor’s reputation and future business.
• Brief summary advice could be included in the Company proxy, with references to a website and/or toll-free phone number for more detail.
• The decision of whether to hire proxy advisory firms in later years would be left open.

Supporting Statement
 
The proxy advisor would be paid with Company funds to give shareowners an independent professional opinion.  Independence would be further enhanced by having shareowners choose the proxy advisor.  This could also increase competition in the proxy advisory business, because new entrants could earn fees on a company-by-company basis, without covering thousands of companies.
 
Example of shareowners’ lack of time and expertise: “I tried to read the proxy statement, but I still don’t understand whether the change is shareholder friendly or not.”
 
Example of mistrust of directors’ recommendations (Harris Poll, September 2003):  “Support for corporate management nominees is also mixed with majorities of shareholders having withheld support from a management nominee.”
 
The conflicts of interest among managers, directors and shareowners are described in Robert Monks and Nell Minow’s 1996 book Watching the Watchers, along with shareowners’ “free rider” and “rational ignorance” problems.
 
Articles discussing the company-pay system for proxy advice are on the Corporate Monitoring website.

(Editor's note: We believe proposals such as the above represent the most effective means to enable intelligent voting by most individuals and small institutional investors.)

Majority Vote Momentum Grows

Proposals won 57% support at Raytheon, 52% at Freeport McMoRan Copper & Gold Inc., 51% at Federal Realty Investment Trust, 46% at Motorola Inc., 45% at Bristol-Myers Squibb Co., 43% at Verizon Communications and 42% at General Growth Properties. (The ISS Friday Report, 5/6/05)

Social Choice for Social Change: Campaign for a New TIAA-CREF

Are You in the TIAA-CREF Retirement System? (If not, you can still help.) Do you want your money to help build housing and businesses in low-income communities? To support socially and environmentally responsible products and services? Spend five minutes to support proposed changes in TIAA-CREF’s socially responsible fund.

In the 1980s, participants lobbied the pension giant TIAA-CREF (TC) for five years to set up a socially responsible fund, the Social Choice Account. Now they are pushing for an improved fund with practices that are becoming standard in socially responsible investing. The effort is endorsed by many activist groups, and individuals like Noam Chomsky, Howard Zinn and Benjamin Barber.

CONTACT TC and ask them to modify the Social Choice Account by:

1. investing in low-income area community development;
2. investing in social venture capital for companies pioneering socially and environmentally responsible products and services; and
3. engaging in socially responsible shareholder advocacy (vote their stock shares to influence corporate behavior).

If you are a TC participant, let them know. Call CEO Herbert Allison at 800-842-2733; 212-490-9000 (ask for him and leave a message with his assistant). You can email him at HAllison@tiaa-cref.org, but a call has more impact. Once a month, that’s all the campaign asks, to keep up the pressure.

To receive campaign updates (every two to four weeks). Contact njwollman@manchester.edu to be added to the list. Be part of a national coalition of activist groups that is pushing for TC to be more socially and environmentally responsible in its various investments.

The Chevedden Report

77% yes-vote for shareholder proposal at Baxter's Chicago meeting May 3
5) Annual Election of Each Director
Sponsor: Charles Miller

66% yes-vote at Boeing
Boeing yes-votes as announced by the Chair of the annual meeting on May 2:
6. Declassify the board 66%
7. Simple majority vote 65%
8. Shareholder committee to address ignored majority votes 29%
9. Always independent board chair 25%
These percentages may be conservative because some votes that were not cast as no-votes were counted as no-votes.

In addition to the 66% yes-vote at Boeing, shareholders spoke volumes in giving only a 71% yes-vote to the 3 directors who had ignored majority shareholder votes on shareholder proposals in 2004. By contrast the one director new to the board received a 93% yes-vote.

Boeing not firing on the corporate governance cylinder "It was said earlier in the meeting that Boeing was firing on all cylinders," Chevedden said in one of many salvos directed at the board. "Well, (Boeing's) not firing on the corporate governance cylinder, that's for sure."
Source: Missteps dull Boeing's glow By Tim McLaughlin, Post-Dispatch 05/02/2005

74% yes-vote at CSX for shareholder proposal item 4 on May 5
4 – Adopt Simple Majority Vote
Sponsor: Victor Rossi

41% yes-vote at General Dynamics
Shareholder Vote on Golden Parachute proposal at General Dynamics May 4
41% yes
57% no
Proponent: John Chevedden
This represents a substantial vote of support and this was the first time for this topic on the GD ballot.

52% yes-vote at Sierra Pacific (SRP) on May 2
Topic: Subject Poison pill to shareholder vote
Proponent: Chris Rossi
The 52% is conservative because it includes the broker non-votes as no-votes. Of course the brokers can't vote on this topic.

85% vote at Raytheon (RTN) on May 4 for a shareholder proposal taken over by management – annual election of each director.

As a shareholder proposal, sponsored by John Chevedden, this topic previously won strong support.
Year Rate of Support
2000 56%
2001 66%
2002 61%
2004 78%

85% vote at Bristol-Myers for shareholder proposal taken over by management. In October 2004 Charles Miller of Great Neck, NY submitted a simple majority vote proposal to Bristol-Myers (BMY). In Dec. 2004 BMY set in motion to submit this topic as a binding management proposal to shareholders.

Then on May 3, 2005 BMY shareholders cast 85% of outstanding shares to approve simple majority vote.

International Review

Editing the most prestigious academic journal on corporate governance becomes more difficult as the volume of studies and essays produced increases. Yet, Christine Mallin continues to sort through submissions, maintaining the highest quality.

The March 2005 edition of the Corporate Governance: An International Review weighs in at 350 full-size pages. The issue includes an article by Bob Monks that suggests reforms in five areas. It can also be found on his site at ragm.com. See "Corporate Governance - USA - Fall 2004 Reform - The Wrong Way and the Right Way."

You can also view Audit Committee Independence and Disclosure: choice for financially distressed firms by Joseph V. Carcello, Terry L. Neal and The Link Between Earnings Timeliness, Earnings Conservatism and Board Composition: evidence from the UK by Wendy Beekes, Peter Pope, Steven Young.

Of course, most of the articles are only available to subscribers or at your library in hardcopy. The Journal explores such diverse topics as A Portrait of Professional Directors: UK Corporate Governance in 2015 to "Insider Ownership Structure and Firm Performance: a productivity perspective study in Taiwan's electronics industry."

Ashcroft Group to Provide Corporate Governance Advice

Former Attorney General John Ashcroft is starting a consulting firm, called the Ashcroft Group, with longtime aide David Ayres and prominent Washington lobbyist Juleanna Glover Weiss, a former press secretary to Vice President Dick Cheney. "The Ashcroft Group will represent big companies with big problems," Weiss said. The firm will advise clients on everything from homeland security and law enforcement to issues involving corporate governance.

Ashcroft considered it a major success that terrorists did not strike inside the United States again on his watch. Will he be able to help companies keep shareholders at bay as well? He will certainly have an inside track to the White House. (Ashcroft to start consulting firm, Columbia Daily Tribune, 5/4/05)

The announcement followed by one day a release by the Business Roundtable of its guides "Committed to Protecting America: CEO Guide to Security Challenges" and "Committed to Protecting America: A Private Sector Crisis Preparedness Guide." "Just as the federal government is reforming its procedures and testing its security preparedness through exercises such as TOPOFF 3, businesses must revise corporate governance practices and evaluate their crisis plans to address important security issues in this new world," said Frederick W. Smith, Chairman, President and Chief Executive Officer of FedEx Corporation and Chairman of the Roundtable's Security Task Force.

Governance Important in Singapore

PricewaterhouseCoopers, the Investment Management Association of Singapore, and the Corporate Governance and Financial Reporting Centre of the National University of Singapore Business School jointly surveyed institutional investors and found that 81% said good corporate governance is an incentive for investment in Singapore.

A high proportion said they want to see improvements in the enforcement of existing rules and regulations, as well as an updated framework to reflect emerging