October 2005

Grade Inflation or Truly Outstanding?

Business Week carries an article, Stars of the Boards, outlining recent awards by the Outstanding Directors Institute. "The group presents a list of candidates -- nominated by fellow directors -- to an advisory board composed of sitting corporate directors and chief executives. They help determine the final list. To make the cut, directors have to be clearly aligned with shareholders' interest, devote significant time to their jobs, be deemed a key player by fellow board."

Former U.S. Senator Bill Bradley makes the cut for may be best known for giving Starbucks guidance and contacts for expanding globally, as well as for helping to design a health-care plan for employees. Former Smith College President Jill Conway, pioneered a plan to tie stock option exercise prices to executive performance on the Colgate-Palmolive board. Inter-Con Security Systems CEO Rick Hernandez, Jr., wins accolades for helping turn around Nordstrom as a director, in part from his own experience in running a family business.

The article lists several more and their achievements. Les Greenberg, of the Committee of Concerned Shareholders, asks if getting awards for doing what all directors should be doing isn't a bit like grade inflation in our schools. I wonder why directors are grading other directors for "being clearly aligned with shareholders' interest." Shouldn't a panel deciding that be made up of shareholders? I suspect a list drawn up by shareholders might include Ralph V. Whitworth, Herbert Denton, and Andrew Shapiro who are well known for turning companies around and adding shareholder value. (for additional examples, see The Turnaround Tactician)

Public Funds Move From Hedge Funds

When the ratio of assets to liabilities plunged from 95% in 2001 to 80% in 2002, public pension plans scrambled into hedge funds, hoping to increase yields. Now that funding ratios have improved to 88%, fewer are showing such interest, according to recent Wilshire Consulting study of assets and liabilities of 104 city and county retirement systems. Steven Foresti, managing director at Wilshire, commented: "Now institutions that are moving to hedge funds are thinking about it and moving in a more strategic way." Foresti predicts that hedge funds will not exceed 10% of a city or county pension fund portfolio. (Pension Trustees' Interest in Hedge Funds Wanes, MMExecutive, 10/12/05)

Still, Wilshire forecasts a long-term median return on city and county pension assets equal to 7.2% per annum, which is 0.8 percentage points below the median actuarial interest rate assumption of 8.0%, so some pressure continues. Additionally, demand for hedge funds as a tool for activists could grow. Cash at S&P 500 industrials recently stood at $613 billion. As a percentage of stock-market value that's higher than at any time since the early 1980s. Shareholder's want it put to productive use. If the company won't use it, shareholders will want it back. Jesse Eisinger argues the need for hedge funds with a long-term approach. (Hedge-Fund Activism Wins Plaudits, But the Focus Is Really on Firms' Cash, WSJ, 10/12/05)

Option Grants Decline

The economic value of stock option grants at the nation's largest corporations declined by almost 60% over the last three years from a total of $118 billion to $51 billion, according to a new Watson Wyatt survey. The survey also found that, using the Black-Scholes formula, the economic value of stock options granted at the typical company declined 64% from $103 million in 2001 to $37 million in 2004, according to a Watson Wyatt press release. The decline occurred in all industry sectors in spite of stock market increases, and was attributed to fewer stock options being granted and a decrease in the size of grants that are offered. Significantly, companies that provided higher total long-term incentive opportunities to their CEOs over the last five years did not outperform those that provided lower award opportunities.  (PlanSponsor.com, 10/12/05)

FTSE Companies Need Improvement

Less than half of the UK's top 100 companies are complying with the Combined Code, according to the Association of British Insurers. However, 96% are meeting performance evaluation and independent directors guidelines. which are both met by 96 pct of the FTSE 100. (Less than half FTSE 100 companies meeting corporate governance standards - ABI, Forbes.com, 10/12/05)

Home Depot Cuts Through Bureaucracy

"In 1991, Home Depot became one of the first U.S. companies to mandate store visits by outside directors so they could spot trends and better advise senior management. Now, many boards rub shoulders with workers through site visits. Experts say the Atlanta-based retailer has broken ground again with the addition of "functional" visits to areas such as finance, human resources, operations and information technology..."

"Governance watchdogs agree. 'It's a great idea,' because functional expertise bolsters boards' monitoring of management, says Roger Raber, president of the National Association of Directors in Washington. A functional visit 'demystifies' the directors, says Paul Lapides, director of the Corporate Governance Center at Kennesaw State University in Kennesaw, Ga. "I'm not aware of anybody else who does [functional visits] in a formal way." (Home Depot Board Gains Insight From Trenches, WSJ, 10/10/05)

Critics charge that such visits encourage directors to rely to heavily on insiders. However, if directors continue to monitor outside sources, such visits are entirely a plus. They allow dissenting opinions to filter up much more quickly in the organization and the information gathered prompts directors to ask more difficult questions of management. Store visits and functional visits set Home Depot ahead of most in this one area of communications. To improve communications even further, they could also begin a dialogue with shareholders. Morningstar holds monthly "forums" to answer questions from any investor or prospective investor. Investors submit written questions by email. Morningstar's director of investor relations digs up the answers and reports to shareholders and the SEC.

Cox Calls for Democracy
 
Hedge fund operator Phillip Goldstein sent the following e-mail to Phyllis Plitch, a frequent writer for the Dow Jones Newswire and Wall Street Journal. I was copied on the message and believe readers will find it interesting.

We have spoken once or twice in the past about proxy matters.  Perhaps you may recall that I manage a few hedge funds and use an activist approach to unlock value from our investments which include closed-end funds.  Our website is www.bulldoginvestors.com

I am writing to you because you cover shareholder rights issues.  I just read Chairman Cox’s very fine speech which he gave today at the National Endowment for Democracy.  See http://www.sec.gov/news/speech/spch100605cc.htm

I will give Mr. Cox the benefit of the doubt and assume he is not aware of the irony of passionately promoting democracy around the world while shareholders right here in America live under a one-party electoral system that Fidel Castro would envy.  Forget about Donaldson’s lame highly conditional proxy access proposal.  Even when shareholders are willing to incur the cost of conducting a proxy contest, it is not uncommon for management to freely use corporate assets to pay lawyers to frustrate their efforts to elect a competing slate.  (We have made demand on The New Germany Fund to sue Sullivan & Cromwell for malpractice in promoting an anti-shareholder preclusive director qualification bylaw.  Let me know if you want to see the documents on that.)  When we asked the SEC staff if the board of directors of a closed-end fund, which under the 1940 Investment Company Act (ICA) is required to be elected by shareholders, could avoid a challenge by imposing burdensome qualifications on shareholder nominees, the staff’s response was that was OK because “the right to vote is not totally meaningless . . . when shareholders can reject nominees but cannot influence nominations.”  I am not making this up as you will see in the attachment.
 

Perhaps you can ask Mr. Cox if he shares the staff’s view as to what the standard should be for an election required by the ICA, a law that was passed to address abuses of investors by management (see section 1 of the ICA at http://www.law.uc.edu/CCL/InvCoAct/sec1.html).  

I would add, it is ironic that Cox would tell those gathered at the National Endowment for Democracy that "democracy is like oxygen. You might not think of it at all … until you're deprived of it." Shareholders have been deprived of democracy for a long time. I would be pleased if Mr. Cox would take up the issue of democracy in corporate governance. I say to you Mr. Cox, tear down the wall that prohibits shareholders from using the proxy of the corporations they own to nominate and elect truly independent directors.

You say "the Soviet Union fell because America and its leaders instinctively trusted the power of freedom." I ask you to trust that power as well. Give shareholders the freedom to hold our directors and our companies accountable. Don't let them hide behind a wall of no action letters from the SEC. You say, "democracy requires open debate, civility, and a solid understanding of your opponent's point of view-if only to defeat him or her through the force of reason." Without access to the proxy, there is no open debate, no exchange of ideas, not understanding of the other's point of view.

You say "the challenge of preserving liberty in America, and the challenge of extending liberty throughout the world, are as one." How about using your powers at the SEC to extend democracy to some of the most dynamic organizations ever conceived by the human mind, the corporation?

As Gourevitch and Shinn note in their book Political Power and Corporate Control, the corporate governance framework "creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” With billions of dollars spent by oligarchic corporations on political contributions and lobbying, many would question if our current political system is actually democratic.

The growing power of corporations is a concern of many, both here and abroad. In fact, resolutions introduced by US shareholders requesting disclosure of corporate political contributions gained ground in 2005. As reported by Institutional Shareholder Services, "advocates of this type of reporting have suggested that companies use a series of organizations to filter money through to local, state and federal political entities without adequate disclosure to shareholders or appropriate internal controls...the resolution at Plum Creek Timber Co. received support from a notable 56.18 percent of shareholders." (The Friday Report, 10/7/05)

Wouldn't we be on firmer ground in our attempt to convert other countries and other peoples (including potential terrorists) to democracy if we instilled some democratic values into what many believe is our dominant institution? Mr. Cox, tear down that wall. Don't let incompetent, ineffective, or even simply unpopular directors hide behind a wall of SEC rules that deny us the equivalent of oxygen, access to the corporate proxy. Let shareholders breathe!

Political Power and Corporate Control

According to Gourevitch and Shinn, “corporate governance - the authority structure of a firm - lies at the heart of the most important issues of society”… such as “who has claim to the cash flow of the firm, who has a say in its strategy and its allocation of resources.”

The corporate governance framework shapes corporate efficiency, employment stability, retirement security, and the endowments of orphanages, hospitals, and universities. “It creates the temptations for cheating and the rewards for honesty, inside the firm and more generally in the body politic.” It “influences social mobility, stability and fluidity… It is no wonder then, that corporate governance provokes conflict. Anything so important will be fought over… like other decisions about authority, corporate governance structures are fundamentally the result of political decisions.” If the authors haven't hooked you on the importance of corporate governance by these statements on page 3, you aren't breathing.

I have long argued that creating sustainable wealth and maintaining a free society both require that institutional investors act as mediating structures between the individual and the dominant institutions of our time, the modern corporation. Democratic corporate governance will reduce the corrupting influence of unaccountable power on government and society. At the same time, by transforming corporations into more democratic institutions, institutional investors will instill them with their own values and will unleash the wealth-generating capacity of "human capital."

The model Gourevitch and Shinn set forth in Political Power and Corporate Control: The New Global Politics of Corporate Governance uses corporate governance as the dependent variable. “The arrow of causation flows from preferences to political institutions to corporate governance outcomes.”

Whose preferences? Key, are those of owners, managers, and workers. How? “To obtain their preferred corporate governance outcome, they have to win in politics” by mobilizing allies outside the firm in systems the authors categorize as largely majoritarian or consensus. A dynamic feedback loop is thus created: "institutions shape policies that influence preferences. At the same time preferences induce institutional arrangements that increase the chances of preserving the policies desired by the preferences."

Treating the categories of owners, managers, managers and workers as homogeneous blinds us to coalitions. Through an analysis of available datasets, the authors demonstrate that outside owners are more likely to ally with workers to support transparency. Workers seeking to preserve their jobs are more likely to ally with managers; whereas, concern for pension funds motivates transparency and ability to exercise shareholder voice. Firm-centered managers prefer blockholding owners; those seeking maximum pay tend to support minority shareholder protections and vigorous labor markets.

Variation in corporate governance is not necessarily a function of economic stages, technology, or legal framework. Instead, Gourevitch and Shinn provide substantial support for the argument that “corporate governance arises from incentives created by rules and regulations that emerge from a public policy process, reflecting the power of alternative coalitions.”

Although most academic writers and the press emphasize minority shareholder protections, Gourevitch and Shinn emphasize the need to also account for “degrees of coordination,” which shape incentives to concentrate shareholding or sell down to a more diffuse market. These include product-market competition, price and wage mechanisms, labor relations, and social welfare systems. Each coalition seeks to persuade society-at-large to provide public policies in corporate governance that favor their own interests.

Systems shift when economic conditions change in big way. One of their most interesting discussions concerns their assertion that pension funds, which they define to include all forms of deferred compensation plans, may be most important as the next phase unfolds. “To understand the future politics of corporate governance debates, we will have to track fights about pension reform.” “Pension plan regulations may turn out to be the tail that wags the corporate governance dog.”

Defined benefit plans held 27% of all U.S. equities in 1989-95 but fell to 21% more recently. Mutual fund ownership, on the other hand, has climbed from 8% in 1990 to 28%. As more defined benefit plans (often jointly administered with employee or union representatives) are dropped, the future of corporate governance reform may lie with mutual funds. That tail, using the above analogy, seems to wag whenever management speaks.

They are required by law, as fiduciaries, to represent the interests of the investors whose money they oversee, not their own business interests, which may including landing contracts to administer 401(k) plans. Recently, Vanguard, Putnam, and Fidelity voted against shareholder proposals that would require directors standing for election to stay on only if a majority of votes are ''yes.'' Clearly, these funds were not voting in the best interest of owners. Mutual funds used to turn over 17% of their portfolio each year (1950-1965) but averaged 91% per year in 1990-2005, prompting John Bogle to remark the “rent-a-stock industry has little reason to care” about good corporate governance.

Gourevitch and Shinn find that “as worker-citizens acquire assets, they develop preferences for shareholder protections, thus adding pressure to the potential for a transparency coalition” and “assets in the hands of institutions that are accountable to their owners are likely to pay more attention to governance than are assets in the hands of autonomous managers.” Perhaps an actual power shift will follow as mutual fund investors demand a role in mutual fund governance and those funds begin to represent their true preferences with corporations. If that happens, we might see a book that looks in reverse, tracing the effects of corporate governance outcomes on political institutions. "Socially responsible investment" will then take on new meaning and dimension.

In the meantime, Gourevitch and Shinn, note enough interesting correlations and observations to make the book must reading for any corporate governance policy analyst, especially those with global concerns. Here is a small sample:

• Blockholding and minority shareholder protections are negatively correlated.
• Minority shareholder protections and share price are positively correlated.
• Blockholding dips after increased minority shareholder protections are likely the result of sales by “new money” entrepreneurs, rather than old money blockholders (who may fear the tax collector).
• Blockholding may be preferred when uncertainty is high.
• State-owned enterprises are the most aggressive users of ADRs.
• Money flows toward firms and countries that provide shareholder protections. “No other group can have quite this direct an effect on the economy…the economic vote of investors counts greatly against the mass of votes in elections.”
• Where job security is strong, diffusion is weak, and minority shareholder protections are weak.
• Weak intermediate institutions of finance, investment, pensions and stockmarkets are correlated with little voice for shareholder rights.
• “The U.S. Securities regulation system assumes that institutional investors and reputational intermediaries are the agents of investors.” “Yet it has become increasingly clear to many observers that these private actors have multiple, complex incentives…”
• “As much as 10 percent of the total ownership of U.S. public firms was transferred from the existing stockholders to senior managers through stock option grants between 1990 and 2000.”

Their treatment of the definition of corporate governance from various perspectives is also an eye opener. Here's a flavor of that discussion:

• Where the political scene is capital versus labor, "the investor coalition defined corporate governance in terms of 'meeting the challenge of financial globalization,' adherence to the OECD Principles, fulfilling 'international standards of governance in the global competition for capital.'"
• From a labor power position, "blockholders and foreign portfolio investors were castigated as selfish oligarch in league with the heartless IMF and the faceless gnomes of Zurich."
• Those favoring the corporatist compromise made much of managers and workers "being in the 'same boat' together, of corporate governance choices that ensured that firms 'served the nation' in a 'stable' economy - with owners dismissed as oligarchs or 'speculators.'"
• Countries shifting transparency coalitions and managerism alignment "witnessed predictable invocations of corporate governance that protected 'the little guy, ' the individual investor,' the widow and orphans," such as speeches by U.S. SEC commissioners.
• "Meanwhile across the alignment divide, managers compete to hijack the notion of corporate governance for their own purpose...'building shareholder value."

Shareholder value is partly about efficiency. But Gourevitch and Shinn raise serious issues of distribution, job security, income inequality, social welfare. Will firms of the future be efficient at creating a healthy environment and general prosperity or efficient at putting money into the pockets of CEOs? Political Power and Corporate Control provides a groundbreaking guide, based on empirical evidence, for anyone concerned with the direction of corporate governance and society.

Call to Action By New York Times

The New York Times (Who's Afraid Of Shareholder Democracy?, 10/2/2005) carried an article by Gretchen Morgenson who questions how mutual funds, such as Vanguard, Putnam, and Fidelity, can justify voting against shareholder proposals that would require directors standing for election to stay on only if a majority of votes are ''yes.''

They are required by law, as fiduciaries, to represent the interests of the investors whose money they oversee, not their own business interests, which may including landing contracts to administer 401(k) plans. Morgenson quotes Glenn Booraem, a principal at Vanguard Funds, twisted attempt to justify their vote in opposition:

Generally, we did vote against those types of proposals from the general perspective that we were concerned with some of the practical applications about the standards that were proposed, such as how the majority standard would work from a corporate law perspective if a full board wasn't elected, if there weren't sufficient directors that got a majority vote to enable the board to continue to operate.

John Hill, chairman of Putnam Funds, says they have been focusing on executive compensation and dilutive stock awards. Majority votes for directors are on its agenda now. "My board has got to vet it, but I think there will be sentiment to support majority voting going forward," he said. However, the law doesn't say fiduciaries can vote with management until they get around to analyzing the impact on investors. They have a fiduciary duty to do that analysis before they vote and frankly I don't see how any fund can justify a vote in opposition.

Morgenson suggests that her readers write to David C. McBride, a partner at Young Conaway Stargatt & Taylor LLP, who is chairman of the corporate law section of the Delaware State Bar Association that will recommend amendments to the state laws relating to corporations, perhaps are early as next April or May. For an example, see a 6/15/2005 letter from the Council of Institutional Investors.

Morgenson also reminds her readers "who own mutual funds that vote against these proposals should also let those companies know if they are displeased with their stances." She notes that "some 36 companies have changed bylaws to require majority votes for directors...but at most companies, shareholder democracy remains an oxymoron. Investors have the tools to change that. Let's see if they do."

I'm delighted to see Ms. Morgenson informing her NYTimes readers on this issue. I only wish she had included contact information. Without it, most of her readers are unlikely to take action and, unfortunately, our readership is not nearly as extensive. For Vanguard Funds, Putnam Investments, or Fidelity click "contact us" in the upper right and fill out the form.

As far as democracy goes, requiring those who win to get more than 50% of the vote seems so rational. Yet, even this nominal reform often takes far too long. CalPERS, long known as a corporate watchdog, finally adopted similar regulations governing their own board elections that apply for the first time to their current elections. (Nine seek seats on CalPERS board, SacBee, 10/1/2005) Unfortunately, CalPERS opted for an expensive runoff process, instead of the much more economical instant runoff form I urged them to adopt in 1998-99 (comments to CalPERS).

September 2005

Democracy, Not Corporate Raiders

Henry G. Manne is right; any move by Cox to require greater disclosure is unlikely to solve the problem of excess pay; lack of shareholder control is the central problem.  (The Follies of Regulation, WSJ, 9/27/2005) However, the solution is not a return to the days of corporate raiders. 
 
Relying on a plunging share price to force change is hardly ideal.  Even after much of the wealth has been destroyed, takeover and the transition to profitability are expensive, generally ranging between 2-4% of already discounted firm value. There are also heavy costs to society in the form of layoffs, lost wages, divorce and suicide, as well as lost taxes and charitable contributions.
 
In contrast, the cost of proxy driven changeovers in control has run "considerably below 1%,” according to proxy advisor Institutional Shareholder Services.  In 2002 Les Greenberg and I petitioned the SEC to allow shareholder access to the proxy to elect their nominees. 

The SEC proposed a watered down version in 2003, which died, in part because of its complexity. Cox should be reexamining those proposals. Elections, even corporate elections, should give voters real choices. Give democracy a chance.

Dumpster Diving

Compliance Week (9/27/2005) carries an article "Governance Data Show 'Smart Money' Is Bottom Feeding." "The notion that investors are seeking the most shareholder-friendly companies—and are selling or eschewing the least friendly companies—appears, at best, a one-dimensional view. More aggressive investors—particularly hedge funds and value-oriented institutional and mutual fund investors—know very well that some of the best opportunities for growth are at companies that have the worst, most arrogant governance practices, and lists like GMIs are being used as a roadmap of opportunity."

Value investors have been racking up 20-25% return rates by investing in companies that have both value and poor governance. It goes on to discuss current investors in Blockbuster, King Pharmaceuticals, Telephone and Data Systems, Tenet Healthcare and Freddie Mac. Value investors mentioned included Lord, Abbett & Co., Wellington Management Company, Longleaf Partners, Gamco Investors and Gabelli funds, Pacific Financial Research, and Guy Wyser-Pratte.

Another excellent source for news in this area is Maureen Nevin Duffy's Turnaround Tactician.

Lead Director Trend

A Frederic W. Cook & Co. survey on executive compensation practices found that 40 of the top 100 NYSE companies and 27 of the top NASDAQ companies have created lead director positions, which usually offers additional compensation in the amount of $15,000 to $20,000. The prevalence of ownership guidelines continues to increase as companies seek to align directors’ and shareholders’ interests. In particular, 67% of NYSE companies and 26% percent of NASDAQ companies disclose either director ownership guidelines or share retention requirements.

ESOP Employees Richer

Employee stock ownership plans (ESOPs) in S corporations wind up more richly funding workers' retirement plans than workplace 401(k) plans, according to a new survey by the National Center for Employee Ownership.  NCEO found that median account balances for S ESOP participants ranged from $75,000 to $100,000, while 401(k) plan median account balances ranged from $20,000 to $22,000.  The report attributed the difference in account balances to evidence that companies tend to make large annual contributions to ESOPs, based on the survey of 16 companies. (Plansponsor.com, 9/26/2005)

Avnet Adopts Majority Election Requirement

Avnet Inc. (NYSE: AVT) announced that its board of directors has amended the company's Corporate Governance Guidelines to include a provision that any director who receives a greater number of votes "withheld" from his or her election than votes "for" such election shall submit to the board a letter of resignation for consideration by the Corporate Governance Committee.

Chevedden Report: FedEx Proposal Wins 65% Approval

FedEx holder proposal wins 65% approval based on 154 million yes votes and 81 million no votes.

Proposal 4 topic:
Adopt Simple Majority Vote standard in place of 80% vote requirements.
John Chevedden, the proponent said, "Hopefully FedEx will adopt this resolution topic which was adopted just last week by ConAgra (CAG) in response to what began as a shareholder proposal."

At the FedEx 2003 annual meeting two-thirds of shareholders voted for annual election of each director as a shareholder proposal and FedEx subsequently adopted this method which was in effect at today’s annual meeting.

Call for Truly Independent Auditors

In a recent article entitled Wanted: Directors With A Backbone (The Hartford Courant 9/25/05), Andrew Leckey laments the ineffectiveness of giant institutional investors in curbing exorbitant executive compensation. At the recent Directors Summit they “expressed the same exasperation” he hears from readers.

"Executive compensation is a window to the boardroom of a company because the shareholders are not in the boardroom," said Linda Scott, director of corporate governance for TIAA-CREF, which has more than $350 billion in combined assets under management. "Some perks for executives can indicate board members are not being diligent."

"Transparency isn't working," says Christianna Wood of CalPERS. "We favor performance-based components," such as return on equity, rather than earnings per share, which is more easily manipulated. Gail Hanson of SWIB wants boards to guidelines when they look for board talent.

I expect they same concerns will be discussed at the CII Conference. Of course, the ultimate solution to lack of director backbone is to make directors directly accountable to owners by opening up the corporate proxy to their nominees. However, since that doesn't appear to be on SEC Chairman Christopher Cox's agenda much effort is currently going into proxy resolutions and bylaw amendments calling on companies to require directors get a majority of votes cast and making withhold votes meaningful.

I'd like to see substantial debate at CII on the issue of auditor independence. If, for example, CII endorsed Mark Latham's auditor independence proxy proposal, we would expect to see auditors to complete their entire review from a shareholder's point of view. Latham appears to have given up on the proposal for now because the SEC keeps issuing no action letters. (See opposing argument, Latham's rebuttal and the SEC's no action letter) Attention from CII and its members could revive this approach or might come up with something even better.

After Enron it is hard for me to believe selecting the auditor should be considered "ordinary business." Requiring independent directors on the audit committee doesn't resolve potential conflict of interest issues when shareholders have little or no voice in selecting directors. Latham's proposal to allow shareholders a stronger voice in selecting the auditor is worth examination by CII. If implemented, auditors might begin to go beyond box ticking and report on the efficiency and effectiveness of manager decisions, as well as the soundness of the compensation committee's recommendations.

Auditing for shareholders would result in a whole different slant than auditing simply to standards aimed at uncovering error and fraud, mostly for potential purchasers so that they can accurately appraise current value. A market for auditor reputation (which my Latham's proposal would encourage) could contribute substantially to raising the quality of audit standards.

After they fill up on popcorn at their private screening of "Enron: Smartest Guys in the Room," I hope someone will raise the issue...with all that went down with Aurthur Anderson, isn't it time to stop viewing selection of the auditor as just ordinary business?

Majority Vote Gains

Microsoft joins Pfizer, Circuit City, and Walt Disney in requiring directors who receive a majority of "withhold" votes on the annual meeting ballot to submit his or her resignation to the board. (Microsoft Gives Holders More Say in Board Votes, 9/23/05, WSJ)

Chevedden Report: ConAgra (CAG) Update

Months before the annual meeting shareholder William Steiner submitted a proposal to Declassify the Board of Directors and shareholder Vanessa Rossi submitted a proposal to Repeal Supermajority Voting Provisions. Mr. Steiner and Ms. Rossi agreed to withdraw their proposals in return for ConAgra including these proposals on the Sept. 22 annual meeting ballot as binding management proposals:

Item 2. Management Proposal - Declassify Board of Directors

Item 3. Management Proposal - Repeal Supermajority Voting Provisions of Article XIV of the Certificate of Incorporation

Item 4. Management Proposal - Repeal Supermajority Voting Provisions of Article XV of the Certificate of Incorporation

ConAgra Foods Holds Annual Meeting of Stockholders
Thursday September 22, 3:19 pm ET
With Key Initiatives And Solid 2006 First-Quarter Performance, Company Has "Foundation For A Strong Future'' Company Proposals To Strengthen Corporate Governance Are Approved

The Corporate Library and IW Financial Announce New Rating Tool

IW Financial and The Corporate Library (TCL) introduced the "Governance Workstation," a powerful new portfolio management tool designed to give asset managers the ability to quickly evaluate corporate governance practices as part of the investment decision-making and proxy voting process. The Workstation incorporates more than 50 data points across nine categories including board independence, CEO compensation, auditing practices, and shareholder rights. Its unique ability to generate comparative ratings based on user or client-defined criteria allows asset managers to quickly examine corporate governance issues using a single standard or multiple user-defined perspectives.

"Corporate governance can have a direct impact on the performance of a corporation, and on the return to shareholders, a reality that is increasingly being recognized by asset mangers and their clients. As a result, governance ratings are viewed as an important metric to be taken into account in the stock selection and portfolio construction," said Karen Lowell, CEO of The Corporate Library. "The Governance Workstation meets the growing need for governance data as well as informing the proxy voting process. We are pleased to be able to deliver our information on such a flexible platform." (9/21/05, press release)

CEO Pay and Ethics

According to Lloyd Eby of George Washington University, "The United States has the largest gap between our richest and our poorest citizens of any industrialized country except Russia. We are increasingly a country where people are marked by economic castes, and those income and wealth castes are becoming rigidly established as well as inherited and passed on."

CEO pay as a multiple of average worker pay has climbed steadily except for a glitch from 2000 to 2002. In 1980 the ratio was 42 to one. By 2004 average CEO income was $11,800,000, while the average worker's pay was $27, 460, for a ratio of just over 429 to one. Eby asks, "Can democracy really thrive and flourish when people are so differently rewarded for their work and effort?"

He holds out little hope for its solution in tinkering with corporate governance. Instead it "requires the growth of a civic, ethical attitude on the part of the people at the top of American business and enterprise whereby they begin to see themselves as rewarded more by living and working for the good of everyone, instead of by how much money and other perks and rewards they can convince the compensation committees of their boards of directors to award them." (CEO Earnings: An Ethical Scandal, 9/15/05, World Peace Herald)

While I hope that day comes, I fear George Washington was a rare man. Not many voluntarily step down from power. Perhaps our real hope lies with who we choose as future leaders.

Australian Investor Backlash on CEO Pay

Some directors warn they may have to resign if their remuneration reports are voted down by shareholders at upcoming shareholder meetings. Recent high votes against approval included 16% at Henderson Group, 20% at Rinker and 23% at Minara Resources. Shareholder activism is on the rise, according to governance adviser ISS Proxy Australia, with 50.1 per cent of all shares voted at top- 200 AGMs last year – up from 40 per cent five years ago.

Australian Workers' Union secretary Bill Shorten says AGMs are a good chance to ask "fair dinkum" questions. "Some of the companies negotiating 4 or 5 per cent pay rises for workers will be giving their executives a good long drink at the remuneration bar. "Senior executive pay has gone from 22 times median wage to 74 times and performance hasn't matched that, so I think there will be lots of shareholders asking questions about excessive packages." (Executive salaries under the spotlight, stuff.co.nz, 9/22/05)

Schwarzenegger Supports Ban on Corporate Contributions Without Shareholder Consent

According to a recent article in Sacramento's Capitol Weekly, California's Governor Arnold Schwarzenegger would support a ban on corporations using shareholder money for political purposes without the expressed written consent of company shareholders. "I support anything [that prohibits political spending] where people are not asked. People must be asked."

Supporters of the idea have already submitted a measure that would place those restrictions on corporate political activity to the attorney general's office. The measure prohibits corporations from "making political contributions or expenditures for political activities except with shareholders’ prior informed consent by means of majority vote and reports to shareholders." The measure needs 373,000 signatures by the end of the year to qualify for the June 2006 ballot. I doubt that will be a serious obstacle.

However, Schwarzenegger clarified that he wasn't endorsing that spefic measure at this time and many are skeptical that he ever will. (Schwarzenegger signs off on shareholder protection, 9/20/05)

Advice for Compensation Committees, CEOs & Advisors

If you are on a board compensation committee or advising one, your best bet is to start with the Sept-Oct 2005 issue of The Corporate Counsel, freely available at CompensationStandards.com. This issue follows up on their 12-Step Roadmap to Responsible Pay Practices, laid out in two issues from last year (those two issues still are also freely available at CompensationStandards.com). These issues offer the best advice on staying out of trouble and doing compensation right. See, for example, “Taking from the King:The Mutual Need and Practical Tips for Rolling Back or Modifying Excessive CEO Compensation” by Eric Keller of Paul, Hastings, Janofsky & Walker, LLP

"The compensation committee should emphasize that rollbacks of excessive pay are not only beneficial to reducing the potential liability of the compensation committee and other board members, but also the potential liability of the CEO.  As examples, the committee can point to Grasso-gate and the Delaware Supreme Court’s conclusion that Michael Ovitz could be held liable for breach of fiduciary duty when he negotiated excessive severance benefits for himself while employed as Disney’s Chief Operating Officer."

Step 2 would be to sign up now for the 2nd Annual Executive Compensation Conference, which is being presented In cooperation with: Stanford Law School's Program in Law, Economics & Business and Harvard Law School's Program on Corporate Governance - and ISS Accredited for Director Education. This is, without a doubt, the best conference on the subject. Mark the date, October 31 in Chicago. We urge you to subscribe to CompensationStandards.com and get half-off on the conference rate.

Step 3 would be to take actually their advice. It will go a long way toward restoring trust in the system by enacting responsible compensation practices.

Warning: Don't think Cox is necessarily going to be your friend. See WSJs "New SEC Chief Tackles A Big One: CEO Pay" (9/21/05). Here is how that article kicks off: "Chris Cox isn't starting out as the capitalists' tool his critics made him out to be. The new head of the Securities and Exchange Commission is smart. He's got good political instincts. And those instincts have led him to the biggest piece of unfinished business on the corporate reform agenda: CEO pay."

The Financial Times ran an article on 9/20/05 entitled “New SEC Chairman Vows To Lift Lid On Fat-Cat Pay Deals,” which stated “Christopher Cox, the new chairman of the Securities and Exchange Commission, has declared war against excessive executive pay amid claims that many American companies try to hide big remuneration deals from investors. Mr Cox, who has been in the job for little more than a month, has set a specialist team of SEC investigators to the task of discovering how American companies disguise executive pay or special bonuses." This is one of the first things he (Cox) has prioritised," a spokesman for the SEC said. "Executive compensation can be opaque and this is what the commission aims to find out about."

"Over time, the prevalent forms of compensation have migrated away from what is transparent to what is opaque. In many cases, the lion's share of an executive's compensation might come in forms that almost entirely elude disclosure. That clearly needs to be addressed." (Cox, quoted in SEC's New Leader Shares His Views On Range of Issues, WSJ, 9/19)

CEO Pay: Popular Revolt?

The Conference Board's excellent “magazine of ideas and opinions,” Across the Board, carries a cover article in the Sept/Oct issue by James Krohe Jr. who observes, “CEOs are making more than ever, while their employees' real wages are falling. Why is no one leaping to the barricades?" (The Revolution that Never Was)

If wages had kept pace with CEO pay since the 1980, workers would be pulling down $184,000 a year, instead of $27,000. “It's been half a century since wage growth was this low for this long,” says Conference Board economist Ken Goldstein. After-tax corporate profits are at a 75-year high, while wages and salaries, as a proportion of GNP, have shrunk to their lowest level ever. According to polls, the vast majority of people believe greedy executives have gotten rich at the expense of ordinary workers. Why aren't workers revolting? Krohe checks with many experts and commentators for opinions.

One I particularly like is from James O'Toole (University of Southern California). “The best explanation is that Americans believe in the jackpot theory of life.” We don't hate CEOs. Instead, we envy their luck. I think most people are against the estate or “death” tax because they hope their luck will change (perhaps by hitting the lottery). The more alienated we become from society, the more we are likely to envy the boss who can take home millions while running a company into the ground. Genius is getting yours, while the getting is good.

Another variant, according to Krohe, is that “Americans accustomed to giving the president sole credit for a nationwide economic boom find it no stretch to credit the manager of managers with everything good that happens on his watch.” Maybe CEOs actually deserve all that money.

A third plausible explanation is that workers are living on the edge. Most have a job, a house and a life. Why risk it by rocking the boat? Liberal activists are too busy fighting defensive battles like keeping Social Security intact and unions are too weak to help. O'Toole points out that the strongest unions are in the public sector where differences in pay are the smallest.

Krohe acknowledges the AFL-CIO's Executive Paywatch site, which helps people compare their wages with those of CEOs, but notes, “the union counsels workers to do nothing more with their outrage that to write complaining letters to their local U.S. representatives or the SEC.”

Where is the action? Krohe cites recurring legislation by US Rep. Martin Sabo attempting to reduce taxpayers' subsidy of CEO pay packages by limiting the tax deduction that firms can claim for such costs. Prospects for passage under the current Congress look bleak so the real action is at corporate annual meetings.

So far this year, more than 260 proxy resolutions limiting pay in some way were submitted to shareholders…ten times the number for such proposals in 2002. Such efforts are largely driven by union and public employee pension funds, joined by faith-based and SRI funds. Resolutions call for limits on salary increases, less lavish severance policies, the expensing of stock options, payback of bonuses after earnings restatements, the use of performance shares instead of stock options or restricted stocks and similar compensation reforms.

According to Betsy Leondar-Wright of United for a Fair Economy, Enron raised awareness of CEO pay and other capitalist excesses. Reform was on the way but was killed by Osama bin Laden. “Since then, the national debate has veered to war and civil liberties and religion rather than economic issues.” The economy's losers - minorities, young men, female heads of households, small farmers, heavy-industry workers have always been the most difficult to organize, says Krohe. “Perhaps this nascent economic-rights movement merely needs a Selma to stir public anger and galvanize the movement.”

My prediction? If the movement for economic democracy has a “bloody Sunday,” and I hope it doesn't come to that, it will take place at a shareholder's meeting. Why should we care? Firms with the widest pay gaps put out products perceived by customers to be of lower quality. Workers are happier and more productive without distracting resentments, when the CEO is more concerned with creating a positive work environment than in emptying corporate coffers into their own pocket. We might also have fewer gated communities, armed guards, and riots.

Want to know if the CEO of a company you own stock in is overpaid? You could check the AFL-CIO's Executive Paywatch, go eComp, the Corporate Library or you could do your own research. Go to the SEC's EDGAR site and look up your company. Then type "Def 14A" in the "Form Type" field, pull up the document and do a "find" for "executive compensation." Note total compensation, bonuses, and options. Then compare these figures with competitors or companies of approximately the same size in the same or similar sector. If your CEO is getting paid substantially above average but your stock has not been doing well, consider selling or becoming an "active" shareholder.

CalSTRS Appointments

California Governor Arnold Schwarzenegger made two appointments to the board of the California State Teachers' Retirement System (CalSTRS). Named were Kathleen Brugger and Elizabeth Rogers, who join a board that has been enmeshed in political controversy in recent months. For the past seven months, the board has been without a full roster after Schwarzenegger ousted four of his five appointees in February for opposing his proposal to replace the state's traditional guaranteed pension plan with 401(k)-style private accounts. In political payback, Senate Democrats later rejected his fifth nominee, forcing the governor to scramble to find five replacements on a 12-member board that oversees a $133 billion investment portfolio for 755,000 retired and active teachers.

Brugger, 62, has spent the past 12 years on the board of Chaffey College, an 18,000-student community college serving western San Bernardino County. Rogers, 60, is managing partner of Pacific Earth Resources, a Southern California sod farm business. A former cable company president, Rogers was the GOP's candidate for Congress in November 2002 against incumbent Lois Capps. CalSTRS trustees will start mapping out a strategy to close a $24.2 billion long-term funding gap. (CalSTRS nominees selected, Sacramento Bee, 9/16/05)

Cox Exaggerates Internet Power

Commentary from Les Greenberg, Chairman, Committee of Concerned Shareholders, on a recent WSJ interview with new SEC chairman Christopher Cox: 

Q: What's your view on the debate over shareholder access and whether shareholders should have the ability to nominate and elect directors? 

A: The Internet as a medium of exchange of information has revolutionized almost every part of our lives. It is ironic that … we have not taken greater advantage of the low cost of communication offered by the Internet. Already, I'm happy to observe, we can vote our proxies over the Internet or by telephone and already some, but not all, documents can be delivered to shareholders electronically. But we are still fighting over who pays the substantial costs of shareholder communication when those costs could be reduced to near insignificance if we relied more thoroughly on electric communication 

Q: So if somebody wanted to wage a proxy fight to propose their own set of director candidates, it wouldn't be prohibitively expensive because they could use the Internet? 

A: Right. Shareholder democracy, just like political democracy, is enhanced by Internet communications." (WSJ, 9/19/05, "SEC's New Leader Shares His Views On Range of Issues") 

Commissioner Cox is on the right track, but it is obvious that he has never engaged in a proxy contest.  He incorrectly assumes that Shareholder identities, including email addresses, are readily and inexpensively available and that Companies and their Transfer Agents will not use every available means to stifle such communications.  Further, he appears not to be aware of the monopoly that ADP exercises in the process.  See annotated Committee Comment Letter to SEC dated April 26, 2004.

TIAA-CREF Grant Deadline Approaches

The TIAA-CREF Institute provides financial support for applied research to enhance our understanding of strategic issues in several areas, including pension and retirement issues. In order to be considered in the first cycle of their 2005 grant program, proposals need to submitted by Monday, October 17, 2005.

Grantees are expected to complete a draft research paper or other detailed document summarizing results of their research within one year of receiving a grant. All draft and published papers should acknowledge the support provided by the TIAA-CREF Institute. In addition, grantees are required to provide the TIAA-CREF Institute with a final report upon completion of the project. The final report should be non-technical in nature and should be roughly 5,000 words and contain a 1-2 page executive summary. A version of this report and/or summary may appear in TIAA-CREF Institute publications, on the TIAA-CREF Institute web site, or possibly in TIAA-CREF publications, at the discretion of TIAA-CREF and the TIAA-CREF Institute. Draft papers may appear on the TIAA-CREF Institute’s web site, at the discretion of the Institute.

Likelihood of Class Action Lawsuit

The current issue of Compliance Week (September 2005) carries an article about Audit Integrity's model that is intended to predict securities-related class action lawsuits. They spent three years developing a proprietary "Accounting & Governance Risk" score of accounting risk, which gets combined with factors such as market cap and stock decline. Lyle Roberts, a securities and litigation expert warns, "if they can convince enough people that they can accurately predict (litigation) and they have a lot of users, it would be a helpful tool" and a self-fulfilling prophecy.

The ten companies with the highest litigation probabilities, as predicted by Audit Integrity, were, in order of probability, as follows:

• Xilinx
• Celgene
• QUALCOMM
• Maxtor
• Lucent
• Infineon Technologies
• Sears Holdings
• Boston Scientific
• Pfizer
• Motorola

Survey Results from Shearman & Sterling

Shearman & Sterling LLP released its annual survey on corporate governance practices of the 100 largest U.S. public companies. Among the trends revealed by the survey as major corporations respond to new governance standards of the New York Stock Exchange, Nasdaq and the Sarbanes-Oxley Act of 2002:

• Poison pills and staggered boards are in decline. The number of companies with poison pills fell by 19%, and the number of companies with a staggered board fell by nearly 30%.
• A majority of companies continue to exceed the minimum independent director requirements of the NYSE and Nasdaq.
• Despite substantial attention to the issue, there has been little change in the number of companies at which different individuals serve as chairman of the board and chief executive officer. (19% up from 14% in 2003)
• Grants of stock options as a component of director compensation decreased to 55% from 70% in 2003.
• The number of shareholder proposals for majority voting in director elections has seen the largest increase, from no such proposals included in the proxy statements of the Top 100 companies in 2003 to 15 such proposals in 2005, fueled primarily by the demise of the SEC’s proxy access proposed rule.

Benchmarking Corporate Governance Risks

Governance and Risk: An Analytical Handbook for Investors, Managers, Directors, and Stakeholders by George S. Dallas (Editor)

This handbook presents the most comprehensive framework for corporate governance as a risk factor that I have ever seen. I have several books on my shelves that compare corporate governance systems in the US, UK, Japan, Germany and France but this one also includes Brazil, China, India, Korea, Russia and Turkey.

I also have plenty of handbooks for directors that describe various duties but Governance and Risk takes the most systematic approach. Each factor is accompanied by instruction, questions, as well as examples of strong and weak profiles.

The premise of rating analysis is that we can isolate and diagnose corporate governance factors that complement traditional credit and equity analysis. This book cites the usual studies, such as Corporate Governance and Equity Prices by Paul Gompers and Andrew Metrick, and a several I had missed, such as Disclosure Practices of Foreign Companies Interacting with U.S. Markets by Tarun Khanna, Krishna Palepu and Suraj Srinivasan.

The most unusual feature of the book is the large number of chapters that lay out the analytical framework used by Standard & Poor's Governance Services in its governance scoring and evaluation process for individual companies, starting with a thorough discussion of limitations. I was a little surprised to read this, assuming they would keep such information under lock and key.

The scoring methodology evaluates roughly 80 analytical factors. In contrast to a checkbox approach, weightings are not necessarily fixed. For example, share registration with an independent body may be relatively meaningless where common practice, such as in the U.S., but takes on greater weight in Russia, where companies serving as their own share registrars have been known to erase contentious shareholders from their books.

Go to Governance and Risk and use the “search inside” feature. You'll see the Contents drills in to the micro level in chapters such as

• Ownership Structure and External Influences
• Shareholder Rights and Stakeholder Relations
• Transparency, Disclosure, and Audit
• Board Structure and Effectiveness

Other parts cover macro issues and wider themes, various countries, and case studies. I was pleased to see that contrary to CalPERS' practice, for example, S&P believes it is “inappropriate to mechanically limit individual country assessments by some form of sovereign ceiling.” S&P's system provides a positive incentive for individual firms to be the best they can be, even if headquartered in a weak country environment. By voluntarily adopting higher standards, such as listing in other countries, such firms can lower funding costs and provide growth opportunities.

The book treats this topic and most others with a fair degree of depth, discussing SEC disclosure requirements (20F filing), presentation of US GAAP accounts, more aggressive enforcement authorities, etc. Now, if I can get the CalPERS board to read this, perhaps they will stop blacklisting foreign companies with good corporate governance. CalPERS should take a country's risk factors into account but should rate individual companies on one scale and countries on another.

The S&P governance analysis isn't designed to uncover fraud and the authors write that the outlined evaluation “stops short of being an audit.” Yet, I haven't seen such a thorough assessment tool elsewhere in book form. Standard & Poor's Governance Services recently announced they would no longer provide public corporate governance scores for U.S. companies. However, with Governance and Risk as their guide, any company could do its own self-assessment. It may lack the comparison data that S&P has no doubt compiled but those choosing to us this tool will have a laundry list of excellent questions, as well as profiles of effective vs. ineffective practices.

Investors and other stakeholders will find the book a ready reference for factors to consider when investing, voting proxies, or looking up common practices by country. While I am sad to see S&P cease its governance services in the U.S., I am delighted they have left such an important legacy in Governance and Risk. I know that I will be referencing the book for many years to come.

CalPERS CorpGov Appointment

Dennis A. Johnson was appointed Senior Portfolio Manager for Corporate Governance, effective September 15. He most recently served as Managing Director for Citigroup Global Markets, Inc. As Senior Portfolio Manager, he will direct the day-to-day activities of the Corporate Governance unit; represent CalPERS on corporate governance issues at conferences, seminars, and company meetings; and oversee the pension fund’s Focus List Program, which targets underperforming companies.

"Dennis brings extensive experience to our Corporate Governance team," said Mark Anson, CalPERS Chief Financial Officer. "He has about 24 years' experience in the investment management industry, and a key part of that entailed the development and management of proxy voting policies and actions." Johnson also advised and counseled clients on corporate governance and proxy issues, managed equity and fixed income portfolios, and extensively conducted research on equity, credit, and fixed income trading.

With CalPERS, he will evaluate the effectiveness of and recommend changes to the Focus List companies program, which involves monitoring performance related to finance, corporate governance practices, and CalPERS strategic issues. He also will oversee selection and monitoring of the Internal Relational Portfolio, the review and selection of new external managers, and the monitoring and allocation of capital among existing external managers. He will report to Christy Wood, Senior Investment Officer for Global Equity.

Johnson has a Bachelor's degree in economics from the Virginia Military Institute (VMI), a Master's degree in finance from Virginia Commonwealth University, and is a Chartered Financial Analyst (CFA). He is a member of the CFA Institute and serves on the VMI Board of Visitors. Johnson is relocating to California from Stamford, Connecticut.

Writing for Compliance Week about the increased clout of those in corporate governance careers, Stephen Davis and Jon Lukomnik remarked: "Consider this: Someone new will shortly become the new corporate governance czar at CalPERS. Pity the poor corporate CFO or general counsel who dismissed the influential power-advocate at his or her previous position."

GMI Releases Data

New data by GovernanceMetrics International shows that poorly governed companies were more likely than well-governed companies to restate earnings. "There does appear a strong correlation between governance and performance," said Gavin Anderson, President and CEO of the New York firm. Investors who scale back poorly governed companies in their stock portfolios are "in all probability going to do better."

The average three-year total shareholder return for consistently poorly rated companies was 8.73% versus 15.93% for the highly rated companies through Sept. 1. During the same period the S&P 500 had an average return of 11.91%.

Nearly three dozen companies received a 10, the highest score. Tyco International Ltd. (TYC) is the U.S. company that made the biggest improvement, going from 1.5 at the end of 2002 to 9. (Firm sees link between poor governance, accounting woes, MarketWatch, 9/13/2005) See press release for scores and analysis.

S&P Stops Scoring US Companies on Corporate Governance

Standard & Poor's Governance Services said it would no longer provide public corporate governance scores for U.S. companies, and it withdrew its corporate governance score (CGS) on Fannie Mae.

S&P began issuing the scores in 2000. Fannie Mae became the first U.S. company to reveal its score in 2003. S&P scored companies upon request by the companies. The scores were based on a complex "interactive assessment of a company’s governance structure and practice, conducted with the cooperation of the company." Companies could either use the reports as a confidential diagnostic tool or publish them.

Most of S&P's public corporate governance scores are focused on developing countries or private companies. Fannie Mae was the only US public company with a corporate governance score, according to Laurence Hazell, director in S&P's Governance Services group. S&P had earlier lowered Fannie Mae's score to CGS-6 from CGS-7 to reflect the "deterioration in the timeliness of disclosure as the company works to complete its financial restatement."

External clients showed demand for the CGS product, but a growing number of internal credit rating clients wanted the expertise of the governance group for commentary. "We found the governance group is much more useful for the corporate ratings group right now," said Hazell. (S&P stops corp gov't scores of US companies, Reuters, 9/9/2005; S&P Stops Issuing Governance Scores, CFO.com, 9/9/2005)

From George Dallas, Managing Director and Global Practice Leader, S&P Governance Services in the UK, "we are experiencing more success in the emerging markets, and will continue to provide the service in specific markets we have been targeting. We are also responding to our US clients (buy side investors) who expect S&P to cover governance related risks, but would prefer to see any analytical conclusions incorporated into our existing credit ratings rather than a separate service."

According to the WSJ, only a few US companies used the service, which "drew some criticism for the governance-ranking operation's potential conflicts of interest: S&P scored only companies willing to pay for the checkup, after which it was up to the client whether to publicize its report card." Fannie Mae was the only one to go public with their 2003 score of 9 out of 10, subsequently dropped to 6 over accounting, compensation and other governance issues, before S&P withdrew its rating. (S&P Quits Rating Corporate Governance in U.S., 9/13/05)

Majority Elections

The Friday Report (9/8/2005) from ISS continues to provide extensive coverage of the movement to create majority voting as the new default standard in corporate director elections. The Canadian Coalition for Good Governance came out in support, the American Bar Association will soon publish its recommendations in a forthcoming issue of the ABA's The Business Lawyer journal, and majority election resolutions have received majority support from investors at 16 companies so far this year. For all the details, read The Friday Report. I will tell you this, shareholders at Wal-Mart had among the lowest rates of endorsement at 22.3%. Why? Wal-Mart executives and directors own a 40.5% stake, according to the companies' proxy materials. I guess they aren't confident they will be able to get even the small 10% vote they need from non-insiders.

The Friday Report also discusses the involvement of institutional shareholders in securities class actions, which has lead to greater recoveries for investors, corporate disclosure Improvements in Central and Eastern Europe, UK CEO Pay Increases, various lawsuits and buyouts.

Director's Training at UCLA

The UCLA Anderson School of Management is hosting the Director Training and Certification Program on October 19-21, 2005.  Designed for executives, and officers of private and public companies, the program covers every aspect of being a successful corporate director, including SEC regulations, FASB considerations, NYSE rules, and current best practices in corporate governance. The program rapidly informs directors and officers in a dynamic environment that encourages one-to-one interaction. Optional Board Committee Modules focus on audit, compensation, and governance & nominating.
 
Directors who complete this course and pass a written examination become "certified directors" and may be eligible for lower rates on D&O insurance. The program is accredited by the Institutional Shareholder Services (ISS) as a Preferred Boardroom Education Program.  A board composed of directors who have participated in this program will receive an automatic upward adjustment in their Corporate Governance Quotient (CGQ) score.
 
For information or to enroll, call 310-825-2001, e-mail or browse their website.

Proxy Governance Launch

Proxy Governance, an independent proxy advisory and voting firm, announced its new automated proxy voting platform is available for use by clients, making the firm one of only two full-service providers of proxy research, voting recommendations and voting agent services.

According to a company press release, users of the platform can choose to have proxies automatically voted based on PROXY Governance's recommendations or based on each issuer's management recommendations. By the end of 2005, managers will be able to choose to have proxies automatically voted based on standardized Taft-Hartley and SRI policies maintained on the platform. They also will be able to have proxies voted automatically based on their own policies, which they will be able to create directly on the Web-based PROXY Governance platform. The platform is also flexible enough to allow clients to easily override automated policy-based voting and implement company-based voting decisions.

Clients can set up automated voting based on account groups. With this feature, managers can group accounts to be voted using the same policies into "voting groups" on the platform. Ballots for all issues in all accounts in a given voting group then can be voted simultaneously with just a few mouse clicks. Multiple levels of "permissioning" can be established on the platform, allowing a money management firm to enable managers to view, specify and execute votes for accounts they manage, while not having access to other accounts and functions.

PROXY Governance, Inc., a wholly-owned subsidiary of the financial services and technology provider FOLIOfn, Inc. PROXY Governance’s policy and voting recommendations, as well as its business model, claims to be completely free from conflict.

New Corporate Governance Foundation in India

The National Foundation for Corporate Governance (NFCG) is being set to implement the principles developed by the Organisation for Economic Co-operation and Development (OECD). The agency will initially evolve corporate governance principles in three areas — institutional investors, independent directors and auditing. The first meeting of the Governing Council of the NFCG was held on July 28, 2004 under the Chairmanship of Shri Prem Chand Gupta, Minister, Company Affairs. The NFCG is a trust, which has been set up by the Government in association with the Confederation of Indian Industry (CII), Institute of Chartered Accountants of India (ICAI) and Institute of Company Secretaries of India (ICSI).

While NFCG guidelines will remain non-binding, the ministry wants it to have the sanctity of a sought after endorsement, said a senior official. (Govt to set up agency for corporate governance, The Economic Times, 9/5/2005)

Companies Negotiating on Resolutions

An article, Talk Therapy, in the September 2005 issue of Corporate Counsel argues that more companies are seeking to resolve issues through negotiations, rather than have "potentially controversial matters dragged into the public eye." Only 570 shareholder proposals made it onto company ballots this year, compared to 708 in 2004 and 698 in 2003. Tina Van Dam, who was Dow Chemical's corporate secretary earlier in the year, is cited as an example. By meeting with proponents, she was able to reduce the number of proposals on the ballot from eight to one. Face-to-face meetings with company representatives with expertise in the appropriate subject matter can often lead to alternatives to a proxy vote.

They were able to negotiate withdrawal of a proposal on executive compensation by discussing their performance-based equity programs, which tie executive salaries and bonuses to both individual achievement and the company's overall performance. In some cases, companies are going along. Calpine and Caterpillar, for example, terminated poison pills after shareholders approved nonbinding proposals. ProLogis went a step further and got rid of the pill before getting a resolution from shareholders.

Anne Stuart offers the following major points in dealing with shareholder resolutions:

• Anticipate and address likely hot spots by examining company policies in light of shifting best practices.
• Provide mechanisms that shareholders can use to contract management or the board. Corpgov.net has pointed to Morningstar's examples of monthly "forums" to answer questions from any investor or prospective investor. Investors submit written questions by email. Morningstar's director of investor relations digs up the answers and reports to shareholders and the SEC.
• Once a proposal is filed, take the initiative and engage in a dialogue with the proponent in a non-confrontational way. "Often the proposal proponents just want to know they're being heard," says veteran Dow director Barbara Hackman Franklin.
• Consider a compromise.
• Seek an SEC "no-action letter.

Shareholder activist John Chevedden says, "yes they are more cooperative in general. However, a number of companies will still try to get me to withdraw a proposal for essentially doing nothing other than study an issue." Apparently being asked to be on a special committee - probably a powerless committee - to study an issue that would require a lot of work and no pay doesn't appeal to some activists.

Foreign Investors Looking for Good Corporate Governance

M K Chouhan, vice chairman, Asian Centre for Corporate Governance, called for greater enforcement of recent corporate governance requirements. For example, the Securities and Ex

change Board of India (SEBI) recently revised Clause 49 of its listing agreement, directing listed companies to have at least one-third independent directors, who are in no way connected to the interests of its promoters, on their boards. According to a recent study conducted by Asian Centre for Corporate Governance, the country needs almost 3,500 to 4,000 independent directors, when the stipulation is in place by next year.

"India needs to induct new independent directors from the categories like management consultants, scientists, academicians and overseas experts, in the case of large Indian companies with ambitions go international," Chouhan opined. "Recently the sitting fee is amended. Now companies can pay up to Rs 20,000 sitting fee per ‘board meeting’, as well as per ‘board committee meeting.' Some of the progressive minded companies are also considering to give ‘stock options’ for independent directors," Chouhan pointed out.

India should encourage more director training and should then be prepared to enforce requirements. (Corporate governance takes front seat, newindpress.com, 9/3/2005)

Cost of Mutual Fund Independence Minimal

After a series of scandals, the SEC proposed reforms requiring most mutual fund boards to be chaired by an independent director and that at least 75% of directors be independent. The U.S. Chamber of Commerce sued because of anticipated high costs for implementation. The Court of Appeals upheld the Commission's authority to adopt the rules but required the Commission to "determine as best it can the economic implications of the rule." Under one of Donaldson's last acts, they determined the existing public record contained sufficient data and the SEC re-approved the rules. The Chamber sued again and on 8/20/2005 the Court of Appeals granted a stay. The Mutual Fund Directors Forum (“Forum”), an organization devoted to educating and furthering the views of independent directors, surveyed its members and found the costs of having at least 75 percent independent directors and an independent board chair to be minimal.

The most common additional cost reported by respondents was additional compensation to the chair. The Forum found its survey results are "consistent with and support the Commission's analysis of the costs of compliance with its rulemaking. The Forum's board of directors continues to believe that industry-wide compliance with the new regulations is in the best interest of mutual fund shareholders." (Cost Implications of an Independent Chair and 75 Percent Independent Board, 8/30/2005)

Chevedden Report

ConAgra turns two shareholder proposals into binding company proposals. William Steiner withdrew his declassify proposal and Chris Rossi withdrew his simple majority vote proposal – both submitted to ConAgra (CAG) for the 9/22/2005 annual meeting ballot. In return ConAgra has included these topics as company proposal 2 to declassify the board and proposals 3 and 4 for simple majority vote.

In what may be a first, ConAgra agreed to resubmit proposals 3 and 4 for the company 2006 annual meeting if the required vote for adoption is not obtained at the 2005 annual meeting. This is the text from the 2005 definitive proxy:

"If either the Item 3 proposal or the Item 4 proposal does not receive sufficient votes to be adopted at the 2005 stockholders meeting, the Company will resubmit such proposal for stockholder approval at the 2006 stockholders meeting."

Last News Roundup for October

Important items carried by others that I did not fully cover in October:

• Transforming the Myth of Democratic Shareholder Power into a Reality, by William Baue, discusses Harvard Professor Lucian Bebchuk's most recent paper on the issue entitled The Myth of the Shareholder Franchise. Includes comments from Bob Monks and Jim McRitchie. (SocialFunds.com, 10/27/2005)
• Take Your Best Shot, Punk, by Justin Hibbard discusses elaborate new defenses that corporate boards have devised against activist hedge funds. According to Hibbard, "Tactics range from stalling dissidents by half-heartedly pursuing a deal to avoiding the election of new directors by not holding an annual meeting." Robert L. Chapman Jr., a principal at El Segundo (CA) hedge fund Chapman Capital Management is quoted, "By the time we get over a few billion dollars under management, no company will be safe."
• Johnathan Glater, writing for the New York Times - Critics of Shareholder Suits Aim at Big Holders. A new study for the US Chamber of Commerce contends that settlements of shareholder lawsuits have overcompensated institutional investors. The study, by a finance professor and Navigant Consulting, is a result of an analysis of settlements of 482 shareholder class-action lawsuits from 1995 to 2005. It asserts that "it is not far-fetched that a large institutional investor could actually benefit from trading in multiple allegedly inflated securities and then, in turn, stand to receive additional funds to cover trading losses on just one of those securities."

Advice for "Forcing" Transparency

Refcos, Enrons Can Be Spotted by Vigilant Investors, according to John Wasik, writing for Bloomberg News. Wasik passes on advise, largely from Gavin Anderson of Governance Metrics International, to Individual investors.

• Elect board members who are not company officers and have no business relationships or "related party transactions'' with the corporation. You can find these listed in the company's proxy statement. Related party transactions are not illegal, but good governance practices would suggest that they not be there.
• Independent directors should comprise a majority of the board and its compensation and audit committees.
• As another layer of protection, independent directors should have a budget and authority to hire independent third- party consultants and auditors without having the approval of management.
• Executive compensation should not be out of line with industry averages. Will such measures ferret out fraud? Not always. Yet some light is better than none, and it certainly makes executives aware they can't easily pull the shades on their shenanigans.

Great, but how do individual investors "elect" truly independent board members when they don't have access to the corporate proxy?

Anson to Leave CalPERS for Hermes

Mark J.P. Anson, Chief Investment Officer for CalPERS has accepted a position to be the Chief Executive Officer of Hermes, the London-based institutional fund manager that invests assets for the British Telecom Pension Fund, and other pension funds, insurance companies, financial institutions, and endowments. (10/27/2005, press release)

UCD - CalPERS, CalSTRS Partnership

The University of California, Davis will offer fellowships of $3,000 and $5,000 to a select number of MBA interns who receive training in investment offices of the nation's largest public pension funds - the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System (CalSTRS).

Under the fellowship, students will work part-time weekly and possibly full-time during the summer while pursuing Masters Degrees in Business Administration in the areas of global equity, fixed income, private equity, corporate governance, and corporate responsibility. UCD offers the youngest and smallest public MBA program ever to be ranked in the top 50 by the three most prominent business school surveys -- U.S. News & World Report, The Wall Street Journal and BusinessWeek. Contact Kathy Klenzendorf, Director of Career Services, at krklenzendorf@ucdavis.edu or (530) 752-4003.

SEIU Looking for Best Ideas "Since Sliced Bread"

The Service Employees International Union is giving away $200,000 for the "best ideas to strengthen our economy and improve the day-to-day lives of working men and women and their families." "Our political institutions haven’t kept pace with the enormous economic transformation America has seen over the past two decades, so we’re done waiting for those who claim to represent us to address the concerns of working people."  Here's what they’re looking for in a framework:

• What's the issue?
• How would you fix it; and
• How fixing it will benefit working families?

They're looking for ideas that are original, creative, have a good chance of practical success, and which:

• Grow the economy
• Create good-paying jobs that allow people to raise a family, afford health insurance, pay for their children’s college education, get additional training and save for retirement
• Encourage existing companies to expand and entrepreneurs to start new ones.

There’s a 175 word limit. Read the overview, the rules, and then a few of the ideas already submitted:

• Soc Sec should copy Public Pensions, by Robert W in Ohio
  The best way to increase the saving rate, improve the return on retirement pensions, lower the interest rates, improve worker productivity, increase investment in America, decrease the liability to the Federal Government and reduce the Federal Deficit is to replace Social-Security with a private pension plan similar to the Public Employees and Teachers Pensions in Ohio.
• Empoyees Buy Their Companies, by Lorraine in Oregon
  Corporations are turning American workers into nothing more than tenant farmers. We are completely at their mercy, which is very disturbing. My idea is based on what a company called Bi-Mart did here in Oregon: the employees bought it! Now they don't have to worry about some large corporation buying and selling the company (which did happen). Plus, once the employees became the owners, customer service really improved.

A panel of national experts will select the top 21 ideas, and then the public will vote. The grand prize is $100,000 plus SEIU’s commitment to work to make that idea a reality. Early next year, they’ll publish a book featuring all 21 finalists and their organizational affiliations.  Will your idea be included? 

Tidbits

A study by the Pension Research Council found that match features don't drive 401(k) plan participation rates. About 60% of employees would participate without a match feature, 10% would join if an employer matched, and 30% would not participate regardless of any employer match. Additionally, the average workforce forfeits about half of the company's match due to failure to contribute the maximum.

About a quarter of Japanese defined benefit pension plans will be closed to new employees by 2008, according to Greenwich Associates. The average funding ratio of Canadian plans increased from 95% in 2003 to 97% in 2004. Perhaps as a consequence, only 20% of Canadian plan sponsors have closed their defined benefit plans to new employees, and just 3% say they intend to do so over the next two to three years. (PlanSponsor.com, 10/25/2005)

Marjorie Kelly does a great interview of Bob Monks for the Fall issue of Business Ethics.

Geoffrey Owen, a visiting senior fellow at the London School of Economics and a former Financial Times editor, discusses how family-owned companies in emerging markets can be preserved in a modern economy. (Scholar insists transparency is good for business, The Daily Star, 10/26/2005).

Gannett amended its corporate governance principles, requiring members of the board to get a majority of votes for election. (Gannett gives shareholders more say, American City Business Journals, 10/25/2005)

Find out what's hidden in the footnotes at footnoted.org. For example, Interpublic Group (IPG), gave new CFO Nicholas Cyprus a $1.83 million sign-on bonus as well as $1.2 million in restricted stock last year.

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Compliance Week

The October 25th edition of Compliance Week, an independently published "must have" resource, carries many articles of interest. Two by Stephen Taub especially caught my eye.

In "Cos. Moving Faster Than Investors To Declassify Boards" he notes, management actually submitted more proposals to repeal classified boards than investors this year. Shareholder proposals for repeal have been gaining support and staggered boards aren't a strong takeover defense. Is this a feel-good ploy that does little to end management-entrenchment? The floodgates have only reduced the proportion of S&P 500 firms with staggered boards from 63% in 2002 to 56%, but progress is in the right direction.