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Current News. News Archives. Disclaimers, Copyright and Conflicts of Interest. Your purchases Dems Pull Ahead on Contributions Securities and investment firms contributed more to Democrats than Republicans this year for the first time in a dozen years, according to the Center for Responsive Politics. The figures exclude Levin Fund donations. My conclusion? It is still early in the year and the money is primarily focused on primaries at this point. ISS Survey Shows Concerns are Global ISS survey finds a majority of investors in every market consider corporate governance to be "very important" or "important" to their firms. Answers range from a high of 90% of Chinese investors, to a low of 61% in Continental Europe. In almost every market studied, a majority of investors say that corporate governance is more important today than it was three years ago and will become even more important in the next three years. The article discusses the spread of methods to address pay concerns. In 2002 the UK began to require companies to submit remuneration reports to a shareholder vote. A year later, the Netherlands took the same practice one step further by requiring companies to submit remuneration reports to a binding vote by shareholders. In 2005, Sweden and Australia both adopted requirements for non-binding shareholder votes on remuneration reports. This year, remuneration reports have become a topic of debate in the U.S. AFSCME filed five shareholder resolutions this season seeking an advisory vote on compensation committee reports. The ISS study shows that investors in the US, Canada, and the UK are the most likely to cast proxy votes outside their home markets, with 73% of US. 67% of Canadian, and 60% of UK investors voting at least 50% of the shares they hold outside of their home market. (The Globalization of Corporate Governance, 5/31/06) CorpGov.Net has popped up high in any search of “corporate governance,” since before Google. Open an account and start delivering relevant ads to thousands of influential readers each day. Click "Advertise on this site" in the ad above. Home Depot Broc Romanek Editor of TheCorporateCounsel.net posted an interview with Rich Ferlauto, Director of Pension Investment Policy for AFSCME, which includes a discussion of the Home Depot annual meeting. (Early Contender: Governance Poster Child of the Year, 5/31/06) Paulson Bush's nomination of Henry M. Paulson to become his next Treasury secretary and "principal economic adviser" is winning praise from most, including this publisher. Goldman Sachs is taking a leading role in recognizing that a healthy environment is necessary for the well-being of society and is the foundation for a sustainable and strong economy. Maybe Paulson, an avid environmentalist, can convince Bush that global warming is something to be addressed. I also like Paulson's 2002 call for action to restore investor confidence. While I no longer hold out any hope for proxy access during the Bush administration, I'd be delighted if Paulson can shift the top slightly from "I" to a bit more of Goldman Sachs' culture of "we." TIAA-CREF Forms New Social & Community Investing Department TIAA-CREF has formed a new Social and Community Investing Department within its Asset Management area. The department will focus on a series of investment programs and oversee the screening methodology used by the CREF Social Choice and the TIAA-CREF Social Choice Equity Funds. In addition, the new department will work on socially responsible investment product development and the formulation of policies around key social issues. The department's investment programs will seek out investment opportunities that are competitively priced and offer broad social appeal. "The new Social & Community Investing department gives us another way to fulfill our financial commitment to our participants while continuing our leadership in the area of socially responsible investing," said Scott C. Evans, head of TIAA-CREF's Asset Management Division. "Our participants tell us that, after financial returns, social factors are very important in how they make their investment decisions. This department furthers our mission to meet the financial needs of the institutions and individuals we serve, and enables us to expand our offerings in this area." (press release, 5/30/06) The department - which will report directly to the Chief Investment Officer -- will be headed by TIAA-CREF Managing Director Scott J. Budde and include Amy Muska O'Brien, TIAA-CREF's Director of Social Investing hired in 2005. Significantly, Amy Muska O’Brien also recently joined the SIF Board. This is another step forward for TIAA-CREF after years of lobbying, says Neil Wollman of the Make TIAA-CREF Ethical coalition. After years of lobbying, TIAA-CREF also agreed a year ago to do shareholder advocacy on issues of social responsibility. We have argued for them to apply such influence to six target companies--including Wal-Mart, Coke, and Nike---which engage in egregious corporate behavior. We continue to wait for a decision on that after years of previous attempts for divestment. In a less positive development, an IT manager in charge of customer relationship management implementations at TIAA-CREF before being fired, seeks redress in a whistleblower lawsuit. (Former IT Manager Seeks Redress with SarbOx Whistleblower Lawsuit, eWeek.com, 5/30/06) US Warms to CSR More Slowly than UK The May 2006 issue of Corporate Governance: An International Review carries an article by Ruth V. Aguilera, Cyntihia A. Williams, John M. Conley and Deborah E. Rupp, Corporate Governance and Social Responsibility: a comparative analysis of the UK and the US. One are of divergence charted was the amount of constraint on executive power in the UK vs the US. In the UK, 90% of large firms split Chair and CEO positions. In contrast, in 80% of US firms the roles are combined. Differences in pay are consistent with this corporate governance strategy with much higher CEO pay and stock-based incentives in the US. The authors find that pension and insurance companies that dominate the UK equity market have long-term payout obligations and more readily adopt long-term low turnover strategies, which include CSR. Investors engage in more substantive ways using "quiet diplomacy" and take a more "relational" approach. Dominance of short-term mutual funds and SEC Regulation Full Disclosure in the US work against such strategies. Proxy access could have moved the US in the direction of the UK, but that movement has stalled. Justice research has consistently shown that employees' perceptions of the fairness of their organization's actions have a strong impact on their attitudes about and actions toward the firm. Employees who perceive a great deal of fairness are more likely to be committed, trusting, loyal, hardworking and good citizens at work. The authors extend that theory, suggesting that employees care not only about fairness to themselves, but also about the external CSR actions of firms. In American firms, dominated by short-term investors, instrumental motives will predominate and decision makers will initiate CSR programs only when they contribute directly to the short-term bottom line. British Government "best practice" codes and the Myners Committee Report that urged investor intervention, plus the threat of legislation have promoted greater sensitivity to social and environmental issues. Will the US follow the UK's lead? The authors conclude, "we expect the US institutional investors' norms towards CSR engagement to develop more slowly than they have in the UK." Institutional assets jump 13.5% Worldwide institutional assets of the 500 largest money managers increased 13.5% last year, while the firms’ U.S. institutional tax-exempt assets grew roughly 8%, Pensions & Investments’ annual money manager survey shows. International markets and emerging markets handily outperformed domestic markets during the year, largely prompting worldwide assets to grow at a more significant clip than domestic assets. The combined assets of the nation's exchange-traded funds (ETFs) were $334.87 billion in April, according to the Investment Company Institute (ICI). Assets of all exchange-traded funds rose in April by $13.58 billion, or 4.2%. Over the past 12 months, ETF assets increased $113.89 billion, or 51.5%, according to ICI. Next Election Might Bring Power to Shareholders Jeff Brown of the Philadelphia Inquirer "gets it." In When pay keeps going up even if performance does not (5/28/06), Brown asks why corporate boards, which are supposed to represent shareholders, keep pushing executive pay up? It's a matter of mutual back-scratching. He cites CEO Compensation, Director Compensation, and Firm Performance: Evidence of Cronyism?, which found that companies paying CEOs excessive amounts also pay directors excessive amounts. Most important: Companies that pay too much also tend to perform worse than their peers. Why do shareholders tolerate this? Sure, many are conflicted or don't care but even those who do, don't have the tools. The solution, according to Brown, is to "change federal regulations to make it easier for unhappy shareholders to nominate candidates for corporate boards. Currently, boards nominate their own candidates, and many boards are under their CEO's thumb. Washington does not care much about this kind of change right now. Something to think about in the next big election." Let's hope we do more than think about it. Corporate Governance Guide Available Perkins Coie released the third edition of its popular guide to corporate governance issues, The Public Company Handbook: A Corporate Governance and Disclosure Guide for Directors and Executives. John Chevedden and his associates are keeping the pressure on this year. What follows is a report on recent votes.
Pay to Play Law Needs Strengthened Dan Morain writing Finance Law Is Virtually Ignored, for the LATimes, finds that firms seeking pension business with CalPERS and CalSTRS easily skirt a rule on revealing donations to state board members. The laws loopholes have come into focus as Treasurer Phil Angelides and Controller Steve Westly — both members of the pension boards — vie for the Democratic nomination for governor. The law requires them to file statements with the secretary of state listing their contributors. However, those filings don't give details on donors' interests in state affairs. So Rep. Adam B. Schiff (D-Burbank) pushed in 1998, when he was a state senator, to create a parallel filing system that would do so. CalSTRS Fiduciary Counsel, Ian Lanoff, dropped a bomb on the proceedings when he indicated he has repeatedly advised CalSTRS board members that they are prohibited, by provisions in the California Education Code, from assisting contributors and should recuse themselves from such votes and deliberations. It was clear the strength of Lanoff's conviction came as a surprise to CEO James Mosman who indicated that constitutional officers on the CalSTRS Board had received different advise from their own counsels and did routinely participate in deliberations and votes involving contributors. It was also clear that potential conflicts of interest are not routinely discussed during such deliberations. I was one of the only members of either system to testify in support of greater disclosure. Passage of SB 1753, which took effect in 1999, hasn't helped. CalPERS, could find only two such disclosures since then, totaling $11,250, one to Angelides and one to Westly. The California State Teachers Retirement System, known as CalSTRS, found none. Crane Wants to Keep CalSTRS Position David Crane, Gov. Arnold Schwarzenegger's legislative affairs secretary, is offering to quit his $90,000-a-year post if lawmakers agree to keep him on the CalSTRS board where he gets $100-per-diem. He faces stiff opposition in Senate confirmation hearings from teachers' organizations and union leaders because of his refusal to take a stand against a measure by Assemblyman Keith Richman's to convert defined benefit plans to hybrid plans (part 401(k) and part traditional pension) for newly hired employees. Crane defended his decision, saying CalSTRS should not take positions on legislative proposals that don't affect current teachers or retirees. (CalSTRS trustee's shocker, Scramento Bee, 5/25/06) These are companies which took a shareholder proposal, made it a binding company proposal and obtained the required shareholder approval at April and May 2006 annual meetings. This is clearly better than a majority vote on a shareholder proposal.
Carbon Beta Basket Innovest, in partnership with UBS, has created a "carbon beta basket," a fund that will hold 50 stocks in five industries. The fund managers would monitor global warming regulations and would buy and sell the stocks on the basis of how the companies would be affected by those rules. According to the NYTimes, geen energy is no longer just an SRI play. Pure profit-and-loss players are moving in, potentially raising the level of the game. They are betting that Washington will someday clamp down on emitters of carbon dioxide and other gases that are believed to contribute to global warming. And they are certain that there is money to be made in holding the shares of low emitters and shorting the shares of big ones. (Wall St. Develops the Tools to Invest in Climate Change, 5/24/06) In a related item, Finally Feeling the Heat, Gregg Easterbrook's op-ed item says he is now switching sides regarding global warming, from skeptic to convert. Earth's surface, atmosphere and seas are warming; ocean currents are slowing; ice shelves are melting faster than projected; spring is coming ever sooner; rainfall patterns are changing; North American migratory birds are ranging father north; the ability of the earth to self-regulate to resist warming appears to be waning. While natural variation may play roles in climatic trends, overwhelming evidence points to the accumulation of greenhouse gases, mainly from the burning of fossil fuels, as the key. ...Mr. Bush should speak to history by proposing a binding greenhouse-credit trading system within the United States. Waiting for science no longer justifies delay, as results are now in. Universal Owners: Challenges and Opportunities The papers and most of the power point presentations from the April 2006 conference, Universal Owners: Challenges and Opportunities (sponsored by the Sloan foundation and supported by the Soda Foundation), are now available at the website of the Center for the Study of Fiduciary Capitalism. Dear Editor Home Depot Home Depot's board has awarded Robert L. Nardelli $245 million in his five years as CEO. During that time, the company's stock slid 12% while shares of its archrival, Lowe's, have climbed 173%. Why would a company award a chief executive that much money at a time when the company's shareholders are arguably faring far less well? (With Links to Board, Chief Saw His Pay Soar, 5/24/06) Model Help David Ellerman, one of my early inspirations, has a new book, Helping People Help Themselves : From the World Bank to an Alternative Philosophy of Development Assistance (Evolving Values for a Capitalist World)
Shareholder Questions The National Association of Corporate Directors posted a fairly comprehensive compendium of questions that shareholders ask at annual meetings that was compiled by PriceWaterhouse Coopers. John Chevedden and his associates are keeping the pressure on this year. What follows is a report on recent votes.
Delaware Bill to Facilitate Majority Voting Broc Romanek, Editor of TheCorporateCounsel.net reports on legislation amending the Delaware General Corporation Law to address some of the majority voting issues raised recently by investors. Broc interviews John Grossbauer of Potter Anderson & Corroon, a member of the Council that worked on the draft bill. Listen to the podcast. Options Backdating Widespread The WSJ reports on studies to detect highly improbable option grant patterns by David Yermack, an associate professor of finance at New York University's Stern School of Business and Erik Lie, an associate professor of finance at the University of Iowa. John Emerson, an assistant professor of statistics at Yale University, developed a computer program to calculate probabilities for the grants. Mr. Lie suggests that options backdating could be pandemic. His data on thousands of option grants show that, on average, they perform far better than normal in the periods after option dates. Typically, options for top executives can be granted only by the board or its compensation committee, and are supposed to carry a "strike," or exercise, price equal to the market value at the time the options are approved by directors. A recipient sometimes must wait a year or more for the option to "vest," then can cash out the option if the share price is above the option's strike price. Backdating -- deliberately moving the grant date earlier, to a more beneficial time when the price was lower -- in effect gives the executive an instant paper profit, undermining the incentive purpose of options. Companies caught backdating risk disclosure and securities-fraud violations. Executives who perpetrate such a scheme can face wire fraud and other criminal charges. Most of the unusual options grants appear to have occurred from the mid-1990s through August 2002, when the Sarbanes-Oxley corporate-governance act tightened disclosure requirements, curtailing the potential for retroactively dated grants. Under accounting rules that were long in effect until recently, issuing a below-market option should trigger extra compensation expense, reducing a company's net income. Companies that failed to record that expense may have to restate their financial results, in some cases going back many years. Backdating also could run afoul of complex tax laws, requiring companies and individual to pay back taxes and penalties. For the gruesome details at various companies, see Five More Companies Show Questionable Options Pattern, 5/22/2006. See also, Companies embroiled in backdating scandal, AP, 5/21/20006. Exec Pay at Home Depot WSJ of 5/20/06 carries article on AFSCME's proposal that would give Home Depot investor s an advisory vote on the compensation committee's executive-pay plan. Home Depot shares have slid 11% since Bob Nardelli took the helm in 2000, while shares of archrival Lowe's Cos. have nearly tripled. Over that same period, Mr. Nardelli has pocketed more than $100 million in compensation, including nearly $32 million last year. (This Week Ahead: CEO Pay) Exxon Mobil's Shareholder Revolt on Global Warming Interesting blog at KailyKos.com regarding pension fund issues with Exxon Mobil. Pension fund trustees and institutional investors, said they were concerned Exxon Mobil's handling of the climate change issue left it trailing behind its major oil peers, such as BP and Royal Dutch Shell. The blog references Big Tobacco. "Like the oil companies are doing today, Big Tobacco spent millions of dollars in a disinformation campaign to dissuade people from the clear scientific evidence that smoking was harmful to your health. The upshot of all that corporate fraud and deceit? Billions of dollars paid by Big Tobacco to settle lawsuits brought by smokers and numerous State Attorney Generals." "Exxon's continuing efforts to muddy the waters of the global warming debate are seen by these investors as a dangerous sign that the value of their Exxon shares in the future will plummet unless management adopts a different strategy regarding climate change, and the sooner the better." Their prediction is "a bill presented to Congress (by Republicans, naturally) at some future date proposing to absolve the oil companies from all legal liability arising from greenhouse gas emissions and the effects of global warming." Pill Bylaw Could Set Precedent Unite Here's pension fund seek a bylaws amendment at Hilton to state the "corporation shall not maintain a shareholder rights plan, rights agreement or any other form of 'poison pill' making it more difficult or expensive to acquire large holdings of the corporation's stock, unless such plan is first approved by a majority shareholder vote." According to analysis by ISS, it has the potential to establish a legal precedent that could help clarify issues surrounding "binding bylaw" proposals. Investors generally vote in favor of shareholder proposals regarding poison pills. In 2005, the average level of support for those proposals was 60.1% of votes cast. Given that many shareholders fail to vote at annual meetings, they will need significantly more than a majority of votes cast to constitute a majority of Hilton's outstanding stock. If that happens and Unite Here and Hilton are expected to end up in court. (Union's Pill Proposal Could Set Precedent, Corporate Governance Blog, 5/19/06) Addressing Global Warming Faces Setback Just when many of us thought everyone has now recognized the need to address global warming, a group funded by Exxon Mobil, General Motors and Ford has begun an advertising campaign that tries to convince viewers it is natural and that setting limits to address carbon dioxide will take us back to the stone age. The Competitive Enterprise Institute's campaign coincides with the release of a documentary, AN INCONVENIENT TRUTH, about the threat of climate change that features former Vice President Al Gore. In response, CalPERS has joined with treasurers in six states and other investors to request a meeting with the independent directors at Exxon Mobil to discuss its failure to pursue alternatives to petroleum-based fuels. (CalPERS Steps Up Pressure on Exxon, LATimes, 5/18/06) Goldman Sachs recently ranked oil companies on their environmental and social performance, which it concludes are important drivers of future performance and valuation. On climate change, Exxon Mobil scored 12th in its industry, far behind competitors like BP, Shell, and Total. For long-term investors, such underperformance is troubling. According to Goldman Sachs, "the companies that have the potential for creating significant value are those that have the most strategic options available to embrace a low-carbon world." “A new report by IRRC, Corporate Governance and Climate Change: Making the Connection, rates 100 companies, including 20 companies in the oil sector, against a 14-point best-practice checklist. ExxonMobil received only 35 points out of a possible 100 in this analysis, again falling well behind its competitors.” (Investor Network on Climate Risk) McRitchie Testifies on Risk to ID Theft and Election Rules at CalPERS The Sacramento Bee's Gilbert Chan reported on one issue included in my testimony, CalPERS seeks election savings. Others were equally substantive. Pay More Aligned, Still Problematic Knowledge@Wharton has a good overview in CEO Pay: A Window into Corporate Governance. According to a survey prepared by Mercer Human Resource Consulting for The Wall Street Journal, total direct compensation for CEOs at 350 top corporations grew 16% in 2005. That was down from a 41% increase in 2004, but well over the 3.2% hike in wages and benefits for U.S. workers overall last year. Median direct compensation, including salaries, bonuses, restricted stock grants, and gains from option exercises and other long-term incentive payments, was $6 million. Pay for CEOs at the 10 businesses with the highest shareholder returns grew by 51.3% to more than $10.2 million. The 10 CEOs whose shareholders took the biggest hit last year suffered a 72.5% drop in compensation to less than $1.6 million, according to The Journal. One of many problems pointed out is that fact that board often use the same consulting firms to assist in setting salaries as corporate management uses in human resources planning or pension design, says Wharton management professor Martin Conyon. "One can imagine a scenario where the consultants would err on the high side on executive pay because they don't want to lose this other lucrative business. If you lowball the CEO's pay this year, your probability of being hired next year is jeopardized." A study in April by The Corporate Library titled, Pay for Failure: The Compensation Committees Responsible, found 11 companies that over the past five years paid out $865 million to CEOs who lost a total of $640 billion in shareholder value. Those on the list are: AT&T, BellSouth, Hewlett-Packard, Home Depot, Lucent Technologies, Merck, Pfizer, Safeway, Time Warner, Verizon Communications and Wal-Mart Stores. The most common metric is total stockholder return, but that does not take into account how well the company is doing when judged against its peers, says Paul Hodgson, senior research associate at The Corporate Library. When United Healthcare's McGuire passed well beyond the $1 billion mark with his options package, that raised eyebrows, says Shirley Westcott, managing director of policy at Proxy Governance. (I guess so!) AIG to Factor Climate Change AIG, the world's largest insurer, became the first U.S.-based insurance company to adopt a policy to manage the risks and capture the business opportunities posed by climate change. AIG unveiled the new policy on May 15. Ceres has been seeking improved U.S. insurance industry practices on climate change through the Investor Network on Climate Risk, a group of 50 institutional investors that manage nearly $3 trillion in assets. AIG's Policy and Programs on Environment and Climate Change states that the company is "actively seeking to incorporate environmental and climate change considerations across its businesses, focusing on the development of products and services to help AIG and its clients respond to the worldwide drive to cut greenhouse gas emissions." The policy acknowledges the harmful effects of greenhouse gases, which include auto emissions, factory pollutants and other gases that trap heat inside the earth's atmosphere and cause water temperatures to rise. Warmer water has in turn spawned hurricanes, which have hit the US Gulf Coast with record storms in 2005, causing more than $100 billion in damages. AIG had $2.1 billion in insured losses from hurricanes in 2005, and 2006 is expected by hurricane forecasters to be another destructive season. (AIG Adopts First Policy on Global Climate Change, Planet Ark, 5/17/06) "I commend AIG for being the first U.S. insurance company to address climate risk," says Ceres president Mindy Lubber. "This is an important step that signals to the market and policy makers that climate change is a critical insurance issue. We look forward to working with AIG to expand on this commitment." (Ceres Praises AIG as First U.S. Insurer to Adopt Climate Change Policy, 5/17/06) Unprepared for Retirement PBS aired a Frontline documentary, Can You Afford to Retire? Clearly, many baby boomers will have a longer life expectancy and not enough income to last because of the shift from defined benefit to defined contribution plans. According to the Department of Labor, in 1978 workers put in only 11% of total contributions to retirement savings, and corporations put in 89%, the announcement said. By 2000, the employee share had leapt to 51% and the company share had fallen to 49%. Experts say Americans with pensions or 401(k)-type plans need to accumulate at least six to ten times their annual pay before they reach retirement to maintain their standard of living. This requires saving 15% - 18% of their salary, every year, over 30 years. Most will be lucky to save half that amount and will run out in about seven years. Glassman to Quit SEC Cynthia A. Glassman, a member of the SEC, announced that she would not serve a second term after her current one expires next month, leaving one of the three Republican seats on the five-member commission open. On several occasions during the tenure of William H. Donaldson as S.E.C. chairman, Ms. Glassman sided with a fellow Republican commissioner, Paul S. Atkins, to vote against initiatives favored by Mr. Donaldson, a Bush appointee, and the two Democrats. (Commissioner Is Giving Up Seat at S.E.C., NYTimes, 5/16/06) Broc Romanek, Editor of TheCorporateCounsel.net, says that among the names being circulated for Glassman's replacement is Kathy Casey, majority staff director for the Senate Banking Committee's chairman, Sen. Richard Shelby (R-Ala.). Sentenced for Tickets A former board member of the Ohio State Teachers' Retirement System (STRS) who was found guilty on two counts of ethics violations was sentenced to probation, and ordered to pay fines and do community service. The Columbus Dispatch reports that Hazel Sidaway, a retired teacher, was sentenced to two years of probation, fined $670, and ordered to pay $5,382 in court costs. In addition, she was ordered to complete 200 hours of community service. Sidaway, 62, apologized to Judge Carrie Glaeden of Franklin County Municipal Court for accepting tickets to a Cleveland Indians game in 2001 and the Broadway production of "Hairspray" in 2003 while on the payroll of the STRS. The free tickets Sidaway received were from investment consultants who had contracts with the State Teachers Retirement System. Her attorney said his client wasn’t aware of the ethics law when she accepted the tickets. "At the time there were no red flags raised. There should have been, but there weren’t," he said. But Judge Glaeden questioned that. "With all due respect, anyone who works for state government has to be hiding under a rock if they had not heard of an ethics law." (Ex-pension board member sentenced, Columbus Dispatch, 5/12/06) Acxiom Battle Coming NYTimes reports on proxy fight shaping up at Acxiom. "In one corner stands Charles D. Morgan, Acxiom's leader, an executive at the company for 30 years. In the other corner is ValueAct Capital, Acxiom's largest shareholder, which contends that Mr. Morgan has billed Acxiom for his personal pursuits, stacked its board with pals and spurned its value-enhancing management ideas." ValueAct holds 11.9% of Acxiom and had tried to persuade Mr. Morgan to give them a board seat to improve Acxiom's performance. Last fall the company said no shareholder would ever serve on its board. Then, ValueAct made a $25-a-share offer for the entire company -- a significant premium, which Acxiom's board rejected. The article goes through a litany of sins at ValueAct:
Another disturbing fact in the case is the caliber of director that appear to be complicit: Thomas F. McLarty III, former White House chief of staff to President Bill Clinton; William T. Dillard II, chief executive of Dillard's Department Stores; Mary L. Good, dean of the school of Information Science and Systems Engineering at the University of Arkansas; Ann Die Hasselmo, a former president of Hendrix College; and Stephen M. Patterson, vice chairman of the trustees of Hendrix. (Start Your Proxy Fight, 5/14/06) Cost Effective Corporate Governance The May 22, 2006 edition of BusinessWeek carries an article on the growing number of firms deciding to list of other than U.S. exchanges. Of the top 25 global IPOs in 2005, only one took place in the US. In 2000, 9 out of the top ten listed with the NYSE or NASDAQ. For example, Peach Holdings recently raised $231 million through an IPO on AIM, the London Stock Exchange's Alternative Investment Market. Going public in the U.S. would have cost $100,000 to get on the Nasdaq plus and estimated $2 million to comply with Sarbanes-Oxley. To go public on AIM, the company spent all of $500,000, including a fee of $7,600 to the exchange. (London Calling, Fobes, 5/8/06) The authors argue “globalization and electronic trading have made US investors mobile as never before.” If more trading moves overseas, jobs and economic growth will follow. Others are pushing to rollback SarbOx, especially applicability of Section 404 provisions to small companies. (Sarbanes-Oxley Section 404 Roundtable, AEI) (SEC Deserves Failing Grade, CFO.com, 5/10/06, House Committee Chair Wants 404 Reform and The 404 Debate) Assuming good corporate governance matters, and the data continue to show that investors think it is important (especially in emerging markets), what we should really be exploring is how to achieve good governance at the lowest cost. Despite all the compliance requirements of SarbOx, many investors see the UK as having “higher” standards. For example, in 2005, GovernanceMetrics International reported that UK companies had the highest overall average rating (7.39), followed by Canada (7.14), United States (7.03). My hypothesis is that it is more cost-effective to give shareholders the power to hold directors and CEOs accountable than it is to require. Robert A.G. Monks explained why eight years ago: "American 'activists' must use confrontation and public relations to embarrass boards and managements into considering remedial action. In the UK, the shareholders are given full power by statute and there is public acceptance that owners be accorded ultimate right of decision. Ten percent of the shareholders can call an Extraordinary General Meeting ('EGM'); a majority of the quorum present at any meeting can discharge one or all of the directors. (Corporate Governance - Corporate Performance Making the Link) With Sarbox, and even with majority voting requirements to elect directors gaining popularity, the US still hasn't caught up to the UK and I would think there are more efficient routes. Bebchuk Sues to Protect Shareholder Rights Harvard Professor Lucian Bebchuk filed suit in Delaware Chancery Court, challenging CA's assertion that Bebchuk's pill- limiting bylaw proposal is illegal under Delaware law. In recent months, companies such as American International Group (AIG) and Time Warner agreed to amend their bylaws in response to his proposals. Bebchuk's proposals obtained about one third of the votes at Chevron and General Dynamics -- an unusually large show of support for novel and binding stockholder proposals. Bebchuk's "poison pill antidote" is designed to limit the potential costs to shareholders that could result from an indefinite use of a poison pill takeover defense by preventing boards from maintaining a pill without shareholder approval. Furthermore, a poison pill antidote requires that decisions to extend the life of a pill must be made by a supermajority of the directors or even unanimously. In response to Bebchuk's poison pill antidote proposals, Bristol-Myers Squibb agreed to amend its by-laws to incorporate such an arrangement, and Halliburton placed the proposal on the ballot for its coming annual meeting. However, CA (formerly Computer Associates) notified the SEC and Bebchuk that it plans to exclude Bebchuk's proposed bylaw from its 2006 proxy statement, based solely on its assertion that the proposed bylaw is impermissible under Delaware law. Bebchuk filed suit to prevent CA from using this assertion to exclude his proposal. (Press Release, 5/11/06) Pension Disclosure Lacking Thanks to Broc Romanek for bringing my attention to Susan Mangiero's Pension Risk Matters Blog. She examines best practices and encourages meaningful debate about the $10 trillion global pension industry upon which millions of individuals depend. Her most recent blog finds that a systematic identification of who does what and why with respect to employee benefits is simply not a reality as things stand today. This makes it difficult (perhaps impossible) to effect change. ERISA mandates the distribution of a Summary Plan Description (SPD) to each plan participant and beneficiary currently receiving benefits. Required information includes "the name, title and address of the principal place of business of each trustee of the plan." Education and experience are not mandatory disclosure items. Westly Involved in Pay to Play? In California, two prominent members of the CalPERS and CalSTRS boars are competing for the for the Dempcratic Party slot in their run for governor. State Controller Steve Westly launched a television advertisement Tuesday that implicitly accuses Treasurer Phil Angelides of proposing a "$10 billion tax increase." (Westly ad airs on eve of Angelides debate, SacBee, 5/10/06) An article in the LATimes notes that "soon after taking office in January 2003, state Controller Steve Westly began helping three venture capital firms land multimillion-dollar investments from California's giant pension system, according to public records including e-mails and officials' calendars." The article provides examples of the three funds that donated a combined $213,000 to Westly since he ran for controller in 2002. Westly spokesman Yusef Robb said any suggestion that the controller intervened for those individuals because they were campaign donors "is ridiculous and insulting to the men and women at CalPERS, whose hard work and integrity has created the nation's largest and most respected public pension fund." Yet, CalPERS invested $80 million in companies that have indirectly donated to Westly. (Westly Helped Firms Tap State Fund, 5/10/06) Corporate Governance Roundtable The June 6-7, 2006 forum "is designed to capture some of the more creative and innovative corporate governance approaches being explored." Corporate Governance Benchmarking Network (CGBN) Mini Study/Roundtable. I've never attended, so cannot vouch for efficacy but could be informative. Tollgrade Investors Vote to Repeal Classified Board 'Investors voted in favor of a proposal by Amalgamated Bank’s LongView Funds at the May 9, 2005 annual meeting of Tollgrade Communications. The proposal, which the company confirmed won a majority of votes cast, urges the board of directors to repeal its system of classified elections, and instead require each director to stand for election every year. “If Tollgrade takes steps to act on the advisory vote, the company’s actions will be in keeping with a trend towards this reform,” said Chris Smith, Corporate Governance Research Analyst for Amalgamated Bank. According to the IRRC, 86 boards took steps in 2004 and 2005 to amend their bylaws and repeal staggered elections. Chemical Concerns in the Mix More than a dozen shareholder resolutions, covering issues from product toxicity to environmental health to chemical security, were filed for the 2006 proxy season, targeting both chemical manufacturers and companies that distribute consumer products that contain potentially harmful substances. ISS adopted a policy that recommends shareholders generally favor resolutions that companies disclose their policies on toxic chemicals. In January shareholder pressure helped prompt General Electric (GE) to disclose how it spent $800 million on PCB-related cleanup efforts from 1990-2005. Shareholders will soon consider a resolution filed by a group of institutional investors that calls on DuPont to report on its options to accelerate the elimination of perfluoroctanic acid (PFOA) used in Teflon. (Shareholder resolutions target toxic chemical issues, Pesticide & Toxic Chemical News, 4/17/04) Board in Focus at Sharper Image The company will drop four of seven current directors in response to a challenge from Knightspoint Group. They will also expand its board to include three members from Knightspoint and three business leaders with no ties to the San Francisco-based company. Stock price has climbed more than 50%, since Knightspoint began its rebellion two months ago, in anticipation of improved profits even as sales have continued to plunge. (Sharper Image Agrees to Shake Up Its Board, LATimes, 5/10/06) ISS Ratings Available to Bloomberg Subscribers Bloomberg users will be able to access free of charge ISS' CGQ Index score, CGQ Industry score, board, audit, compensation and takeover defense sub-scores and 6-months of historical data for all 8000 companies in the database via the function CGOV on the Bloomberg Professionsal service. For investors wishing to download full data files for US companies, international companies or the complete ISS global database, a subscription service is also being made available to Bloomberg subscribers. (ISS Corporate Governance Ratings Now Available Via Bloomberg) ICI Reports on Holdings Americans held a record $14.3 trillion in retirement assets, of which $3.4 trillion were invested in mutual funds, at the end of 2005, the Investment Company Institute reported. Investors held $7.3 trillion in IRAs and DC plans at year-end 2005, accounting for more than half of the entire retirement market. Registered investment companies managed a record $9.5 trillion at year-end 2005. (That figure climbed to $10.0 trillion by March 2006.) Exchange-traded funds grew rapidly in 2005. ETF assets grew 31 percent to $296 billion by year-end. Closed-end funds maintained their share of the investment market, rising 9 percent to $276 billion. (ICI Reports That Americans Own a Record $14.3 Trillion in Retirement Assets) Nepotism Brightpoint, a cell phone distributor has spent millions of dollars in recent years buying goods and services -- from personalized stationery to temporary labor -- from businesses with direct ties to relatives of Brightpoint CEO Robert Laikin and CFO Anthony Boor it seems. Experts in corporate governance say such arrangements are rife with potential conflicts of interest and often are examples of boards of directors not fulfilling their duty to scrutinize a company's operations. "It's certainly a red flag and certainly something that the shareholders should be bringing to the attention of the board of directors, and the board of directors should be closely scrutinizing," said James McRitchie, publisher of CorpGov.net, a corporate governance watchdog Web site. "If you're buying basic services from immediate family members, it just doesn't say much about your aggressiveness across the board in maximizing the value for shareholders," said Beth Young, senior research associate at The Corporate Library, a corporate governance research firm. Brightpoint defended the transactions, pointing out it properly approved and disclosed them. The company also pointed out that 40% of all companies in the Standard & Poor's 500 have some kind of related-party transactions, according to a 2004 study by RateFinancials. (Brightpoint finds blood is thicker than water, Daniel Lee, Indianapolis Star, 5/8/06) And from Footnoted.org (A family of senior vice presidents…5/5/06), Lifetime Brands disclosed a long list of relatives of CEO Jeffrey Siegel and former Chairman and CEO Milton Cohen who were drawing paychecks from the company. Other than name and job title, it provided few details:
Career Education Writing for the NYTimes, Gretchen Morgenson reports on a proxy battle at Career Education between the former CEO of one of its units, American InterContinental University, and the board. Steve Bostic ran three resolutions last year -- to require the company's directors to stand for election annually, to eliminate the company's poison pill and to allow shareholders with one-third of the company's stock to call a special meeting -- each received approval from about two-thirds of the stock outstanding. And 62 percent of the company's stock outstanding was voted in opposition to the three directors standing for election. Career Education appointed two new independent directors, terminated its poison pill and instituted stock ownership guidelines for senior management and the company's directors. This year, at a cost of him of $2 million, he is running a slate of candidates and estimates Career Education is spending more than $4 million of the company's money to try and defeat them. The company has taken out full-page newspaper advertisements. CEO John M. Larson, sent a letter to shareholders urging them to reject Mr. Bostic's slate. ''We do not believe it is in your best interest for our momentum to be interrupted -- or worse, potentially permanently impaired -- by distractions from Steve Bostic, a dissident who owns approximately 1 percent of CEC's stock and is choosing to become a perennial agitator against your company, management and board in order to forward his own self-serving agenda,'' the letter said. One interesting quot e at the end of the article from Bostic, ''The problem is, the individual shareholder has got to take this on and it really shouldn't be that way. Most people don't have the passion and energy to do it. But major institutions do not pursue actions against a company. They vote with their feet and just leave, and that's bad for the rest of the shareholders.'' (Can a For-Profit College Learn a Lesson?, 5/7/06) Who speaks for shareholders? In this case, it appears one lone individual who owns 1% of the company is doing all the heavy lifting. ISS is recommending shareholders vote out three sitting board members in favor of a slate of dissident investors. "This looks like the death knell for this board," said Jack Ablin, chief investment officer, Harris Trust and Savings Bank, which uses Rockville, Md.-based Institutional Shareholder Services as its governance consultant. "Institutions really listen to ISS." (Poor report card for Career Education, Daily Herald, 5/7/06) Corporate Babble on the Rise CEO letters to shareholders have reached new highs for "the use of Orwellian double speak which contradicts and distorts reality," says L.J. Rittenhouse, President of andBEYOND Communications. "Only 24% of the companies in our 2005 survey were awarded top marks in candor down from 57% in the 2002 survey. While many executives are certifying their results to comply with Sarbanes-Oxley, they are also publishing virtually unintelligible shareholder letters. If they cannot candidly articulate their goals and results, then how can they credibly walk their talk?" The survey of a cross-section of Fortune 500 companies confirmed a strong positive link between candor and stock price performance. In each of the past four years, the 25 top-ranked companies in candid disclosure have outperformed the 25 bottom-ranked companies. The 10 Top-Ranked Companies in the 2005 Rittenhouse Candor Rankings(SM): Wells Fargo, Alcoa, JetBlue Airways, PepsiCo, Walgreens, Jack in the Box, Continental Airlines, Charles Schwab, Harley Davidson, and Xerox. End to Broker Vote Nears...for Directors For more than 10 years CorpGov.net has recommended elimination of broker votes for anything other than obtaining a quorum. Now, a New York Stock Exchange committee agrees, at least with respect to director elections. A decades-old NYSE rule gives brokers the right to vote shares held in investors' accounts on "routine" matters, when shareholders don't provide instructions. Fail to vote and your broker votes on your behalf...always mindlessly in favor of whatever management recommends. Many of us have long questioned the idea that director elections are considered routine, but we don't see why even routine votes on proxy resolutions should be plagued with by uninformed broker votes. According to the WSJ, the proposal could go to the Big Board as early as June, where it is likely to be adopted. The absence of broker votes would give fund shareholders more leverage. "This strengthens shareholder rights," said Mercer Bullard, a University of Mississippi law professor and founder of the investor-advocacy group Fund Democracy. Proponents of broker votes as well as the NYSE, a unit of NYSE Group Inc., have argued it would be harder for companies to reach an annual-meeting quorum. Phil Goldstein, of Opportunity Partners, says "if the quorum requirements are too high to meet without a phony voting scheme, that is a problem for state legislatures and/or corporations, not the NYSE." (End to Broker Votes Might Be Near, WSJ, 5/3/06) Allen Advises MPFs Jamie Allen, secretary general of the Asian Corporate Governance Association in Hong Kong, observes that many of the pension fund schemes under Hong Kong’s Mandatory Provident Funds appear to operate in black box. Members have no idea who the trustees are, or what they do, and there is no way to verify that they are acting in the best interest of their members. He belives investment managers stand to benefit by pursuing corporate-governance agendas regarding the companies in their portfolios. This is especially true of state pension systems, which much invest passively in their home markets and, therefore benefit from fighting for better corporate governance. MPF master trusts should ensure they have experienced and independent trustees, develop a policy on corporate governance and on share voting, create a dedicated unit for corporate governance and consider setting up corporate-governance funds. Finally, he argues that MPF providers will benefit if they can chang e people’s perceptions of their MPF scheme’s inner workings as a black box. The low percentage of voluntary contributions suggests that people don’t trust MPF plans. (Pension funds warned of governance problems, FinanceAsia.com, 5/4/06) Foundation Failure The Chronicle of Philanthropy reports that only two of those surveyed, the Ford Foundation and the Rockefeller Foundation, have policies specifically designed to ensure such consistency between investment and program goals. Both Ford and Rockefeller consult members of their grant-making staffs before casting proxy votes on resolutions that relate to social issues. Social activists who have tried to persuade grant makers to support shareholder resolutions say one reason many foundations have resisted change can be found in the makeup of their boards, a lot of corporate executives. The Bill & Melinda Gates Foundation owns more than $450-million worth of stock in pharmaceutical companies that have been considering shareholder resolutions designed to make HIV/AIDS drugs more available in poor countries. Apparently, the foundation does not believe it should get involved in proxy voting, and has established a "wall" between its program staff and the outside company that manages the foundation's investments. (Meshing Proxy With Mission, 5/4/06) Corpgov Greater Impact on Financial Institutions Corporate governance tends to weaken financial institutions' credit ratings more than the issue affects companies in other industries, according to a new report released on Wednesday by Moody's Investor Services. Banks suffer from some governance shortfalls including larger than average boards and a tendency to appoint as directors representatives of corporate clients or local real estate developers or lawyers, Moody's said. (Banks' governance can weigh on ratings-Moody's, Reuters, 5/3/06) Tide is Turning According to Marc Lane, writing for Forbes, the tide is turning toward shareholder democracy. "In most companies, shareholders can either vote for management’s hand-picked slate of directors or withhold their votes." Yet, over the last several months, about 100 of America’s largest public companies have acted to head off shareholder proposals by adopting majority voting policies or bylaws. Majority election proposals are on the agenda at more than 100 shareholders’ meetings this proxy season. The goal, according to Lane, "is to hold management’s feet to the fire, to put an end to wink-and-nod deal-making, and to tie executive compensation to performance." "Outsized executive compensation has been linked to fraud, earnings restatements and shareholder litigation. And repairing the broken process that allows pay and performance to diverge is probably the most important reform measure on boardroom tables." The 2006 season is also empowering shareholders to voice their views on a host of emerging social issues. Lane writes that his own research finds that "tracking corporate behavior over an eight-year period...companies earning the highest marks in advancing social justice and treating the environment with respect outperformed the Russell 3000." "This proxy season’s battle over the boardroom is already seeing the balance of power tip toward shareholders. Activists who lead the charge will help restore public trust in the capital markets, boost shareholder value and promote positive social change." (Corporate Boards Feel Shareholder Heat, 5/2/06) Let's hope Mr. Lane is right. Personally, I like Les Greenberg's advice concerning the next step: After all that time and effort expended, pension funds have yet to learn that the shortest distance between two points is a straight line --- if Shareholders seriously wish to hold corporate Directors accountable for their actions, Shareholders have to offer serious alternate candidates in a proxy contest. They could start with smaller corporations and work their way up the food chain. The bigger fish would take serious notice. Fear is a great motivator. We speak from experience. The filing of a bare bone proxy statement and making about 30 vote soliciting telephone calls to institutional proxy voters could have a substantial impact. Our group of individual investors, who met on a Yahoo financial message board, ran such a campaign against a NYSE listed company, contacted 80% of the eligible voters, won 24% of the vote for our slate of Director-candidates and caused the departure of a CEO of questionable competence. Our out-of-pocket expenses were less than $15,000. One would think that well-financed pension funds could do even better with some of the 14,000 companies that have publicly traded securities and are in need of better corporate governance. If one truly desires the impact of a telegram, one does not send a post card. Boeing holders approve binding simple majority vote proposal at May 1st annual meeting by more than 93% vote. A company stock plan won a 63% vote – an unimpressive percentage for such plans recommended by management. (as reported by shareholder activist John Chevedden) Individual Shareholders Go Where Institutional Investors Fear to Tread Dissident shareholders put General Motors on notice they intend to put up an alternative slate of directors at the company's annual meeting in June. John Lauve, a GM shareholder from Holly, Michigan, filed a non-management proxy solicitation with the SEC in advance of the meeting. In a letter to the SEC, Lauve said: "The clear record of the current Titanic directors has been market rejection, junk credit rating and financial losses." According to the filing, the Nominees are John Chevedden, James Dollinger, Dean Fitzpatrick, Lucy Kessler, John Lauve, Louis Lauve III, Steve Mahac, Erik Nielsen, Larry Parks, Danny Taylor, William Walde, & William Woodward M.D.. GM lost 10.6 billion dollars in 2005. Last month, GM chairman Richard Wagoner announced that GM executives had opted voluntarily to trim salaries. Wagoner's salary was cut in half, $5.5 million in 2005, down from the $10 million in 2004. Chief Financial Officer John Devine received a package valued at nearly $3.9 million, down from $6.4 million in 2004. The board cut their own compensation by 50% and shareholder dividends were cut 50% to one dollar per share. (Dissident shareholders plan challenge to GM management, AFP, 4/29/2006) Several shareholder proposals will be on the ballot at General Motors' annual meeting, mincluding one by longtime shareholder activist Evelyn Y. Davis to put a moratorium on stock option awards. Other proposals deal with changes in corporate governance, such as a recommendation to separate the chairman and chief executive positions and changing the director-election process to a majority rather than a plurality system. GM recommended shareholders vote against these proposals. (GM CEO Wagoner got $5.5M in total 2005 compensation, MarketWatch, 5/1/2006) Chevron's Liability According to Corporate Govrnance Watch, Chevron failed to disclose a large potential liability to its shareholders in its SEC filings. Global Environmental Operations, estimated the cost of cleaning up 18 billion gallons of toxic "water of formation" spilled into Ecuador's rainforest from 1964 to 1992 would be at least $6.14 billion. That doesn't include personal damages to the thousands of victims in the region, nor compensation for the decades that the local population has lived in a degraded habitat – both of which together could double or even triple the clean-up cost. Amazon Watch filed a complaint with the SEC. (Chevron and the Ecuadorian rainforest, 4/30/06) PCAOB to Defend Itself The Public Company Accounting Oversight Board will defend itself vigorously against any legal challenge mounted against its authority granted under the Sarbanes-Oxley Act. The Free Enterprise Fund is challenging the PCAOB’s power under Sarbanes-Oxley to oversee the accounting industry, arguing that it violates the US Constitution. (PCAOB to defend itself from legal challenge, Accountancy Age, 5/1/06) Majority Vote ISS' Corporate Governance Blog reports this season's first binding proposal seeking majority voting received more than 49% of votes cast at Honeywell, according to AFSCME, significantly higher than the 20% received by a binding AFSCME proposal at Paychex in October. Before the April 24 vote, the best showing for a majority vote resolution at a company with a resignation policy was the 45% at Hewlett-Packard in March for a non-binding proposal by the United Brotherhood of Carpenters and Joiners. Progress Energy filed in its proxy materials what is believed to be the first management proposal to change a company's articles of incorporation to require a majority vote for the election of directors. The executive council of the Corporate Law Section of the Delaware State Bar Association endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes. (More Support for Majority Voting, 4/28/2006) (Delaware takes step toward 'empowering' shareholders on board votes, MarketWatch.com, 5/3/06) Last month The Corporate Library, which monitors corporate governance at more than 2,100 companies, found that stocks of well-governed companies returned an average of 15% for the 18 months that ended Dec. 31, 2005, compared with 12.5% for the overall market. John Chevedden and his associates are sponsoring far more proposals than most individual investors to introduce proxy resolutions aimed at improving corporate governance. Theabbreviations for the topics are listed below. Symb Topic Sponsor %-yes of yes and no votes Back to the top
April 2006 “Principles for Responsible Investment” Backed by World’s Largest Investors In a historic development for global financial markets, United Nations Secretary-General Kofi Annan was joined by a group of the world’s largest institutional investors, including CalPERS, at the international launch of the Principles for Responsible Investment. The heads of leading institutions from 16 countries, representing more than $2 trillion in assets owned, officially signed the Principles at a special launch event at the New York Stock Exchange. The Principles were developed during a nearly year-long process convened by the UN Secretary-General and coordinated by the UN Environment Programme Finance Initiative (UNEP FI) and the UN Global Compact. (more) “These Principles grew out of the understanding that while finance fuels the global economy, investment decision-making does not sufficiently reflect environmental, social and corporate governance considerations – or put another way, the tenets of sustainable development,” the Secretary-General said. He added: “Developed by leading institutional investors, the Principles provide a framework for achieving better long-term investment returns and more sustainable markets. I invite institutional investors and their financial partners everywhere to adopt these Principles.” In joining with institutional investors to develop the Principles, the United Nations collaborated with some of the world’s most influential institutions – many of them public pension funds – involved in investment activities worldwide. It is estimated that pension funds alone – public and private – account for up to 35 percent of total global investment. More than 20 pension funds, foundations and special government funds, backed by a group of 70 experts from around the world, held meetings in Paris, New York, Toronto, London, and Boston over an eight-month period to craft the Principles. “We are proud to endorse the Principles, which recognize that social and environmental issues can be material to the financial outlook of a company and therefore to the value of our shares in that company,” said Denise Nappier, Treasurer of the State of Connecticut, who is the principal fiduciary of $23 billion in pension fund assets. “Financial markets tend to focus too heavily on short-term results at the expense of long-term and non-traditional financial fitness factors that could affect a company’s bottom line. For many institutional investors it is the long-term that matters and in this context environmental, social and governance issues take on new meaning.” The six overarching Principles, which are voluntary, are underpinned by a set of 35 possible actions that institutional investors can take to integrate environmental, social and corporate governance (ESG) considerations into their investment activities. These actions relate to a variety of issues, including investment decision-making, active ownership, transparency, collaboration and gaining wider support for these practices from the whole financial services industry. The Principles for Responsible Investment aim to help integrate consideration of environmental, social and governance (ESG) issues by institutional investors into investment decision-making and ownership practices, and thereby improve long-term returns to beneficiaries. Implementing the Principles will lead to a more complete understanding of a range of material issues, and this should ultimately result in increased returns and lower risk. Signatories will be part of a network, which creates opportunities to pool resources, lowering the costs of research and active ownership practices. The Principles also allow investors to work together to address a range of systemic problems that, if remedied, may then lead to more stable, accountable and profitable market conditions overall. The Principles suggest a policy of engagement with companies rather than screening or avoiding stocks based on ESG criteria (although this may be an appropriate approach for some investors). The six principles are as follows:
Monitoring the Monitor CalPERS creates billions of dollars in wealth for investors while expanding shareholder rights, according to an important new study by Brad Barber of the Graduate School of Management, University of California, Davis. Barber's study of what is commonly termed the "CalPERS Effect," the incremental stock appreciation resulting after placement on CalPERS' annual "Focus List" of underperforming companies, found short-term benefits of at least $3.1 billion for investors over a 14-year period ($224 million annually). Barber breaks some ground methodologically, with his construction of a calendar-time portfolio that invests in focus list firms where weights are proportional to each firm's market capitalization. His primary theoretical contribution lies in the discussion of two agency costs. The first is widely known and recognized, that being the conflicts of interest between shareholders and corporate managers. Corporate managers may pursue projects that benefit themselves, but not shareholders. "The second agency cost, less widely discussed that the first, is the conflicts of interest between portfolio managers and investors." "Just as voting power can be used to benefit shareholders through effective monitoring of corporations, the voting power can be abused by advancing the interests of portfolio managers that are different from those of their investors and reduce the value of the portfolio they manage." He reminds us that portfolio managers and the boards that oversee them may have interests that are not aligned with shareholders or beneficiaries. Focusing on CalPERS, his primary example of the second form of agency cost is what some would argue was their vote to oust Safeway's CEO, Steven Burd, from Safeway's board of directors in May 2004 for his harsh dealing with employee unions. Of course, this second form of agency cost is much more pervasive at mutual funds, which frequently derive substantial income from administering corporate benefit programs and are reluctant to be strong shareholder activists for fear of losing clients. Barber's concluding admonition is one which I embrace and have emphasized frequently. "When institutional activism cannot be reasonably expected to maximize shareholder value, the preferences of investors should be given top priority. Institutions must open lines of communication with investors; they must understand how investors stand on moral issues that might affect investment policy." Those who invest in SRI mutual funds frequently do so because their values are aligned with those of the portfolio managers. If they turn out to have serious disagreements, they can take their investment funds elsewhere...at least in theory, although it may be impossible to find true alignment anywhere. CalPERS members don't have the same choice. Members do have opportunities to directly vote on about half the board members. However, that opportunity comes only as terms expire and factors favoring incumbents make it extremely difficult for challengers. Therefore, Barber's advice is important. Opening the lines of communication with members could not only reduce agency costs, as Barber suggests, it could serve to educate all parties involved and could help to ward off frequent political attacks. There is one perception if the president of the board appears to be using his influence to support striking members olf his own union through the use of proxy power; quite another if members demand the system do so. The CalPERS Shareowner Forum could provide a mechanism for member feedback and for debating the issues. Instead, it has the appearance of an elephant graveyard where readers are presented with largely ageing material and no meeting place for open discussion among experts or members. CalPERS should revitalize this "forum," which could be a gathering place for the exchange of important ideas leading to greater portfolio returns, education, and increased legitimacy for what are sometimes seen as politically motivated investments and votes. Barber makes one last point, which I believe, is not highlighted enough. Because CalPERS owns only a small fraction of the equities market, members enjoy benefits of only $1.12 million annually of the benefit from the pension fund's activism. Barber notes long-term benefits from CalPERS activism of as much as $89.5 billion. Of that, only .5% accrue directly to CalPERS. Of course Barber's figures don't take into account the deterrent effect and the ability of CalPERS to "drive the herd." However, his point emphasizes the need for a greater role by organizations such as the Council of Institutional Investors and the Investors for Director Accountability Foundation so that costs and benefits can be more equitably distributed. By working more closely with these and other organizations, CalPERS could reduce "free rider" issues where 95.5% of the value they generate goes to others. Funds could, for example, coordinate by using the Council to consider proposing replacement corporate directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. EBSA Seminar The US Department of Labor's Employee Benefits Security Administration (EBSA) regional office in Philadelphia will hold a free seminar May 18 to assist employers, pension plan administrators, and other benefit professionals to comply with federal employee benefits law at the NOAA Science Center in Silver Spring, Maryland. The one-day seminar will offer comprehensive information and one-on-one help on using the Voluntary Fiduciary Correction Program (VFCP) to self-correct potential violations of the Employee Retirement Income Security Act (ERISA). (PlanSponsor.com, 6/24/2006) Database Being Created CalPERS and CalSTRS have joined forces and have hired Altura Capital to develop a comprehensive database of emerging managers and emerging financial service provider firms (EMFSP database). Goals include:
Read to Head CalPERS Investment Office Russell Read, former deputy investment chief for Deutsche Asset Management in New York, will join CalPERS on June 1. He replaces Mark Anson who left in January to head London-based Hermes Pensions Management. Read will earn a base salary of $534,000 a year, plus bonuses up to 75%. According to an article in the Sacramento Bee, Read is already involved in environmental issues. Read apparently planted 10,000 oaks, sugar maples, black cherry trees, elms and chestnuts on 60 acres on his property in Brooks, Maine. Read earned a doctorate in political economy and master's degrees in economics and political science from Stanford University. He also received a master's of business administration in finance and international business and a bachelor's degree in economic statistics from the University of Chicago. (CalPERS picks money ace, 4/20/06) Empower Employees Korn/Ferry International advises that companies may want to stop throwing money at their top executives. Their recent study found that only 5 percent of global executives say that inadequate or inconsistent compensation is the main reason they left their last job. Rather, 33% say lack of challenges or opportunity for career growth was the top reason they left.; 20% pointed to ineffective leadership; and 17% to the attractive job market. Additional Conflicts of Interest For Ivan G. Seidenberg, chief executive of Verizon Communications received $19.4 million in salary, bonus, restricted stock and other compensation in 2005, 48% more than in the previous year. Shareholders didn't do as well, since their stock fell 26%. Verizon reported an earnings decline of 5.5%. Class Mobility Stalls Across the 1990s, about 40% of US families ended the decade in the same income bracket in which they began, versus 36-37% in the 1970s and 1980s. More than half the families at the bottom were still there after 10 years. The best way to get ahead my be to move, if you can afford it. Researchers found that mental health improved greatly when the poor people in the studies moved to better neighborhoods. “Overall, they likened the magnitude of the effect to that found in 'some of the most effective clinical and pharmacological mental health interventions.' ” (Overcoming Barriers to Mobility, Brookings, 4/2006) The Corporate Library Proposes Better Compensation Tables Shareholder activists, corporate officers, and executive-pay consultants have joined in criticizing SEC proposed changes to the so-called summary compensation table describing what top brass earned the prior year. One of the main concerns raised by critics is that combining the value of yet-to-be-earned equity, as proposed, with hard cash actually paid out the prior year in a single table risks confusing investors. The Corporate Library has proposed a reasonable alternative. An "earned compensation" table would include salary, perks, annual bonus, vested restricted stock, exercised stock options and other compensation received during the year. A "future compensation" or target compensation table would include, among other things, target annual bonuses, value of restricted stock awards amortized over the vesting period, and grant date value of stock options. "In this way, all the 'apples' will be in one table, and all the 'oranges' will be in another," says senor researcher Paul Hodgson. (Activists, firms critique proposed SEC compensation tables, Phyllis Plitch, MarketWatch, 4/20/2006) CalPERS Announces Focus List CalPERS, the largest U.S. pension fund, announced six targets for turnaround: Brocade Communications Systems, Cardinal Health, Clear Channel Communications, Mellon Financial, OfficeMax, and Sovereign Bancorp. CalPERS reviewed more than 1,800 U.S. companies in its portfolio before selecting its annual "Focus List." All of the companies except Clear Channel require supermajorities to amend their by-laws, all but Sovereign have significantly underperformed their peers over five year and Sovereign has lagged in the past year. CalPERS said Cardinal and Clear Channel grant excessive severance, Clear Channel pays its executives too much, OfficeMax and Sovereign have "excessive" takeover defenses, and Sovereign offers "limited shareowner rights" and grants severance to directors. (CalPERS targets six underperforming US, Reuters, 4/19/2006) A 1995 study by Steven Nesbitt, of Wilshire Associates, examined the performance of 42 companies targeted by CalPERS. It found the stock price of these companies trailed the S&P 500 Index by 66% in the five year period before CalPERS acted to achieve reforms. The same firms outperformed the Index by 52.5% in the following five years. A similar independent study by Michael P. Smith (Economic Analysis Corporation, Los Angeles) concludes that corporate governance activism increased the value of CalPERS' holdings in 34 firms over the 1987-93 period by $19 million at a monitoring cost of $3.5 million. The CalPERS internet site should not only include how CalPERS intends to vote, it should facilitate the ability of members to e-mail the corporations about their concerns. (Disclosure: James McRitchie, the publisher of CorpGov.net, is a recently declared candidate for the CalPERS Board of Administration) SARs Spreads CFO.com reports that with FAS 123R making stock options increasingly unpopular, a growing number of companies are resurrecting an old form of incentives known as stock appreciation rights, or SARs. Like options, SARs reward employees based on the increase between a set strike price and current market price. The compensation vehicle gives the right to the monetary equivalent of the appreciation of share price over a specified time, but no stock or options are actually granted at the time the right is offered. Since they cover only the marginal gain, however, SARs can be fulfilled using cash or fewer shares of stock than options require, reducing dilution. "They're no more open to abuse than stock options or restricted stock," says Paul Hodgson, senior research associate at The Corporate Library. However, he adds, "the problem with both restricted stock and SARs is that they are no more related to performance over the long term than options are." (Taking Stock of SARs, 4/1/2006) (see also Beyond Stock Options) Cheaper Drugs Could Increase Profits for Universal Investors Like CalPERS Trillium Asset Management and the Interfaith Center on Corporate Responsibility have collaborated on a draft research paper, "Why Lower Drug Prices Benefit Institutional Investors." SOX Costs Decrease for Large Firms Large U.S. companies spent less than expected to comply with the Sarbanes-Oxley corporate governance law last year, according to a study commissioned by the four largest accounting firms. The CRA study found that costs for smaller companies weren't falling as steeply. Total compliance costs for companies with market capitalizations of $75 million to $700 million dropped 31%, to $860,000. (Sarbanes-Oxley Costs Down, WashingtonPost.com, 4/19/2006) Indian Armed Forces to the Rescue Corporations in India are having a difficult time finding 3,000-4,000 independent directors to meet the new revised clause of SEBI for public companies. Now, it appears the armed forces is coming to their rescue. Army officers will be trained in a two week course in corporate governance by Bombay Chartered Accountants Society and the SP Jain Institute of Management Research. The program will include lessons in corporate governance, aspects of audit committee, risk management of companies and corporate governance in practice (with a case study on Infosys). (Governance training for ex-army men, Business Standard, 4/17/06) And American companies are having difficulty finding "qualified" directors. Phil Johnston blogs that he has spent the last four-and-one-half decades sitting on five public and 16 non-public boards. "I never once saw a board member being proposed by the nominating committee. Typically, one director alone along with the CEO, or the CEO alone proposed nominees. The nominating committee merely vetted. (Sing It Again, Frank ... That's Life, Corporate Governance Leadership Blog, 4/17/20060) Time for changes. Blame Mutual Funds for High CEO Pay, Says Bogle John Bogle, the founder of Vanguard, says the compensation packages of mutual fund managers should be more transparent. Pay disclosure is scant, because many fund management companies are private or are subsidiaries of large organizations, and the fund executives are not necessarily among their companies' five highest-paid people. According to Bogle, runaway executive pay isn't the fault of grasping corporate managers alone; it's also the fault of the many mutual fund managers who have done little to stop the diversion of shareholder money to excessive compensation. Index managers should be especially active since, if they can't sell the stock, being active is the only way they can raise value. Yet, when it comes to executive pay, only Amalgamated Bank's LongView Funds filed a comment letter with the SEC on its pay disclosure proposal. (Fund Managers May Have Some Pay Secrets, Too, NYTimes, 4/16/06) Widespread Vote Manipulation in Corporate Elections Mark Hulbert's article on vote borrowing (One Borrowed Share, but One Very Real Vote, NYTimes, 4/16/2006) overlooked a related problem, Wall Street's failure to keep adequate tabs on shares that can easily be loaned repeatedly for the same election, allowing three or four owners to cast votes based on the same holdings. According to Thomas Montrone, of Registrar & Transfer Co., which oversees shareholder elections says "a lot of the time we have no idea who’s entitled to vote and who isn’t." The Hazlet, a New Jersey–based group for stock transfer agents, reviewed 341 shareholder votes in corporate contests in 2005. It found evidence of overvoting—the submission of too many ballots—in all 341 cases. (Corporate Voting Charade, Bloomberg Markets, April 2006) As usual, Broc Romanek, editor of TheCorporateCounsel.net, is about a year ahead of most of us. See his informative interview, Inside Track with Julie: Broc Romanek on Understanding Overvoting. (4/25/05) Also of interest, Inside Track with Broc: Rich Koppes on Investors Placing Directors on Boards. (3/29/06) Letters Support Corporate Governance Allan Murry's Corporate-Governance Concerns Are Spreading, and Companies Should Take Heed (WSJ, 4/12/06 -- subscription required) is followed up with The Math on Corporate Boards (WSJ, 4/15/06) letters, mostly supportive of greater attention to corporate governance. Ironic Perks Michelle Leder's Footnoted.org reports on recently disclosed and sometimes ironic perks (Perk Watch, 4/12/2006):
Google Shouldn't Be Corporate Governance Outlier The Bricklayers & Trowel International Pension Fund, which owns 4,735 shares of Google filed a proposal seeking to dismantle its two-class stock structure. It has no chance of passing, since co-founders Sergey Brin and Larry Page and CEO Eric Schmidt control 70% of the voting control. Google has two classes of stock. The class B shares held by the three executives count as 10 votes for every share, compared to one vote for every share of class A stock held by most other shareholders. The proposal will be voted on during Google's annual shareholder meeting on May 11. Jake McIntyre, who represents the Bricklayers, argues that Google may be fine now but "people become corrupted, or the founders pass away and leave the company to heirs. They could be ne'er-do-wells. At that point, it becomes apparent why you wanted to have more direct shareholder control.'' Charles Elson, director of the Center for Corporate Governance at the University of Delaware, agrees. "Any time you separate economic interest from voting interests, it leads to all kinds of problems. It lessens the accountability. I haven't heard of any good reason for dual-class stock. I think the proposal will strike a chord with a lot of people.'' I couldn't agree more. Brin, Page, and Schmidt wouldn't be in any danger of loosing control if all shares carried the same voting power, as long as Google continues to perform. Furthermore, it shouldn't be up to these three or their heirs to determine when they have become corrupted or incompetent. Few people readily acknowledge their own failings. Shareholders should support the resolution. (Google shareholder wants two-tiered stock structure dismantled, San Jose Mercury News, 4/12/2006) Public Employees Face Shortfalls The Colorado Coalition for Retirement Security, a new group representing more than 100,000 Colorado public workers, has been formed to oppose any structure that would pay future hires lower pension benefits than current workers. The Colorado Public Employees Retirement Association (PERA), which covers 370,000 members, backs a bill that would funnel a portion of contributions from future hires to overcome an $11.3-billion shortfall. Despite a $14.1 billion return on investments, falling interest rates and increasing numbers of retirees are to blame for the shortfall at the Ontario Teachers' Pension Plan. In 1990 there were four working teachers per pension recipient; now there are only 1.6 working teachers per pensioner. Best-Performing Strategies The Wall Street Journal reports a study by ISS of more than 300 institutional investors finds corporate governance concerns are on the rise. 63% of those surveyed believe corporate governance will be even more important to their firms over the next three years than it has been over the past three years. Investors are recognizing that attention to corporate governance increases the value of their investments. 59% said monitoring corporate governance of companies they invest in enhances investor returns. Chinese investors give the strongest endorsement to corporate governance, with 90% of them saying it was either "important" or "very important." But those investors are concerned with achieving basic levels of board accountability and transparency in Chinese companies already common elsewhere. Japanese investors put primary emphasis on eliminating poison pills and other measures designed to prevent takeovers, which can boost shareholder returns. Dennis Johnson, a senior portfolio manager at CalPERS, says his they have invested $4 billion with activist managers who focus on different corporate-governance measures in different markets with great success. "It's one of the best-performing strategies in all of equity investing for CalPERS," he says. (Corporate Governance Concerns Are Spreading, and Companies Should Take Heed, 4/12/2006) Look at the sour-grapes way Goodyear reported the 73% yes-vote for simple majority voting (Shareholder proposal #5): 76 million yes-votes vs. 28 million no-votes.
This may be an all-time record high vote percentage for a shareholder proposal submitted to Goodyear. (Publisher: But aparently not, if you count those who didn't vote.) Moody's Criticizes Coke Director Pay Plan Moody"s Investors Service published a negative response to use of incentive pay for outside members of boards of directors. Moody's views the programs with skepticism, says Moody's Managing Director Kenneth Bertsch, an author of the report. "Incentive pay for directors based on performance metrics can undermine director independence when setting executive compensation and providing oversight of financial reporting. Further, it introduces a risk that the board's attention will shift to short-term shareholder-oriented performance," says Bertsch. CalSTRS Seeks Majority Election Default The California Teachers' Retirement Board will join CalPERS in sponsoring California State Senate Bill 1207 (Archon). The Board also voted to officially support the provisions in Congressional Bill H.R. 4291 (Frank). SB 1207 sets as a default policy that uncontested nominees to the board of directors of a California-registered public company must receive a majority of votes from the shareholders represented and voting in order to be elected, instead of the current plurality standard that allows a director to be elected with the positive vote of one share. SB 1207 is permissive and would allow companies to adopt plurality voting standard if they chose to do so. According to a press release from CalSTRS, this legislation aims to put the ultimate power over the election in the hands of the shareholders, and helps California corporations set the standard of best practices in voting. The bill was referred to the state Senate Committee on Business, Professions and Economic Development. (see Leginfo) H.R. 4291 would require company disclosure of executive compensation plans in its annual reports and proxy statements, as well as requiring a separate vote for general equity compensation plans and so-called Change-in-control severance agreements. Additionally, H.R. 4291 provides shareholders the protection of a clawback policy. The clawback provision would require companies to adopt policies in which all principal executives return compensation to corporations. The clawback policy would also apply to compensation for performance that does not meet stated measures, compensation as a result of fraud and unearned performance-based compensation as a result of restatement. The bill is in the House Subcommittee on Capital Markets, Insurance and Government Sponsored Enterprises. "We have been working for decades to improve transparency at the board level and have fought tirelessly to make our voice as shareholders heard," said Jack Ehnes, CalSTRS CEO. "While we have made great strides in engaging companies directly on these issues, these bills lend a strong and consistent legal framework." (California State Teachers' Board Supports Corporate Governance Legislation; Bills Ensure Shareholder Democracy and Performance-Based Executive Compensation, 4/11/2006) In other news the board re-elected Carolyn Widener as Chair and Dana Dillon as Vice-Chair for the 2006 term. (CalSTRS Board Elects Chair and Vice-Chair for 2006 Term, 4/7/2006) They also announced Tuesday an agreement to build a new $176 million to $186 million headquarters office tower at Raley's Landing in West Sacramento, bringing a high-profile investor to the commercial, retail and residential complex along the Sacramento River. That will put CalPERS and CalSTRS within a few blocks of each other. (CalSTRS HQ to anchor West Sac waterfront development, 4/11/2006) H.R. 4291 would require full disclosure of a company's compensation plan for principal executive officers in their annual report and proxy statements. The Frank bill would also require separate shareholder approval for any compensation plan, including "golden parachute" packages. Independent Directors Bring Higher Mutual Fund Returns The most recent study (and the study that uses the most comprehensive dataset) was presented at the AFA this January in Boston. This paper by Drs. Ding and Wermers sheds light on the current controversy about the independence of mutual funds boards. This is what they have to say:
Outside Advisors Pay Dependent Gretchen Morgenson's excellent article in the NYTimes (Outside Advice on Boss's Pay May Not Be So Independent, 4/10/2006) points to the fact that many "outside" advisors on executive pay are dependent on those executives for a substantial part of their business. Hewitt Associates, for example, not only reportedly advises Verizon on Ivan G. Seidenberg's pay package but also on running the company's employee benefit plans, providing actuarial services to its pension plans and advising it on human resources management. Morgenson also notes that SEC rules do not require companies to disclose the names of pay consultants or their conflicting relationships. The SEC has proposed rules on compensation disclosure that would require compensation consultants to be identified. But the rules would not force companies to disclose details of other services provided by the consulting firm or its affiliates. The Conference Board issued a report in January suggesting, among other practices, that boards hire their own compensation consultants, who have not done work for the company or its current management. John W. Snow, secretary of the Treasury, characterized executive pay this way: "In an aggregate sense, it reflects the marginal productivity of C.E.O.'s." Mr. Snow added that he trusted the marketplace to reward executives. Mr. Snow was a member of the Verizon board from 2000 to 2002 and on its compensation committee in 2001. An increasingly common practice of consultants is to use the same performance benchmark to generate both short-term and long-term pay. This arrangement rewards executives twice for a single achievementnoted Paul Hodgson, senior research associate at The Corporate Library. According to Morgenson, even though stock exchange regulations require compensation committee members to be independent of the executives whose remuneration they oversee, their connections with those people can run deep. Verizon's compensation committee, for example, consists entirely of chief executives or former chief executives. Three of the four members sit on other boards with Mr. Seidenberg. You scratch my back; I'll scratch yours. That's independence according to the current rules. As I have noted repeatedly, what we need are directors who are not only independent of management but dependent on shareholders. I urge shareholders to consider proposing replacement directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. Will Cox Step Up? That's Mercer Bullard's question after learning of the US Court of Appeals for the District of Columbia decision that rules requiring at least 75% of mutual fund directors to be independent could be set aside in 90 days, largely because the SEC incorrectly followed procedures when estimating the costs of the rulemaking. The SEC could maintain the rules by allowing more public comment, depending on how Cox and other commissioners choose to act. The plaintiff in the case was the US Chamber of Commerce, which said it filed the appeal on behalf of mutual-fund-company members it declined to identify. (Court stalls SEC rule fought by Fidelity, Boston Globe, 4/8/06) Will Cox protect investors or will he side with those who do not want to be held accountable by independent directors? CEO Golden Years While more and more companies switch from defined benefit to defined contribution retirement plans, CEOs continue not only with DB plans but also with additional perks. According to the AFL-CIO, 69% of Fortune 1,000 CEOs are covered by traditional DB plans, while only 21% of private-sector workers are covered by such plans. CEO Golden Years: The Top 25 Largest CEO Pensions, a report by the AFL-CIO and The Corporate Library, reveals Pfizer Chief Executive Hank McKinnell will get an annual pension of $6.5 million (or a lump-sum pension check of $83 million), ExxonMobil's ex-CEO Lee Raymond is also at $6.5 million (or a lump-sum payment of $81 million), and AT&T's Edward Whitacre ranked comes in third with a pension valued at $5.5 million a year. (AFL-CIO puts big CEO pensions under scope, USA Today, 4/7/06) Westly's Campaign Contributions Scrutinized The Los Angeles Times took a closer look at State Controller and gubernatorial candidate Steve Westly campaign contribution, writing that he "steered California's giant pension system to invest in a fledgling venture capital fund whose politically connected partners helped him raise campaign cash." "Before Westly's involvement, the pension board's outside advisors had rejected the fund as ill-suited for its portfolio. After the investment was made, one of the partners became enmeshed in an unrelated pension-fund scandal in Illinois, pleading guilty to attempted extortion." (Funding for Westly Followed Investment, 4/6/06) Disclosure of Political Contributions Gets Traction The Wall Street Journal reports that the campaign for corporate disclosure is gaining momentum. ISS is, for the first time, recommending passage of a shareholder resolution requiring more oversight and disclosure of political giving. The unprecedented recommendation involves Washington Mutual Inc., a fast-growing Seattle thrift. According to Alan Gulick, a company spokesman, Washington Mutual opposes the resolution on grounds that information on the thrift's donations, roughly $50,000 in the past election cycle, are already available to the public. In addition, Washington Mutual executives argue the cost of implementing a new policy may well exceed the company's relatively modest political giving. A recent survey of investors by Mason-Dixon Polling & Research, commissioned by the Center for Political Accountability, provides support. More than 90% of respondents backed more disclosure and 84% wanted board oversight and approval of such giving. Nearly three-quarters of respondents agreed that corporate giving is often aimed at advancing the private interests of executives rather than the company's interest. Sixty resolutions are pending this year and 41 are scheduled for votes. ISS says resolutions will be evaluated on a company-by-company basis and largely will hinge on whether a firm already has high-level oversight of donations and a policy explaining its criteria for giving. (Investors Seek Clarity on Campaign Giving, WSJ, 4/5/06) Coke Board's Pay Plan No Model The Coca-Cola Company announced an innovative plan for paying outside directors: Coca-Cola's $175,000 annual director payments, issued as stock, will be payable only if the company meets a compound earnings growth target of 8% over the next three years. If earnings per share do not rise fast enough over the three-year period, directors will receive nothing. But they will get a significant raise if earnings perform as expected. The idea was enthusiastically supported by Warren E. Buffett, the chairman of Berkshire Hathaway and a Coca-Cola director who is stepping down from the board and will not be eligible for the payments. (Coke's Board to Get Bonus or Nothing, New York Times, 4/6/06) This publisher tends to side with an analysis by PROXY Governance. "It's hard to envision directors like Barry Diller, Peter Uberroth or James Robinson III risking their reputations by getting involved in earnings shenanigans to ensure their Coca-Cola director payments," Managing Director for Policy at PROXY Governance Scott Fenn said. "But there are several good reasons why we don't view this as a particularly useful model for Corporate America," he added, "and creating a strong incentive for directors to look the other way if management plays games with earnings is high on the list."
The April 4 management proposal 5 for certain simple majority voting provisions was approved by shareholders (Source: Morgan Stanley From 8–K). Plus the related shareholder proposal 7 for 100% simple majority vote won 59% of shareholders' yes and no votes. John Chevedden, proxy for sponsor Emil Rossi. 40% of votes cast backed a proposal by AFSCME calling for majority voting in board elections. Morgan Stanley had already changed its corporate governance policy to ask any board nominee who gets more “withhold” votes than “for” votes to tender his or her resignation. Additionally, 55.5% of shares were voted to support to a proposal by the LongView Collective Investment Fund calling for executive severance packages that exceed 2.99 times the sum of the executive's base salary plus cash bonus be subject to shareholder approval. Shareholder proposal triggers NiSource Inc. (NI) company proposal. The Ray T. Chevedden rule 14a-8 shareholder proposal for annual election of each director submitted for the 2006 NiSource annual meeting ballot triggered a company proposal on the same topic (Per April 3, 2006 definitive proxy). This is particularly advantageous for shareholders because the company proposal requires only a 51% vote of shares outstanding. Plus each director will then stand for a one-year term at the 2007 annual meeting and thereafter. "Each director whose term would not have otherwise expired at the annual meeting in 2007 will tender his or her resignation to be effective at the annual meeting in 2007." Mr. Chevedden's 2005 proposal on this same topic won 74% of the yes and no votes at NiSource. ISS Governance Weekly notes one of the upcoming meetings to watch is PG&E's on April 19, 2006. John Chevedden (on behalf of the on behalf of the Ray T. Chevedden & Veronica G. Chevedden Family Trust) has introduced a proposal to require the company to submit future “poison pills” to a shareholder vote within four months. The company notes that it has terminated its poison pill plan in February 2004 and adopted a policy to seek shareholder approval within 12 months of adopting such a defense. A proposal by Nick Rossi asks the board to require an independent chair. The company claims it has a high level of board independence and a lead director to ensure independent oversight of management and sound policymaking. Cavanagh Predicts Forbes.com interviewed Richard Cavanagh, who's stepping down after 10 years as chief executive of the Conference Board. On when women will be CEOs, "I think it'll be in the next three to five years." Regarding proposed SEC executive-pay disclosure rules, "better disclosure has a good chance of raising pay rather than limiting it. In Lake Wobegon, we are all above average and need to be paid above average." On big corporate governance issues a few years down the road, shareholders don't act like shareholders because they don't hold for the long-term. In Switzerland, shareholders who hold securities for 10 or 12 years pay virtually no capital gains. "And guess what: They get a lot of people holding onto them. So I think that's the real crux of it." (Diversity, Governance, Executive Pay, 04/06/06) Majority Vote Seminar The Weinberg Center for Corporate Governance at the University of Delaware will hold a panel discussion on Majority Voting and Director Contest Reimbursement as part of the Seminar in Corporate Governance taught by Charles M. Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance. That's Tuesday, April 25, 2006 between 9:30 am and 11:30 am at 125 Alfred Lerner Hall. Call 302-831-6157. Guest panelists include:
Marching Under the Bylaws Banner WSJ points out that frustrated shareholders are now starting to make more frequent use of binding bylaw resolutions. Eighteen of 1,056 shareholder proposals submitted last year were binding, according to Institutional Shareholder Services; by the end of March this year, 10 of 890 submitted were binding. Failure to win open access to the proxy for investor nominated directors has yielded a new burst of creative strategies. Lucian Bebchuk (see Letting Shareholders Set the Rules) has targeted eight companies with bylaw amendments this year. Mr. Bebchuk's proposals would require companies to reimburse shareholders for expenses incurred in initiating and promoting successful resolutions and amendments, up to the amount the companies themselves spent to defeat them. Three companies -- American International Group Inc., Bristol-Myers Squibb Co. and Time Warner Inc. -- have already accepted his proposals or variants. Five others are opposing his proposals, so shareholders will vote on them this spring. The article also discusses proposals by CalPERS and AFSCME. (Stock Activism's Latest Weapon, 4/4/06) Jackie Cook's Blog and Site Jackie Cook, a Senior Research Associate at The Corporate Library, has a blog and an ambitious site worth bookmarking and checking frequently. Governance Map offers "a window into the network of corporate decision makers." A current news item discusses the fact that at least 49 resolutions calling for a majority vote threshold to be applied to director elections have been published in US public company proxies already this year (up to 31 March 2006). Her internet site is The Directormap Project, which publishes results of director elections. Here, for example, you can see a chart of the largest spread between least supported board nominee and average of other nominees (with more than 30% difference). Her online resources section is a work in progress but, when built out, will put my little stone-age links page to shame. When I look at her work, I feel so 20th century, but also in love with what the 21st century is bringing. I feel certain that with these tools shareholders and society will be able to unlock the true wealth generating potential of corporations, while ensuring a sustainable future. Short-Tremism Revisited Conference Board report, Revisiting Stock Market Short-Termism, finds that short-termism has many negative effects including focusing investor and corporate attention on near-term quarterly earnings to the possible detriment of longer-term corporate growth. Among the key factors compelling change:
The following are the report's suggestions for future action:
To Unlock the Investor Link:
To Unlock the Analyst Link:
Vote on Severance Pay at Morgan Stanley Morgan Stanley shareholders vote on Amalgamated Bank’s LongView funds proposal, which appears as Item #8 in the proxy statement, to seek shareholder approval for executive severance agreements that provide at least three times an executive’s base pay plus bonus. In 2005, Morgan Stanley entered into agreements, often known as “golden parachutes,” with Chairman and CEO Philip Purcell and Co-President of 3.5 months Stephen Crawford, under which they would receive severance packages valued at $44 million and $32 million, respectively. Both executives then left the Company. “Morgan Stanley’s 2005 executive severance payouts came at a high cost to shareholders and in our opinion reflected poorly on decision-making by the board,” said Julie Gozan, Director of Corporate Governance for Amalgamated Bank. “Our proposal, if adopted, would give our current directors a policy to follow to ensure best practices. Hopefully, the policy would encourage restraint when the company negotiates awards in the future, and it would allow for shareholder oversight of any very large golden parachutes.” In addition to base compensation, executive severance plans may include lump sum payment of annual bonuses; payment of long-term incentive awards; immediate vesting and lapse of all restrictions on restricted stock; the right to exercise outstanding stock options; and continuing coverage under the company's benefit plans. In 2005, proposals seeking to limit or provide oversight for very large executive golden parachutes received, on average, a majority of shareholder votes cast on the issue. I wonder how Morgan Stanley’s own fund groups will vote. A recent study by AFSCME and The Corporate Library identified Morgan Stanley Funds as "pay enablers," saying they used their substantial voting strength to foil attempts by other investors to rein in runaway executive pay. Signs of Shareholder Revolution Continue Gretchen Morgenson continues to brings the readers of the New York Times news about the struggle for more democratic corporate governance in "One Share, One Vote: One Big Test." (4/2/06, subscription required) LongView Funds, a family of mutual funds run by the labor-union-owned Amalgamated Bank, submitted a proposal to CA Inc., formerly known as Computer Associates, asking its shareholders to vote to remove two directors at its coming meeting: Alfonse M. D'Amato, a former senator from New York, and Lewis S. Ranieri, a former vice chairman of Salomon Brothers and the chairman of CA's board. "We deem it important to replace those directors who served during the period of misconduct," the proposal states, "who continued on the board during the board's failure to effectively investigate accounting issues that were raised in 2001 newspaper reports and government investigations, and whose initial response was merely to demote the C.E.O. and offer a $10 million payment to end the law enforcement inquiries." The company made the $10 million offer in 2004, notes Morgenson. The article recalls the fascinating history of CA's "spectacular implosion." From the many earnings restatements, indictments and guilt pleas to fraud, and cooking the books to lavish lifestyles. "The beauty of the LongView proposal," according to Morgenson, "is its simplicity. It does not require an expensive shareholder campaign to unseat a director in favor of another candidate. Nor does it ask the S.E.C. to create any new rights for CA shareholders. It simply asks that CA shareholders be allowed to remove directors by a majority vote of the shares outstanding — something they are entitled to do under the laws of Delaware, where the company is incorporated." For more information, see the Forum for Shareholders of Computer Associates International (“CA”). We anticipate the SEC will issue a no action letter allowing CA to withhold the resolution from the proxy based on Rule 14a-8(i)(8) - Relates to election: If the proposal relates to an election for membership on the company's board of directors or analogous governing body. However, the SEC could get religion. Afterall, their mission is to "protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation." How does denying shareholders the right to proposals relating to elections "protect" investors? I would urge LongView Funds to also consider proposed directors under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. The Corporate Library informs me the rule has been invoked at least twice. At Office Max, Monte R. Haymon was recommended by K Capital.tw and his nomination was accepted by the board. He was elected. More interestingly, at Gateway Energy, shareholder Chauncey J. Gundelfinger, Jr. nominated himself and Steven C. Scheler to be considered for election to the Board of Directors. From Gateway Energy's proxy:
Both were elected by shareholders, despite the Board's recommendation. Back to the top Back to the top Equal access? The SEC's rulemaking, S7-19-03 (comments, Editor's: 1, 2 & 3) would have been a weak first step. Compare the petition Les Greenberg and I filed to allow shareholder proposals to elect directors: Petition File No. 4-461, which the Council of Institutional Investors said "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." See Equal Access - What Is It?, Inside Track interview, ad. Evolution at Solicitation of Public Views Regarding Possible Changes to the Proxy Rules and Shareholder Access to the Proxy. Hold on until 2009. We'll be back!
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