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Current News and Commentary. January 2007, February 2007, March 2007. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest. Your ad clicks help pay the bills.
John Chevedden Reports Fortune (FO) Annual election of each director 68% To read more on the activities of Chevedden and his associates, see Edison defends compensation policy, LATimes, 4/17/07; EDS shareholders reject limits on some executive compensation, San Jose Mercury News, 4/17/07; Northrop Chief Gets Highest Pay of Top Defense CEOs, Bloomberg, 4/12/07; Shareholders asked to ditch anti-takeover protection, Midland Daily News, 4/12/07; 3 Goodyear shareholder votes fail, Akron Beacon Journal, 4/11/07; Morgan Stanley, Bank NY reject 'say on pay,' CNNMoney, 4/10/07. CEO Pay vs Private Equity CEOs of public companies regularly come under fire but a recent article in the Financial Times points out that rewards are even more generous for those who run hedge funds. "Take the 25 best-paid hedge fund managers, as recently unveiled by Alpha magazine. On average, yes, average, they made $570m apiece last year. The top three – Jim Simons, of Renaissance Technologies, Ken Griffin, of Citadel, and Eddie Lampert, of ESL – made more than $1bn each. Meanwhile, the highest total compensation for a chief executive last year that the Corporate Library could find (including the proceeds of cashing in options and other such items) was just under $120m." FT blames much of the difference to the fact that "public companies are – well – public...By contrast, the goings on at hedge funds and private equity firms are mostly hidden from view, even if Alpha does turn on the spotlight now and again." (On Wall St: Focusing fire on CEOs, 4/27/07) Fund Votes Jackie Cook, who maintains Directormap and the Governance Map blog, recently posted another very informative site, Fund Votes, which contains summaries of how mutual funds voted on shareholder resolutions and also summarizes voting results on all categories of shareholder resolutions. Australian and US Ties to Increase Australia's Federal Treasurer Peter Costello has announced a plan to harmonize Australian and US stock exchange rules. If the plan goes ahead, in future it should be easier for Australian companies to have a secondary listing in the US as they will no longer have to comply with two sets of regulations. (Stock exchange rules may be harmonized, The Crossborder Group, 4/27/07) Comverse Opens Access, Slightly Comverse Technology has become the second company to adopt proxy access provisions. In 2003 Apria Healthcare adopted its Policy Regarding Alternative Director Nominations by Stockholders in 2003. Apria's policy provides that 5% stockholders that have owned for two years or more can nominate up to two candidates, whose name will then appear on corporate proxy. ISS reports that "Comverse announced the proxy access bylaw this week as part of a series of governance changes as the New York-based company tries to recover from a stock-option grant scandal that led to criminal charges against three former executives. The voice-mail technology firm also is facing a proxy challenge from Oliver Press Partners, which is seeking to call a special meeting and to elect two board nominees." Under the newly adopted bylaw, an investor that owns a 5% stake for at least two years may nominate one director to appear on the company’s proxy statement, not to exceed 500 words, in support of the Nominee's candidacy. The Comverse bylaw also bars an investor from making nominations for four years if its nominee fails to receive at least 25% support. ISS suggests the move "may encourage other companies to consider creating mechanisms to allow investors to nominate directors to appear on corporate ballots." “The action at Comverse is a clear breakthrough as the first company that has amended their bylaws to establish a process for shareholders to nominate directors on the company proxy card,” Richard Ferlauto told ISS' Governance Weekly. Mark Terrell, former executive director of KPMG’s Audit Committee Institute who became Comverse’s chairman in July, said the proxy access bylaw, majority voting requirements and a new shareholder advisory group reflect the boards efforts to “remake the governance of the company in the wake of the options problem.” (Comverse Adopts Access Bylaw, ISS Governance Weekly, 4/26/07) Activist investor group Oliver Press Partners LLC is unhappy with the new rules. The firm is seeking to add two directors to the company's board and won't be helped by the new bylaw changes since it owns less than 1% of the company's outstanding shares. Currently, just two Comverse shareholders, Fidelity Investments and Capital Research & Management, hold stakes of at least 5 percent in Comverse Technology. (Comverse Investors Can Nominate to Board, Houston Chronicle, 4/24/07) Jacob "Kobi" Alexander, the ex-Comverse Technology CEO who was arrested in the African Republic of Namibia in September, has been granted a delay in attempts to extradite him to the US. He is wanted on charges of manipulating stock options for personal gain. He fled the country after the FBI issued an arrest warrant for him last July. Alexander is reportedly in the process of establishing a scholarship fund in Namibia to support top students to “further their studies in science and technology.” (He's Probably Also Angling For Piece of Angelina, DealBreaker, 4/24/07) The bylaws amendments by Comverse are certainly welcome. It will be even more positive when companies that are not financially troubled or plagued by scandal adopt proxy access policies and bylaws. Growing Income Inequality A study by the Poverty Task Force of the Center for American Progress (CAP) finds that in 2005, the top 1% of American households held 19.3% of the nation’s income, equal to its largest share since 1929. At the same time, the U.S. Census Bureau reports that in 2005, those in the bottom 20% had just 3.4 percent of total income. Ceres-ACCA Award Winners The Vancity Group, the winner for best sustainability report, provided an innovative and convenient “dashboard of performance metrics” in several key categories and contained interviews with managers responsible for specific sets of issues. Bristol-Myers Squibb—trying to rebound from a $2.5 billion inventory overloading scandal, which led to a 2005 deferred prosecution agreement with U.S. prosecutors—produced a report with several unusual features that may set new standards. It is one of the first U.S. reports to apply the new GRI guidelines, known as G3 (and using an external assurance provider, received a B+ application level). The report clearly identified key material sustainability issues with long-term goals and targets. Its benchmarking disclosure appeared designed to drive internal performance, and it also displayed unusual transparency, by citing instances where its performance was exceeded by competitors. There is also strong discussion of management governance issues and itemized disclosure of political contributions. Two companies—Mountain Equipment Co-op and Green Mountain Coffee Roasters—were honored as joint winners for best first-time sustainability reports. Green Mountain’s report followed GRI guidelines, a significant accomplishment for a first-time reporter, and offered an exceptional level of transparency, including wages and cost of living for direct employees and farmers in its supply chain. Mountain Equipment Co-op also displayed remarkable transparency, fully disclosing non-compliance in its supply chain. The report also contained a strong discussion of fair compensation by comparing minimum wages with CEO pay. (2006 Winners of the Ceres-ACCA Reporting Awards, CRO) CRO has also posted links to more than 100 Corporate Responsibility Reports. China Booms with Pollutants Within a couple of years, at most, says the International Energy Agency, China will surpass America as the world’s biggest emitter of greenhouse gases, the ones that contribute to climate change. China’s race to the number-one spot is not because America has cleaned up its act, sadly, but a sign that the booming Asian economy is pumping out pollution faster than had been expected. The news also highlights an awkward fact: in the debate on what to do about climate change, America finds itself acting more like China and less like its rich-world friends in Europe and elsewhere. (China may become the world's single biggest polluter sooner than you think, The Economist, 4/25/07) What ISS Says on Pay ISS published What International Markets Say on Pay and posted it to their Say on Pay Information Center. Findings include the following:
SEC Roundtables on Shareholder Rights and Federal Proxy Rules The SEC announced a series of roundtable discussions in May on shareholder rights and federal proxy rules. The first of three roundtables will take place on May 7, 2007 and will consist of panels addressing:
"When Congress charged the SEC with regulating the proxy process for public companies, it created a federal role for the vindication of shareholders' state law rights," said SEC Chairman Christopher Cox. "This roundtable will explore the relationship between the federal proxy rules and state corporation law, and pose questions to the participants about whether this relationship can be improved." The second and third roundtables on proxy voting will take place on May 24 and 25, 2007, respectively. A final agenda and list of participants and moderators will be published for each roundtable closer to the dates of the roundtables. The roundtables will begin at 9:00 a.m. and will be held in the Auditorium at the Commission's headquarters at 100 F Street, NE, Washington, D.C. The roundtables will be open to the public with seating on a first-come, first-served basis. Doors will open at 8:30 a.m. and visitors will be subject to security checks. The roundtable discussions also will be available via webcast on the Commission's Web site. The Commission welcomes feedback regarding any of the topics to be addressed at the roundtables. The information that is submitted will become part of the public record of the roundtables. Submissions to the Commission may be provided by any of the following methods:
All submissions should refer to File Number 4-537. This file number should be included on the subject line if e-mail is used. To help process and review submissions more efficiently, please use only one method. The Commission will post all submissions on its Web site. Only information desired to be shared publicly should be submitted. Jobs Corporate Accountability International (formerly Infact) is a membership organization that protects people by waging and winning campaigns challenging dangerous and irresponsible corporate actions around the world. Since 1977, they have forced corporations like Nestle, GE and Philip Morris/Altria to stop "abusive practices." They have active and ongoing campaigns targeting the water, tobacco, food and agribusiness and oil industries. They have several current job openings and internships available in Boston. SEC Fine A proposed pilot program at the SEC seeks to avoid disagreements that have erupted among the commissioners over corporate fines negotiated by enforcement attorneys, according to a blog at ISS. (Staff Faces New Limits on Seeking Corporate Fines, 4/24/07) Disputes have apparently delayed settlements with some firms, such as Brocade Communication Systems, where a former CEO has pleaded not guilty to criminal charges over the alleged backdating of stock options. Enforcement Division Director Linda Thomsen gives the program a positive spin. Settlements that have been pre-approved by the commissioners would be "fast-tracked with little or no further commission debate." Ted Allen, the ISS blogger, notes, "Republicans, including Commissioner Paul Atkins, and business groups have argued that levying large fines against companies ultimately hurts investors, while Democrats contend that corporate fines are a necessary deterrent." Staff attorneys will be dissuaded from "hedging their bets'' by proposing small fines for fear commissioners might "cut them off at the knees,'' Cox, 55, told members of the Mutual Fund Directors Forum in Washington. In Cox's first full year at the SEC, the agency brought 9 percent fewer enforcement cases. Ralph Ferrara, a former SEC general counsel now at LeBoeuf, Lamb, Greene & MacRae LLP in Washington, said Cox should propose parameters for calculating fines instead of inserting commissioners into the negotiations. "Bright-line guidance is what's called for, not blocks to the progress of enforcement cases or their resolution,'' he said. (SEC's Cox Tightens Reins on Enforcement Division, Bloomberg, 4/13/07) One unintended consequence may me more visibility. In a probably unrelated, but interesting development, Broc Romanek blogs that the SEC landed the #3 spot in a "Top Places to Work in the Federal Government" survey for large federal agencies conducted by the Partnership for Public Service and the Institute for the Study of Public Policy Implementation, based on a Office of Personnel Management's Federal Human Capital Survey. (We're Number #3!, TheCorporateCounsel.net Blog, 4/24/07) Will SEC staff still feel empowered? Newmont Mining Impacts to be Reported Christian Brothers Investment Services, Inc. (CBIS) and other religious investors today hailed a shareholder vote of 91.6 percent at Newmont Mining Corporation (NYSE: NEM), one of the world’s leading gold producers, to produce a report addressing community-based opposition to its operations in the U.S. and around the world. The company’s annual meeting represents the first time a U.S. mining company had called on its shareholders to vote for a social resolution. While the result of the vote is still preliminary, it is expected to remain close to 92 percent. (91.6 Percent of Newmont Shareholders Support Resolution for Mining Company to Report on Its Impacts on Local Communities, 4/24/07) Back to the top Feet Directors Settle Five former outside directors of defunct shoe retailer, Just for Feet, have paid $41.5 million to settle a lawsuit. Remember WorldCom? In 2005, its former outside directors paid only $24.8 million of their own money to settle a shareholders' suit. Former outside directors of Enron Corp. paid about $13 million. Although such settlements may fan the fears of board members, such payments are rare, according to a report in the Wall Street Journal (Settlement in Just for Feet Case May Fan Board Fears, WSJ, 4/23/07).
Just for Feet involved conflicts of interest and misrepresentations. "This case demonstrates that the law doesn't protect directors who fly blindly or fail to do the homework necessary to make informed decisions on behalf of a company," said William Ryan of Whiteford Taylor Preston LLP in Baltimore, the lawyer for the trustee. Challenging Times ISS and Glass Lewis are urging New York Times shareholders to institute several changes including separating the roles of chairman and CEO. Proxy Governance is taking the other side. Hassan Elmasry, a Morgan Stanley fund manager is leading the charge to abolish a two-class share structure that allows the Sulzberger family to control the company. The Sulzberger and Ochs families have a 1% economic interest in the company and elect nine of its 13 directors. (N.Y. Times Co. investors may press for change, Chicago Tribune, 4/24/07) Update: Investors delivered another rebuke to the company’s financial performance by withholding 42% of their votes for four directors, compared to 30% last year. (Times Co. shareholders withold votes, boston.com, 4/24/07) Changing the World In 2005, corporate donations grew by 22.5%, to $13.77 billion, according to the Giving USA Foundation. Nearly 1,000 companies now publish sustainability reports, up from zero ten years ago. Levi Strauss established the first supplier code of conduct in 1991. Now about 1,000 companies have adopted voluntary codes of conduct for labor practices, according to the nonprofit organization Business for Social Responsibility. Even Wal-Mart Stores, considered by many as among the most reckless companies, is investing $500 million annually in energy-saving technologies, plans to reduce solid waste by 25% over the next three years and is pressuring its 60,000 suppliers to reduce their environmental impacts. A Forbes.com article asks Can Corporations Save The World? (11/28/06) and cites Revolution, a for-profit venture that "builds businesses that are changing the world." It concludes, "many believe, in fact, that CSR will only become a realistic and sustainable way to effect change when it proves to be driven by the bottom line." The Financial Times urges you to vote on which shareholder activists are the most influential. Few seem to be out to save the world. Make it Democratically Can a Company Be Run as a Democracy? Yes, says WorldBlu, a Washington organization which sponsored the first known "Worldwide Award for the Most Democratic Workplaces." The premiere list represents industries such as technology, telecommunications, media, manufacturing, and retail with a combined total of nearly $3 billion in annual sales. Among the organizations are Great Harvest Bread Company, GE Aviation's Durham Engine Facility, Honest Tea, 1-800-GOT-JUNK, Equal Exchange, Linden Lab (makers of the Second Life virtual reality world), Zingerman's Community of Businesses, SRC Holdings Corporation, Orpheus Chamber Orchestra, i-Free, and Threadless. “Democratic companies understand that the future of business is less about pomp and more about participation, less about titles and more about meaning, and less about fiefdoms and more about being flat in order to be competitive in this new, democratic age,” says WorldBlu Founder and CEO, Traci Fenton “This is the beginning of a movement.” At Linden Lab, makers of the highly successful Second Life online virtual world, key financial data is openly shared in real-time on giant flat-screen TVs, employees are encouraged to chose their own work rather than be told by someone else what to do, and they show their appreciation for one another by “sending love” through their “Love Machine” software program. At Continuum, a design consultancy in Boston with offices in Milan and Seoul, they have “open town forums” each month. The Grammy® Award-winning Orpheus Chamber Orchestra based in New York City is completely conductorless, rotating leadership amongst orchestra members. “Creating the world's largest junk removal service is completely in alignment with being recognized as one of the world's most democratic places to work,” comments Brian Scudamore, Founder and CEO of the $158 million company 1-800-GOT-JUNK? “To ensure our organization is a world-class working environment, we focus on employee engagement through our open-office concept to create alignment and trust with our employees. We know that our steady growth and customer satisfaction relies on our ability to carry out these democratic processes.” Founded in 2003, WorldBlu works with CEOs and executive teams to design, develop, and lead the most successful democratic companies in the world. WorldBlu's approach is principle-based, freedom-centered, and results-driven. See Managing: Can a Company Be Run as a Democracy? in the 4/23/07 WSJ. Do I think democratic workplaces are the wave of the future? Yes, and I've got plenty of bumper stickers left over from about 25 years ago when Products for Democracy helped a friend and me work our way through graduate school. Send $2 to CorpGov.net at 9295 Yorkship Ct., Elk Grove, CA 95758 and I'll send you either "Make it Democratically" or "Democratize the Workplace." Guest Commentary from Les Greenberg Two recent WSJ articles mentioned a potential SEC compromise --- more "equal access" to the corporate ballot in exchange for mandatory arbitration of disputes between shareholders and corporations. This is a marriage of convenience. There should be premarital counseling and/or a detailed prenuptial agreement in any compromise. "Go for the jugular," that's what Les Greenberg said about proxy access. While allowing investors to set executive pay is a noble exercise, he believes the most important change must be to allow shareholders to nominate independent directors. (Direct proxy access gaining momentum, Financial Post, 4/14/07) Chevedden Reports The following are updates from shareholder activist John Chevedden: Eli Lilly Shareholder Proposal 9 wins at least 62% of the yes and no vote at April 16 annual meeting. Item 9: Shareholder Proposal Regarding Adopting a Simple Majority Vote Standard [51%-Vote requirement to pass a management proposal] William Steiner sponsored the proposal. Frank's Bill to Move Barney Frank's bill allowing shareholders the right to a nonbinding vote on executive pay is expected to pass the House this week. The measure would also give shareholders the right to vote on any “golden parachute” compensation plans that are awarded to executives while they are negotiating the purchase or sale of a company. The White House says it “does not believe that Congress should mandate the process by which executive compensation is approved.” “Before additional corporate governance requirements are legislated,” it said, “the administration believes that recent enhancements should be given time to take effect." Institutional investors have strongly supported the measure. The United States Chamber of Commerce and the Business Roundtable are opposed. Republicans plan to offer amendments to declare SEC rules on disclosure adequate, to require the government to study whether shareholder votes on pay packages make it more difficult for companies to recruit or retain executives, to exempt virtually every company from the bill’s provisions, and to require investor groups involved in the voting to disclose who they are and how much they spent on any campaign for or against the ballot proposals. (Democrats Seek Shareholder Voting on Executive Pay, NYTimes, 4/19/07) Back to the top Koppes Interviewed in WSJ Corporate-governance expert Richard Koppes, who advises Pfizer, Eastman Kodak, McDonald's, IBM, and other large firms, says management, boards, and shareholders should have closer to equal power. He sees "say on pay" as fashionable, but perhaps misguided because most shareholders probably don't have enough information on the subject to make an informed vote. Better would be "electing good, independent directors and having an input in that. I do support some kind of proxy access [for shareholders in nominating directors]. Or consultation with the shareholders on who should be on the board. But beyond that, I think they ought to get out of the way." Koppes advises that shareholders shouldn't be treated as the enemy; they should be engaged. Boards should seek a broad range of candidates...including those without prior board service. Boards shouldn't expect to reach consensus on every issue and should be willing to seek more resources to help them do their work. Executive pay should be in line with true performance and with other salaries in the company. (Advice to the Boss On Boards, WSJ, 4/16/2007) Governor John Hoevenhe signed into law the most shareholder friendly incorporation provisions in the United States. Among the most significant provisions of the new law are the following:
Chapter 10-35 of the North Dakota Century Code gives companies a choice, after July 1, 2007 to be subject to the new law by including a provision to that effect in their articles of incorporation. North Dakota only has two publicly trade corporations chartered in the state, Dakota Growers Pasta, and Integrity Mutual Funds of Minot. (Most support corporate governance option, in-forum.com, 3/5/07. HB 1340 was written by William H. Clark Jr., a Philadelphia corporate law firm that has in the past represented Icahn. Clark and Bismarck business owners Bill Sorensen and Steve Herman formed the North Dakota Corporate Governance Council to push the bill. The North Dakota Corporate Governance Council is a nonprofit corporation organized to support enactment of the new law and to advance the discussion of shareholder rights in publicly traded corporations. Its current board of directors consists of William H. Clark, Jr., William Sorensen, and Steven Herman. Mr. Clark drafted the new law and is a partner in the national law firm of Drinker Biddle & Reath LLP. Mr. Sorensen is the former mayor of Bismarck, ND, and is the President of Business Information Systems Incorporated, a telecommunications and computer services company serving the Midwest. Mr. Herman is the CEO of AAction Moving, with offices throughout the Midwest, and the treasurer of Unigroup, Inc., the parent company of United Van Lines. (press release, 4/12/07) Responses of the North Dakota Corporate Governance Council to The Testimony of the North Dakota Chamber of Commerce on HB 1340. Comments From Our Readers"We have had a long-term 'race to the bottom' with state control of corporate governance laws, writes Nell Minow, Editor and Co-founder of The Corporate Library. "With the passage of this law, North Dakota begins for the first time a 'race to the top.' Shareholders should begin pressing portfolio companies to re-incorporate in ND and they should press Delaware and other states to follow this example." "The North Dakota law is a welcome move in giving shareholders more power. It is wonderful to see federalism working in the right direction on this issue," writes Peter A. Gourevitch, in expert on international political economy and economic globalization. Trust Mark Roe, securities market expert, to add a dose of realism: "Looks like an interesting effort to get into the chartering market for shareholder-focused firms. At a franchise fee rate of about $80,000 per year, they’re cheaper than Delaware, more expensive that other states. But since boards and shareholders must both approve reincorporation away from, say, Delaware, it doesn’t seem that there’d be many reincorporations in that direction: activist investors who could get the reincorporation approval through the board and a shareholder vote could presumably get these shareholder-friendly provisions into the corporate charter or the by-laws. So the “market” target is more likely to be IPO’s of firms controlled by founders who want the firm to have a pro-shareholder orientation as the founder leaves the firm. And it’s not just the rules that count in making a state an attractive place to reincorporate, but the experience of its judiciary in handling corporate law matters expertly and expeditiously. This is something Delaware does and something another state, like North Dakota, would want to show it’s set up to do if it’s to build on its currently-reported base of two public companies." Similary, but with a little more humor, this from Richard Koppes, of Counsel to Jones Day and former Deputy Executive Officer and General Counsel to CalPERS: "Lots of good ideas but I don't predict a big rush by corps (or their shareholders) to the garden state of ND." "I hope to see the provisions of the North Dakotan law spread to other states and to the federal level. The Securities & Exchange Commission should consider adoption of the letter and spirit of this excellent law," stated Simon Billenness, an independent consultant on corporate governance and socially responsible investment. Peter D. Kinder, President of KLD Research & Analytics provides a different perspective: 'So what's not to like?' is a reaction I can hear to the new North Dakota statute -- which I know only from the summary you provided. If one's definition of 'good corporate governance' consists of removing obstacles to flipping the company, the summary you sent looks grand: no classified boards, subsidized proxy contests, a special meeting requirement.... Andrew Shapiro, President of Lawndale Capital Management, LLC wrote the following about North Dakota's new optional incorporation provisions: This is an outstanding piece of legislation returning an appropriate balance of power to a corporation’s true owners. It would behoove other states to follow this example and a benefit for all companies to be subject to these good governance principles. Lawndale Capital Management and other investors will be more inclined to make an investment in companies that choose to adopt these provisions providing these corporations with higher valuation multiples and lowered cost of capital. Les Greenberg, a shareholder activist and attorney who engages in business/investment litigation/arbitration, writes: The corporate laws of North Dakota have taken a big step in the direction of equitable corporate governance. However, the history of state corporate law has been a race to the bottom, with Delaware in the lead. For all practical purposes, BODs and Management choose the place of incorporation and will choose states whose laws allow Shareholders to give them the least potential grief. Shareholder activist, John Chevedden, simply wrote: "Jim, I hope that Delaware is listening." "Most interesting and intriguing—they certainly raised the bar for other states," wrote Charles Elson, Edgar S. Woolard, Jr., Chair in Corporate Governance and the Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. "It looks like a winner for shareholders and for North Dakota’s progressive governance image, but I don’t see a flock of companies rushing to reincorporate there, especially with such debatable provisions as a mandatory separation of chair and CEO roles," writes James Kristie, Editor and Associate Publisher, Directors & Boards. CalSTRS Profiled Steven Brull has written a fairly comprehensive article for the April edition of Institutional Investor Magazine outlining the recent rise in prominance of CalSTRS. (see The Reeducation of CalSTRS) Brull notes that "CalSTRS has dramatically stepped up its profile as a shareholder activist." CalSTRS has opted out of class-action lawsuits, much to it own benefit. Last year their investments outperformed those of CalPERS by 139 basis points. "CalSTRS owes much of its newfound assertiveness to CEO Jack Ehnes, who has emerged as a national spokesman on corporate governance issues as chairman of the Council of Institutional Investors," writes Brull. Ehnes, says his zeal for shareholder activism is less about ideals than the bottom line. "The fact that we've put a billion dollars into corporate governance funds and are putting in more conveys that we're not just betting on a wish," he says. At 86%, CalSTRS' funding ratio of assets to liabilities is only slightly above the median for large public funds, according to Standard & Poor's, and roughly equivalent to CalPERS's ratio of 87.3%. "But unlike most retirement systems, including CalPERS, the contributions CalSTRS receives from the state government don't automatically increase when its funding ratio falls. That makes the sheer size of its shortfall, and the risk of its spiraling out of control, a potential disaster." So far, Ehnes looks up to the challenge. (Brull also wrote an interesting look at CalPER's president, Rob Feckner, A Truly Civil Servant, 6/15/06) Boards Seek Appearance of Democracy In an effort to head off the right of shareholders to place their director nominees on the proxy, some boards are seeking what they call a "middle ground," which would include initiatives such as the following:
These recommendations seem far from "middle ground." Instead, they seem to be a desperate attempt to allow boards to continue to reject shareholder candidates, while giving the appearance of democracy. Shareholders should continue to press forward with their legal right to propose procedures allowing them to directly place nominees on the proxy. Read Loren Steffy's take on Citigroup "using the appearance of good corporate governance to shroud an ugly truth: It isn't willing to give its investors a voice without the security of a do-over clause." (Citigroup bullies need to grow up, Houston Chronicle, 4/13/07. Pickens Favors Shareholder's Rights Shareholders should be allowed to nominate corporate directors, have those candidates vetted by an independent consultant and then vote on a broad list of names, said T. Boone Pickens. The right to nominate directors would be restricted to shareholders who own a certain amount of stock exceeding the average number of shares held by a company's existing directors, he said. A consultant independent of the company would determine viable candidates based on factors such as education and accomplishments. (Editor: Who will hire the independent consultant under the Pickens plan?) U.S. Chamber of Commerce President Tom Donohue believes unions are using proxy battles to achieve what they could not win at the bargaining table. "We will fight any effort to give some shareholders greater power than others.'' (Pickens, 1980s Corporate Raider, Pushes Shareholder Rights, Bloomberg, 4/11/07) Super Majority Vote Wins Three 58% to 70% Votes on April 10th The Simple Majority Vote shareholder proposal won a 58% yes-vote at the Morgan Stanley (MS) annual meeting. The 58% vote understates the support level because the company refused to advise the percent of no-votes. At Morgan Stanley it was the 2nd consecutive majority vote in support of this topic. If the Morgan Stanley Board does not act to adopt this proposal, Institutional Shareholder Services could recommend a vote against directors in 2008 for their non-responsiveness. The proponent was Emil Rossi. 37% of shares were voted in favor of A "say on pay" proposal. (For Morgan Stanley, vote of confidence, Bloomberg, 4/11) At Goodyear (GT) the vote was approximately 2-to1 in favor on the Simple Majority Vote shareholder proposal: 82,276,915 yes; 41,118,187 no. At Goodyear this is the 2nd consecutive 2-to-1 vote in favor. The proponent was Emi Rossi. (Goodyear: Management 3, Reform 0, Motley Fool, 4/12/07) This same topic also came to a vote at Bank of New York (BK) for the first time and won 70% support. the proponent was William Steiner. 47.3% supported a measure giving shareholders an advisory vote on pay. (Shareholders reject "say on pay," Washington Post, 4/10/07) Thanks to John Chevedden for this update. Back to the top Corporate Secretary Covers "Say on Pay" Issue Highlights from A voice in matter (April 2007): Richard Ferlauto (ASFCME) attributes the success of ‘say on pay’ to a pair of catalytic events: the mind-blowing pay packages received first by exiting CEO Henry McKinnell of Pfizer and then by Robert Nardelli, CEO of Home Depot. In spite of shareholder complaints about excessive compensation, McKinnell and Nardelli left with $198 million and $210 million in severance, respectively. The pay-outs were considered so egregious that even President Bush issued a public admonishment, reminding board members to pay close attention to the compensation packages that they approve. Ferlauto also emphasizes that the revelations garnered from Pfizer and Home Depot crystallized shareholders’ need for another tool [to combat such excesses].’ Stephen Davis says a similar measure in the UK 'has produced a dramatic increase in dialogue between investors and boards.’ In 2003, GlaxoSmithKline lost a vote ‘and that produced a shockwave throughout British boards.’ Since then, says Davis, boards have become far more proactive, approaching shareholders to ask: ‘Do you have concerns about this we should know about beforehand and that we should address? Let’s talk.’ Nell Minow points out that it’s a mistake to suppose advisory votes on pay will result in criticism of the board – they may do just the opposite. ‘Ultimately,’ she says, ‘it should be a tremendous credibility enhancer when you get a vote in favor. It shows that you’re doing the right thing and it inoculates you from a lot of misery.’ Dual Class Action Suits to Build Now that Europe is embracing US style action, lawyers are cashing in on their active soliciting of European shareholders. Royal Dutch Shell announced it will pay $352.6 million for defrauding European shareholders by overstating reserves. Shell will also have to pay $47 million in fees to the American lawyers who represented the European shareholders. Concerns abound that the adoption of class action overseas could give rise to dual suits, and dual costs. In the case of Shell, the settlement will actually alleviate US suits because most of the shares were purchased on Europe exchanges. But for shares purchased on the NYSE, penalties remain: investors will pursue another class action suit. (They work hard for other people's money, CrossBorderGroup Blog, 4/13/07) Satisfying Reg FD by Blog Sun Microsystems' CEO Jonathan Schwartz has proposed that companies be able to meet Reg FD requirements through blogs or an 'Official Investor Communications' page linked to the company's home page or the main page of the IR site. (Sun again, CrossBorderGroup Blog, 3/16/07) Comfort Systems Disclosure Wins Praise Footnoted.org praised Comfort Systems for disclosing that his 1999 GMC Jimmy is used for both personal and business use. Since it costs the company less than $5K a year, Comfort Systems didn’t even have to disclose the perk. Compare with Visteon, which disclosed spending $62K on one executive’s car or Sotheby’s , which is spending $161K for car-related expenses. (Gold star wheels…, 4/13/07) Cox Condems Shareholder Intimidation New York City Comptroller William Thompson, asked both the SEC and the Justice Department to investigate Wal-Mart's reported surveillance of shareholders. In his letter of response, SEC chair Christopher Cox said, "The right of shareholders to propose appropriate matters for consideration at annual meetings is an indispensable element of the federal securities laws we administer at the SEC."..."Attempts by company fiduciaries to intimidate shareholders exercising these rights are antithetical to the core principles of corporate governance and the full and appropriate expression of shareholder rights and should be roundly condemned." (SEC's Cox condemns surveillance of shareholders, Reuters, 4/13/07) Democracy Issue Gets Notice The most visited news article recently at Pensions & Invesestment is Anson: Extend democracy to U.S. corporate world, 4/2/07. In it, Mark Anson, former chief investment officer at CalPERS and now CEO of Hermes Investment Management Ltd., notes, “In the U.S., we take a lot of pride in our democracy, but this does not extend to the corporate world.” The article goes on to discuss recent efforts by European funds to gain the same rights, such as the ability to nominate directors, for their investments in the US that they have in Europe. Special Shareholder Meeting Postponed in Canada By court order the Special Meeting of Shareholders of Wildcat has been adjourned until April 26, 2007, to ensure that the shareholder meeting is conducted in a fair and unbiased manner for the benefit of all stakeholders in Wildcat. Rite Aid Corporation Adopts Majority Vote Standard for Directors Rite Aid amended their bylaws to adopt a majority vote standard for the election of directors. If a candidate for director does not receive a majority vote, the will be required to submit his or her resignation to the board, which must decide no later than 75 days following the date of the stockholders' meeting whether to accept it. Previously all directors were elected under a plurality vote standard. The plurality vote standard will continue to apply if a stockholder nominates a person for election to the board in compliance with the company's advance notice requirements. "Changing to a majority vote standard provides for a greater level of accountability of directors to stockholders and is evidence of our commitment to good corporate governance," said Bob Miller, Rite Aid chairman of the board. (Business Wire, 4/13) Shadow CIA Predicts Shareholder Democracy Called the “shadow CIA” by Barron's for the analysis it provides to global corporations, Stratfor's post, Shareholder Democracy': An Idea Whose Time has Come? (4/12/07), offers insights worthy of attention. The article discusses the recent history of proxy access and notes that if the SEC rules that management retains full control over the rules governing the election of directors, the US will been seen as less responsive to investors than European markets. "This is a problem because being listed on U.S. exchanges already requires that companies comply with the 2002 Sarbanes-Oxley Act, and even more important, being subject to private securities litigation. No change in SEC proxy-access rules could create the sense that U.S. securities regulation poses a paradox of many rules and a high degree of legal accountability -- and yet little responsiveness to shareholder concerns." "In the wake of Sarbanes-Oxley, particularly, the United States is seen as being gummed-up with rules, regulations and requirements while being unresponsive to shareholder concerns. " If the US follows the European road and allows access, "the culture of American corporations would be permanently changed." "The issue quickly gets messy, however, when considering that shareholders do not (and realistically cannot) have the same information as directors and senior management. Furthermore, most investors do not have the time or expertise to judge from publicly available information the full scope of a company's finances or strategic position." (Of course, that's where solutions proposed by the Corporate Monitoring Project for voter-funded infomedia would help resolve the problem of voter ignorance.) Stratfor notes that corporate democracy works in the UK because their markets are dominated by pension funds led by sophisticated financial experts, experts who are now putting pressure on the SEC to allow for shareholder access and voting. They want "the same rights in the United States as they view themselves as having in Europe." "The SEC needs to find a way to harmonize regulations and to build a structure to join the predominant global system, and ruling that board of director election rules are fair game is a relatively painless way to go." "Ultimately, the likely backing away from the SEC's 1990 decision will result in better corporate response to shareholder complaints. It also will make management far more available for meetings and discussions over corporate policy. The degree to which large pension funds -- both European and American -- begin to change how corporations define their social responsibility will determine how far corporations evolve as instruments of social change." One can only hope that Stratfor is at least half as influential as they claim to be. Informed Voters The surest way forward for improved corporate governance is increased pressure from owners. The surest way to motivate such pressure is to develop a track record of success. That body of knowledge is bound to increase as mutual funds adopt activist tactics previously used almost exclusively by hedge funds. Rejection of the management at Take-Two Interactive Software by the Oppenheimer Funds, T. Rowe Price, speeking out against a leveraged buyout of Laureate Education as well as the merger of two energy companies, and Pzena Investment Management's atempts to stop Carl Icahn from acquiring Lear and examples cited by the editorial staff at Money Management Executive. (More Mutual Funds Adopt Shareholder Activist Tactics, 4/12/07) Similarly, we now see the New York Times endorsing say on pay. "Giving the owners of a company a voice on how much management receives, even an advisory one, could put the brakes on some of the worst packages. And maybe it could help end the practice of excessive pay just to go away." (The Billion-Dollar Brushoff, 4/12/07) The required disclosure of proxy votes is clearly one of the causes for the upsurge in activist funds. More recently required disclosures on executive pay could lead to a similar upsurge in actual pay for performance - and say on pay could accelerate that development. Excess returns would solidify activism in either front and would bring much needed recognition that better data, more coverage of factors correlated with success - as advocated for years by the Corporate Monitoring Project - could result in continuous improvement. Maybe Malcolm Baldrige National Quality Awards for voter-funded infomedia would be another step in the right direction. Back to the top Tim Smith Responds to NYTimes Article on SRI Joe Nocera's article, Well-Meaning but Misguided Stock Screens, in the 4/7/07 NYTimes builds on several common misconceptions about SRI. Tim Smith, Senior Vice President of Walden Asset Management and chair of the Social Investment Forum provides a thoughful response in a memo to Nocera reprinted below.
See also, Responsible Investing for Dummies (Not) (Julie Fox Gorte, Calvert, 4/10/07) Campos Seeks Campaign by European Investors Speaking at the Governance for Owners corporate governance conference in London last month, Commissioner Roel Campos urged European investors to write to the SEC, industry groups and US companies, urging them to back proxy access. "Tell them that it's in their economic best interest to do so, because it might lead to additional investment by European investors such as yourselves. We're at a critical point in the U.S. for proxy access, and you can make a real difference.pressuring them on the issue." (Campos, London, 3/22/07) Gender Bias Still Strong Half of all managers at US employers are female, yet when it comes to senior posts, men outnumber the women by almost 6 to 1. According to a survey from TheLadders.com, the "glass ceiling" is still a major factor for female executives. When asked whether men and women were paid the same for similar positions, a 71.5% majority said, "no." Likewise, 66.3% of executives surveyed said that women do not have as many opportunities as men to become company CEOs. 55% of executives said that employees with young children are more likely to experience workplace discrimination. 63% of executives responding to the survey said that their workplace offers no assistance in the form of day care, on-site nursing facilities or time-off children's school activities. 51.2% of executives responding to the survey said they have experienced some form of sexual harassment. Twenty six percent said that they hadn't personally but knew of someone who had experienced harassment. (press release, 4/10/07) Linked to Higher Returns Portfolio managers overweight firms they are connected to through their educational network and perform significantly better on these holdings relative to non-connected firms. A replicating portfolio of connected stocks held by managers outperforms a replicating portfolio of non-connected stocks by up to 8.4% per year. Returns are concentrated around corporate news announcements, consistent with mutual fund managers gaining an informational advantage through the education networks. The study concludes that social networks may be an important mechanism for information flow into asset prices. (The Small World of Investing:Board Connections and Mutual Fund Returns by Lauren Cohen, Yale School of Management; Andrea Frazzini, University of Chicago Graduate School of Business; Christopher Malloy, London Business School) A question the researchers didn't appear to address is that of legality. SEC Rule 10b5-1 provides that a person trades on the basis of material nonpublic information if a trader is "aware" of the material nonpublic information when making the purchase or sale. Pay Info Still Buried "Nuggets on executive pay are buried so deep in the new corporate filings that it helps to bring along a calculator and a shovel," writes Eric Dash. He cites Ray R. Irani, Occidental Petroleum’s chairman and chief executive, whose total pay was about $52.1 million last year. But then there was the $270.1 million in profit from stock options he cashed out in 2006 and the $93.3 million that Mr. Irani withdrew from a huge deferred stock plan that was revealed for the first time this year under the new rules. "It is found in a table on Page 28 of the Occidental proxy statement, in the kind of fine print often used by credit card and insurance companies." He still can tap at least four other deferred compensation plans, totaling at least $124 million. Buried in the proxy of Pfizer were details about its independent compensation consultant’s compensation, $184,555. (More Nuggets on Pay From Proxy Filings, NYTimes, 4/9/07) John Schwartz writes that "there is so much information that you can’t see the forest for the non-tax-qualified deferred compensation. The disclosure forms run dozens of pages, with so much swirling data and paper that they form a cloud, like the foil chaff that fighter jets drop to confound radar." (Transparency, Lost in the Fog, NYTimes, 4/8/07) Companies hoping to avoid the spotlight, might well head the advice of Broc Romanek:
For more than headings, see The Media and the Executive Compensation Disclosure Rules at TheCorporateCounsel.net Blog, 4/10/07. Back to the top Sam Zell Rocks Stanford Sam Zell put on a predictably good show at “Make Me an Offier”: Sam Zell and the $39 Billion Buyout of Equity Office Properties at Stanford Law School, sponsored by Arthur and Toni Rembe Rock Center for Corporate Governance. He was very critical of corporate governance, which he called “the flavor of the month.” The cost of Sarbanes Oxley is ”enormous, “ he said and criticized its emphasis on form rather than substance. CEO Pay Grows CEOs at the nation's largest companies saw their annual bonuses increase 13% to $2.2 million and the value of their equity-based compensation holdings grow nearly 50% to $30.2 million last year, according to an analysis of proxy statements conducted by Watson Wyatt Worldwide. (press release, 4/5/07) Institute to Train Women Lawyers for Board Service The American Bar Association and Catalyst are the principal sponsors of DirectWomen Institute, an initiative to enable women lawyers leaving private practice to prepare for service as independent corporate board directors. Ms. Hayman, a partner at Skadden, Arps, Slate, Meagher & Flom in New York, said: “The first group of women to graduate from law school in large numbers in the early 1970s is now approaching retirement age. The women in this group were often the first women in their law firms or in their companies. And this group is expected to be in the forefront of redefining the concept of retirement. For some of them, board service is a logical next step.” More than 200 applications were received for the Institute’s first workshop. The class included corporate counsel at a wide variety of companies, partners at leading law firms, and academia, associations or other affiliations. The pool was geographically diverse, coming from 13 states nationwide. Institute participants explored topics ranging from independence and oversight to issues of compensation and compliance. The distinguished faculty is composed of judges, prominent academic experts in corporate governance, women currently serving as corporate board members, and representatives of institutional investors, search consultants and leading law firms. (DirectWomen Institute Enrolls First Class, 3/8/07; Female Lawyers Set Sights on Yet One More Goal: A Seat on a Board, NYTimes, 4/6/07) SarBox Gets Principled The SEC will move to regulatory principles rather than iron-clad rules in Sarbanes-Oxley reforms. (SEC Approves Framework to Ease SOX Rules, Accounting Web, 4/6/07; SEC Commissioners Endorse Improved Sarbanes-Oxley Implementation To Ease Smaller Company Burdens, Focusing Effort On 'What Truly Matters') The vote by the five SEC commissioners was unanimous to:
Ceres Seeks Support for Climate Change Resolutions The following companies have global warming-related resolutions proceeding to a vote in 2007 proxy season. The date in parentheses refers to the date of the company annual meeting. Unless an investor is voting in person at the annual meeting, the deadline for voting proxies is the generally the day before the annual meeting. Banking: TIAA-CREF Updates Policy TIAA-CREF recently published a revised Policy Statement on Corporate Governance. The document outlines TIAA-CREF’s philosophy of “quiet diplomacy” over public confrontation or divestment. Policy stances include:
TIAA-CREF abstains from a recommending separation of chairman and CEO, recognizing such separation or a lead director may be appropriate in firm specific cases. The statement also contains extended sections on international investments, especially emerging markets, and the growing importance of social and environmental policies for corporate performance. The Make TIAA-CREF Ethical coalition keeps looking for TIAA-CREF to follow its tagline of “Financial Services for the Greater Good,” which leaves an impression of social concern. They presented proposals on six companies based on company abuses in human/labor rights, the environment, and effects on local communities. The campiagn claims they were told that decisions would be made after document revision, but they are now told to wait till summer-- with the caveat that they might decide to not add any new issues/companies. "Why revise a document, present it to media, and then say they are not sure they will engage companies further on issues of social responsibility?" Back to the top A Good Friday Special With the markets closed for Good Friday, NBR presents a special program: Sarbanes-Oxley: Five Years Later. Think of the metaphors. Thanks to Broc Romanek to bringing this TV special to our attention. Bebchuk, Not Just Academic Fortune carries a nice article on Lucian Bebchuk, Director of Harvard Law School's Program on Corporate Governance. It calls him "America's most influential critic of CEO pay." A corporate governance gadfly irks CEOs (4/4/07), focuses on Bebchuk's activism as a shareholder. This year he is going after AIG, Bausch & Lomb, Bristol Myers Squibb, Chevron, El Paso Natural Gas, Exxon Mobil, Halliburton, Home Depot, Time Warner and Walt Disney. The boards of Bristol Myers and Home Depot have already agreed to require that CEO pay be approved by a supermajority of independent directors.
On the Harvard Law School Corporate Governance Blog, Bebchuk's most recent post cites a study which finds cumulative returns during the four and a half months leading up to passage of SOX were approximately 10 percent higher for corporations whose insiders lobbied against one or more of the SOX disclosure-related provisions than for similar non-lobbying firms. Analysis of returns of the post-passage implementation period indicates that investors’ positive expectations with regards to the effects of the law were warranted for the enhanced disclosure provisions of SOX. (4/3/07) Jobs Contributing to Positive Change Ceres plays a unique role in the national environmental and sustainability movement by bringing the perspective and power of investors to environmental and sustainability issues and specifically to the performance, practices and policies of corporations. They have several job openings:
Safe Water Network (SWN, site coming soon) is a not-for-profit to support the identification, assessment and deployment of geographically appropriate solutions. SWN seeks to support technologies and solutions that meet requirements for community-level deployment in developing world settings (e.g. ease-of-use, low maintenance, versatility, portability and affordability). Key partners include Deloitte Touche Tohmatsu, Johns Hopkins University and PepsiCo International. Contact Michelle Tomlin. SWN seeks:
Say on Pay Favored 76% of surveyed investment professionals, including financial analysts and mutual fund managers who are members of CFA Institute support shareholders sponsoring proposals that would give investors a nonbinding vote on compensation packages. But 68% oppose a legislative requirement. (Investment Professionals: Give Holders a Say on Pay, WSJ, 4/4/07) Lessons in Democracy From UK Interesting article entitled "A penny for your thoughts" in the March 22nd edition of The Economist. It starts with the following paragraphs:
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