Current News and Commentary. January 2007, February, March, April, May, June, July. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest, updated 8/9/07. Book bites.

August 2007

Bits and Pieces (Catching Up After Vacation)

Broc Romanek posts put the crisis in a nutshell. (Auditors Must Help Stem Subprime Defaults? A Rebuttal and "Next Financial Crisis Starts Here")

Why did so many public companies begin issuing undisclosed, misdated stock options grants around the same time? "The SEC charged Lisa Berry, former in-house corporate attorney of KLA-Tencor Corp. and Juniper Networks, with backdating option grants from 1997 to 2003. She 'devised the improper backdating scheme while serving as general counsel of KLA and then implemented similar practices after assuming the position of general counsel for Juniper,' the SEC said in its complaint filed with the U.S. District Court in San Jose, Calif." (Backdating: Are the Lawyers to Blame?, CFO.com, 8/29/07)

Ohio has passed a law making it possible for firms incorporated in the state to adopt majority voting in director elections. Some of the pressure to amend the law stemmed from novel shareholder proposals, filed at 14 Ohio-incorporated companies this year, asking them to reincorporate in Delaware, where a majority vote standard is permitted. As of Aug. 7, 63.8 percent of the firms in the S&P 500 index had adopted board election reforms--either a plurality standard with a director resignation policy, or a full majority vote standard, according to Claudia Allen, a partner with the law firm of Neil, Gerber & Eisenberg in Chicago. (Ohio Adopts a Law to Allow for Majority Voting, ISS Corporate Governance Blog, 8/28/07) CEOs backdated options to directly and indirectly inflate their own pay, not to benefit their firms, asserts Jesse Fried. (Greed, Not Firms’ Well-Being, Was Motive for Backdating, The Harvard Law School Corporate Governance Blog, 8/30)

Reports find that fund managers see incorporating climate change considerations into their investment decisions as being outside their institutional mandate. Only those funds specifically focused on socially/environmentally responsible investing took such considerations into account. New tools are emerging for investors and fund managers to evaluate companies’ exposure to the environmental, regulatory and financial consequences of climate change. One such tool is the Carbon Risk Exposure Assessment Model (CREAM) developed by a Swiss SRI research firm, Centre Info. (Fiddling While The Planet Burns: Mainstream Investment Funds Blinkered To Climate Risk, Social Funds, 8/25/07)

Predicting Material Accounting Manipulations, explains how to calculate a "fraud score" for public companies, thereby identifying which corporate books deserve further scrutiny. Abnormal patterns in five key areas where manipulation likely takes place: accrual quality (in terms of the number of accruals being booked); financial performance (including earnings growth, cash margins, and transaction management), non-financial performance (order backlog and employee headcount), off-balance sheet activities (operating leases and pension assumptions), and market-based measures (valuations and price-to-earnings ratio). manipulations are most common in growth companies experiencing deteriorating operating performance.

"If I were a betting man, I would bet [the commissioners] would issue the [NYSE] proposal (elimination of discretionary broker voting in board elections) on the same day they roll back AIG so investors would have one piece of good news on an otherwise bad day," Jeff Mahoney, general counsel at CII told Governance Weekly. (Waiting for Action on Broker Votes, 8/24/07)

The Missing Monitor in Corporate Governance: The Directors’ and Officers’ Liability Insurer,” finds that while directors’ and officers’ liability (“D&O”) insurers attempt to price based on risk, they "neither monitor corporate governance during the life of the insurance contract nor manage litigation defense costs once claims arise." "Corporate managers buy D&O coverage for self-serving reasons, and the coverage itself, because it does not control moral hazard, reduces the extent to which shareholder litigation aligns managers' and shareholders' incentives"...spirling more and more out of control over time. "The obvious explanation here lies in corporate officials’ control over corporate resources. Top executives in public corporations are able to purchase income-smoothing insurance without ceding any governance authority to insurers because this purchase, like all such decisions, is insulated from shareholder challenge by the business judgment rule. Insurers are willing to sell this coverage because, in most markets, they can do so profitably...corporate governance arrangements that cannot place reasonable limits on CEO compensation can hardly be expected to place reasonable limits on a far less visible (and less expensive) insurance product that is not widely understood." Shareowners "should push for the creation of a bundled package of monitoring and risk distribution services that D&O insurers may be uniquely positioned to provide."

We do it for drug dealers, why not fraudster CEOs? In The Culture of Under-Enforcement: Buried Treasure, Lisa H. Nicholson argues that "Congress should enact specific forfeiture legislation that reaches the property involved in, or traceable to, violations of the newly-enacted securities fraud statute. Congress recognized the economic motive of wrongdoers when it authorized the forfeiture of executive bonuses pursuant to SarbOx section 304. Regrettably, Congress stopped short of enacting meaningful forfeiture legislation. In light of recent forfeiture consents and the successful criminal prosecutions of many of the high-profiled corporate defendants, the time seems right for Congress to take a new look at the Act's criminal measures."

CalPERS adopted a new principles-based approach on August 13th to guide external managers who invest for CalPERS in emerging international markets, eliminating their black list approach...something I recommended at an Asian Development Bank speech as soon as the now revoked policy came out. (CalPERS to halt global screening, Sacramento, Bee, 8/14/07)

The Responsible Endowments Coalition, a nonprofit organization that works to foster social and environmental change through university endowments, is looking to hire a Development Director and an Organizing Director.

What’s Next for Governance? - Forces Fueling Engagement to Grow in 2008. A higher degree of engagement and dialogue between companies and investors characterized the 2007 U.S. proxy season. Will this trend continue? This ISS article explores what's on the horizon for 2008, including an increased focus on smaller companies.

Retirees vie for CalPERS opening (Sacramento Bee, 8/17/07) and I'm supporting Henry Jones.

Opposing the SEC Attack on Shareholder Rights

Social Investment Forum (SIF) Board Chair and Senior Vice-President of Walden Asset Management Tim Smith, Interfaith Center on Corporate Responsibility (ICCR) Executive Director Laura Berry, and Chris Fox, director of investor programs at Ceres held a joint press conference on 8/29/07 to enlist support in their opposition to controversial "proposals" from the U.S. Securities and Exchange Commission (SEC) to weaken the rights of U.S. shareowners.

The SEC has issued three specific proposals (actually questions that could become proposals), which would eliminate or cripple the resolution process. They cannot support the following proposals:

1. the "opt-out" option that would allow the most unresponsive companies -- those with the worst records when it comes to good corporate conduct and governance -- to drop out of the shareholder resolution process and isolate themselves further;
2. the unilateral substitution of the electronic petition model or "chat room" for the vibrant and public 14a-8 shareholder resolution process; and
3. the raising of shareholder resolution resubmission levels from the current 3%, 6% and 10% vote levels to 10%, 15% and 20% levels, thus effectively killing many important shareholder resolutions.

SIF Board Chair and Senior Vice-President of Walden Asset Management Tim Smith said: “We are investors and representatives of investors who take seriously our rights and our responsibility to be engaged and informed as shareowners of companies. We strongly oppose proposals at the SEC to either eliminate the shareholder resolution process or make it more difficult to sponsor resolutions. We also oppose any step to make it more difficult for investors to help nominate directors.   Shareholder advocacy is vitally important in communicating with corporate boards, management and other investors on key issues such as climate change, governance reforms, employee diversity, executive compensation, and human rights in overseas factories.” 
 
ICCR Executive Director Laura Berry said:  "It is time for American investors large and small to voice their concerns to the SEC and Congress.  As representatives of faith-based institutional investors, investment managers and other allies, the members of the Interfaith Center on Corporate Responsibility are deeply committed to protecting this important link between morality and markets.  We are united in our resolve to protect our right to continue to be active owners of corporate America and we intend to vigorously communicate our concerns to the SEC.  We have worked for over 35 years with companies, protecting and strengthening a process that has served shareholders and publicly held corporations well."
 
"Shareholder resolutions are a critical tool for investors to ask corporations to disclose the business risks of climate change and other sustainability issues" said Chris Fox, investor programs director at Ceres, a leading coalition of investors and environmental groups working with companies to address environmental challenges such as global climate change.  "In more instances than not, shareholder resolutions have led to productive dialogues and positive results with companies. Without resolutions prodding companies to act, the vitally important issue of climate change would not have attained the prominence it has."

They also announced support the right of investors to nominate board members using the proxy process and "urge the SEC to have a reasonable level of shares required for the nomination process. Under one approach raised by the SEC, such shareholder involvement would be barred outright, whereas another approach outlined by the Commission is so onerous to make such involvement all but impossible." They expressed their opinion that no decisions on these issues should take place without a full commission, given that Roel C. Campos announced his intention to return to the private sector next month.

Allowing boards to amend their bylaws to eliminate nonbinding resolutions would take away a very fundamental right. In the SEC v. Transamerica Corp., 1947, the efforts of the Gilbert brothers resulted in a court decision that “a corporation is run for the benefit of its shareholders and not that of its management.” The original purpose of shareholder resolutions was to police potential “fraud and mismanagement.” It took 50 years to actually win a majority vote. After Enron how could anyone believe management should be able to opt out of the resolution process? Are fraud and mismanagement suddenly existent only in the past? If resolutions did fade from the governance framework, shareowners would then be forced to introduce binding bylaw provisions, which would then probably end up being tailored to each company primarily via litigation in the courts. Nonbinding resolutions allow for flexibility; bylaw resolutions do not.

With regard to the "chat room" option, if that became a substitute for nonbinding resolutions, I believe pension and mutual funds would have a fiduciary duty to use their "votes" in that forum. As Laura Berry or ICCR mentioned during the press conference, "it could become the wild west." Chaos that would literally cost millions for companies and funds alike to monitor. Why throw out a process that has taken 60 years to construct and that works?

SIF and ICCR launched a web site at SaveShareholderRights.org as part of their campaign to oppose controversial proposals at the SEC that would seriously undermine the rights of investors. I encourage all readers to review the materials posted there and to sign on to the "500-organization alliance."

The customizable email comment for individual investors to send to the SEC and Capitol Hill reads, in part, as follows:  “I oppose any action by the Securities and Exchange Commission to weaken the rights of Americans to present resolutions for votes by the millions of investors like me who own stock in companies.  I urge the SEC and, if necessary, Congress to stop any initiatives that would limit the rights of shareholders to sponsor proxy resolutions or prevent investors from nominating members of corporate boards.    My bottom line here is simple:   I believe that it would be better for the SEC to take no action on their shareholder resolution initiatives than it would be for the Commission to destroy the rights of shareholders.  I am worried that the SEC is on the wrong track.” 

It seems highly unlikely that so many mainstream companies would have adopted "green" directions so quickly without being pushed through resolutions. (Social Responsibility Is Entering the Corporate World)

The SIF/ICCR Web site aims to both: (1) enlist 500 institutions and financial professionals to sign a joint statement opposing the SEC proposals; and (2) help facilitate the filing of several thousand comments by individual investors, with copies of the comments going both to the SEC and the individual investors' elected members of the U.S. House and Senate.

Let's make it a 5,000 member alliance. Please join us in protecting the rights of shareowners or, in the words of the court, to ensuring that each "corporation is run for the benefit of its shareholders and not that of its management.” Sign on to SaveShareholderRights.org.

Press coverage: Chris Cox: Put Up Your Dukes!, Conde Nast's Portfolio.com. Activists Launch Online Opposition To SEC Proxy-Access Plans, CNNMoney. Shareholder rights groups aim to shoot down SEC proposals, Financial Week. Leading Socially Responsible and Religious Investing Groups to Organize Thousands to Oppose Sec Attack on Shareholder Rights, CSRWire, all 8/29/07. Shareholder Activists Lobby Against Proposed Rule Changes, ISS Corporate Governance Blog. Shareholder activists call for more access, Financial News (adds the following: "A study from the Wharton School, the business school of the University of Pennsylvania, found that companies with activist shareholders outperform the stock market by more than 7% in the short term, with improvement on performance and return on equity in those companies lasting up to two years." Groups protest proposed SEC shareholder rules, P&I, 8/30/07.

permalink: http://www.corpgov.net/news/archives2007/August.html#OpposingtheSECAttackonShareholderRights

SRI and Public Pension

Barry Burr wrote Unsuitable for Public Pension Funds in the 8/20/07 edition Pensions & Investments. Burr cites Alica H. Munnell's "Should Public Plans Engage in Social Investing." Burr writes that Munnell "covers an extensive range of social investment, not just divestment." True, but only in a surface way and that part of her report could easily be read as a critique of SRI funds. She relies on Social Investment Forum data that 68% of such funds only screen investments, while 26% rely only on advocacy.

I share Munnell and Burr concerns regarding the dangers of divestment, which is the main focus of Ms. Munnell article. It is difficult to determine who profits from investments in the Sudan or Iran, what the best options are, including "constructive engagement," and the need to coordinate responses through our elected representatives. Options must be carefully weighed and calls for divestment are too often based on emotional appeal. See Colorado PERA Board of Trustees' Statement on Divestment.

In the next issue of P&I, expect to see a letter to the editor from Peter Wilkes, Managing Director, Innovest Strategic Value Advisors, who argues that SRI/ESG "has evolved from a simple negative screening/shareholder advocacy process to a rigorous, positive, proactive, best-in-class, in-depth analysis of how environmental, social, and governance issues can directly affect a corporation’s bottom line." Predicting that the "entire sub-prime real estate market was headed for a fall was information that our clients did not get from either Wall Street and/or the traditional rating agencies until well after the fact," yet Innovest did it in October 2006.

Public pension funds that take such factors into account do well for both their beneficiaries and society-at-large. Environmental, social and governance factors shouldn't be off bounds for consideration by public pension funds. The real questions involve how these factors can be better measured to reduce risk and increase yield and create a better world. For the second year in a row, Innovest Strategic Value Advisors was ranked the #1 Leading Independent Research Provider of "extra-financial research" by 140 buy-side firms and 18 sell-side firms across Europe and the UK. Their efforts should be encouraged, not lumped in with perhaps ill-conceived divestment movements.

Mainstream Looks at Innovative Solutions

Breaking the Broker Vote from the July 2007 Corporate Secretary magazine is now on the web. Mary Beth Kissane covers much of the same ground I did in my May posts Proxy Voting: More Than Mechanics and Fill Empty Votes in June. It is great to see attention being paid by the Corporate Secretary to issues surrounding voting (and lack of voting) by retail investors and the possible solutions offered by Andy Eggers, founder of Proxy Democracy, Glyn Holton’s Investor Suffrage Movement and Mark Latham's extensive work “Proxy Voting Brand Competition” and VoterMedia.org. Still nothing in BusinessWeek or Forbes though.

CPA and Wharton Study Corporate Political Accountability

The Center for Political Accountability (CPA) and the Wharton School’s Zicklin Center for Business Ethics Research announced a new collaborative effort on corporate governance and corporate political accountability. Initiatives include a study of how directors carry out their oversight responsibilities of company political spending and activity, a survey of the codes of conduct of S&P 500 companies and how they regulate political spending, and an examination of existing regimes for political disclosure and accountability of the U.S. and a range of foreign countries and companies. They will also co-sponsor a conference on corporate governance and corporate political accountability to be held in late February 2008. (press release, 8/24/07)

ICCR Under Spotlight

Interesting article on Christianity and the Rise of the Investor Left (8/25/07) appears right-leaning Townhall.com. Linking Christianity, socialism, Hillary Clinton, and more importantly the rise of the Interfaith Center on Corporate Responsibility (ICCR), which "serves as the movement's clearinghouse." "Given its current network of 275 investor organizations with a combined portfolio exceeding $110 billion, the ICCR, though with a relatively tiny budget, has a lot of weight to throw around."

"What Leftist shareholders want is not simply reform, but revolution on the installment plan.  They seek to permanently alter the relationship between corporation and society in ways that effectively would render CEOs and boards as stakeholder wards." 

CalPERS Puts Retirees at Risk

Roughly 445,000 retirees across California received brochures announcing an upcoming election to fill a vacancy on the CalPERS Board. "All or a portion of each person's Social Security number appeared -- without hyphens -- on the address panel," reports the Sacramento Bee. (Apology sent over CalPERS privacy error, 8/22/07) Retirees are outraged.

CalPERS has long set high standards in the area of corporate governance. Yet, their own practices, especially with regard to careless use of Social Security numbers, have long been in need of reform.

For years, I railed against "underground regulations" at CalPERS which put members signing candidate petitions at risk because the Board requires them to identify themselves with the last six digits of their Social Security numbers. Such petitions are widely circulated and subject members to identity theft because if you know where the person registered for their SSN, or can guess, then you know the first three digits and the whole number.

I appealed to CalPERS to discontinue this practice. When they repeatedly refused, I petitioned the Office of Administrative law, which issued a determination that the regulations had not been legally adopted (2007 OAL Determination No. 1). Now the CalPERS Board is proposing regulations requiring the use of up to eight digits of the SSN (Amended Board Election Regulations).

Careless use of SSNs is the norm at CalPERS. Try going to their internet site and asking a simple question, such as when the next board meeting is; the form asks your for your Social Security number!

Not only do the currently proposed rules put members at risk from identity theft, they also allow the Board to set the number of signatures required to become a candidate and other conditions of candidacy without going through the rulemaking process. Want to limit the competition? Raise the number of signatures required. If you agree that the CalPERS Board should not put their own members at risk from identity theft and should place all requirements to run for office in regulations, send an email to Joe Parilo, Acting Regulations Coordinator, at joe_parilo@calpers.ca.gov. Mr. Parilo will present all comments, any proposed amendments, and suggested responses to the Board. The public comment period ends August 27, 2007. You don't have to be a CalPERS member to comment.

99¢ Only Stores Remember

99¢ Only Stores (NDN) filed a DEFA14A on Aug. 17, 2007 solely to include a poison pill shareholder proposal by John Chevedden in its proxy materials for its Sept. 17, 2007 annual meeting. This may be the first time a company made a separate filing solely to include a shareholder proposal in its proxy materials.

On July 30, 2007 99¢ Only Stores had already filed what appeared to be its complete definitive proxy with only the election of directors on the ballot. 99¢ Only Stores apparently made the mistake of failing to include the shareholder proposal in its previous annual meeting proxy. Oops. Management urges a vote against. We urge a vote in favor.

Activism Up; SEC Workload Down

TheCorporateCounsel.net Blog reports that although CalPERS doubled the number of shareholder proposals submitted to companies in fiscal 2007, the SEC's workload on shareholder proposals has declined from 356 no-action letter requests compared to 370 for the same period last year. "These numbers are down sharply from roughly 450 no-action requests in 2005 and 2004. Less no-action requests at the SEC no doubt signals more success on the negotiation front, and perhaps more instances of companies running shareholder proposals rather than going through the process of seeking to exclude them." (Activism on the Rise: CalPERS Doubles Shareholder Proposals, 8/21/07)

Nothing Better

According to an article in the St. Louis Post-Dispatch (Proposed rules are the wrong route to shareholder democracy, 08/19/2007), Dan Pedrotty, director of the AFL-CIO's division of investment, is willing to accept a shareowner requirement of 1% for ballot access with a holding period of two years.

But Pedrotty says he'd rather have no ballot-access rule at all rather than see either of the SEC's proposals enacted. "It's important to get this right instead of moving something forward that is not workable," he said.

David Nicklaus, the author of the article, says he's right. "Shareholder democracy may be a messy process, but it's the most important check we have on the abuse of corporate power." Let's hope that's also what most commentors also tell the SEC. Meanwhile, the Council of Institutional Investors has asked the SEC how it will rule on access proposals next year if neither rule is adopted.

PERSWatch.net Supports Jones for CalPERS Board

Henry Jones is a consensus builder who will work to ensure that retirees are protected in all facets of their lives, from their pensions and health benefits to issues such as senior abuse, identity theft, affordable housing and fraud. Jones will support efforts to avoid inadvertent practices by CalPERS itself that may contribute to these problems. He is endorsed by a wide variety of organizations representing CalPERS members who have retired from public service. With his experience as Treasurer of the $1 trillion Council of Instututional Investors, as Chief Financial Officer for LAUSD and Board Chair of the $120 million Schools Federal Credit Union, Jones may well be the most highly qualified candidate in history to ever run for the CalPERS Board.

CalPERS May Hold IRV Elections

At their August 10th meeting, the Ad Hoc Board Member Elections Committee instructed staff to take a serious look at instituting “instant runoff voting” (IRV) for the election of Board members at CalPERS.

IRV is equivalent to a series of runoff elections conducted by allowing voters to rank the candidates in order of preference, 1, 2, 3, and so on. The candidate who receives the fewest number of first choices from the voters is eliminated in the first count and all his or her ballots are re-distributed to voter second choices. Each successive count eliminates the next lowest polling candidate, transferring his or her ballots, until one candidate achieves a majority. Although it sounds laborious, computers accomplish the counting task very quickly.

Item 6 on the agenda (or archived here) began with staff reporting that, since a majority vote requirement was instituted in 2002, 67% of elections did not require a runoff. Either the incumbent was unopposed or one candidate won a majority in the first round. Additionally, a survey of the National Association of State Retirement Administrators fount that out of 23 responding, 18 use plurality voting and 5 use the majority method with a runoff. They recommended against further research on instant runoff.

Pete Martineau, of Fairvote, recommended reconsideration, pointing to Ireland's 65 years of experience with 3.5 million citizens, to the recent adoption of IRV in many municipal elections, including San Francisco, as well as to AB 1662, which requires an IRV-like ballot for California's overseas troops and civilians to avoid time consuming runoff return time. Martineau argued that IRV results in less acrimony. Candidates work together, since each may be dependent on second choices. Roberts Rules has always recommended IRV for offices like CalPERS trustees and he cited his own church and McClatchy High School as local examples in Sacramento.

Jim McRitchie, of CorpGov.net and PERSWatch.net then presented committee members with the following:

• Sample IRV ballot,
• Report on methods for implementing IRV for statewide elections in Vermont, estimating ballots could be counted in one day at a cost of $15,000 or less,
• Letter from TrueBallot indicating the are confident they can administer IRV “at a cost comparable to or less that, what you are spending at present.”
• Copy of AB 1662 mention by Mr. Martineau, and
• Copy of AB 1294 also moving though the Legislature, which would all local elections to used IRV.

McRitchie, argued that CalPERS didn't wait for other retirement systems before it got active in corporate governance and it shouldn't wait for others before adopting IRV, which would save time and money, as well as encourage more members to vote.

Chuck O'Neil, of Californians for Electoral Reform, described witnessing the May Scottish IRV election. He related anecdotal chats with voters who had no problem understanding how to rank candidates and who didn't particularly care to know what formulas computers used for all the required sorting … as long as the count honestly reflected their consensus. C.T. Weber then described his recent election as a Regional Director with the California State Employees Association as “unfair” because he was elected with less than 50% of the vote. He spoke of need for majority winners and of the savings in time and cost that would result if CalPERS institutes IRV.

George Diehr, elected by state employees, asked that staff fully investigate IRV, as well as other reforms to reduce the length of the election cycle, such as giving members less time to mail their ballots. Marjorie Berte, the Board's insurance industry representative, agreed and expressed her wish that electronic voting and other mechanisms be explored. Committee Chair, Kurato Shimato, elected at-large by all members, instructed staff to research other voting methods and technology, especially IRV, and to report back in December with an eye to instituting changes in time for the 2009 elections.

Most directors, especially the almost half elected by CalPERS members, would like to reduce the time spent campaigning. If staff comes back with a report that it is feasible AND members keep expressing support, the first IRV elections at CalPERS will be held in 2009.

Now, how long will it take to institute IRV in corporate elections? Shareowners are still trying to get the right to vote against the one candidate nominated for each position, instead of symbolically withholding votes. First we need majority elections. Then we need more than one candidate running for many board positions. Eventually, we may have three or more candidates for some positions. At that point, I'll be pushing for IRV, assuming I'm still alive.

ERISA Advisory Council Openings

The U.S. Department of Labor (DOL) is soliciting nominations to fill five vacancies for three-year terms on the Advisory Council on Employee Welfare and Pension Benefit Plans, also known as the ERISA Advisory Council. The deadline to submit nominations is 10/1/07. The bipartisan council consists of 15 members appointed by the secretary of labor to represent specified groups and fields involved in employee benefits. The council, which meets four times a year, advises and makes recommendations regarding functions carried out under ERISA. Nominations are being accepted for one vacancy each in the fields representing employee organizations, employers, insurance, accounting and the general public (representing those receiving benefits from a retirement plan).

Holdings

For the curious, get a quick look at Russell Read's report, regarding CalPERS holdings, including asset allocation, top 20 stock holdings, target v. existing allocation, net performance v. expected returns, investment in California, etc. I've also updated my list of investments so that readers can be alert to possible conflicts of interest in the pages of CorpGov.net.

Speculation on Aguilar: Nazareth May Also Step Down by Year's End

The second Democrat on the commission, Annette Nazareth, whose first term ended in June, will leave by year-end, according to individuals familiar with the matter, who spoke on condition they not be identified. Ms. Nazareth declined to comment. (SEC's Democrats to Step Down, WSJ, 8/9/07) It is beginning to look increasingly likely that we will either have no movement from the SEC on proxy access by next season or they will enact the "no access" proposal. Bloomberg News reported that U.S. Senate Democrats are vetting former Invesco Plc counsel Luis Aguilar as a potential successor to Roel Campos. "Shareholder advocates including the Council of Institutional Investors want more say in selecting directors, arguing that entrenched boards have failed to police managers. The U.S. Chamber of Commerce says opening the door to shareholder nominations would let labor unions and hedge funds hijack corporate strategy."

Also from that report: "Aguilar, in the 2004 LawCrossing.com interview, said he was wary of over-regulating companies. While the Sarbanes-Oxley Act contains ``some good stuff,'' it's also a ``burdensome cost imposed on corporate America,'' he said. Congress passed the law in 2002 to increase penalties for corporate wrongdoing and stiffen audit requirements after the collapse of Enron Corp. and WorldCom Inc. Aguilar also criticized regulatory agencies for trying to layer legal constraints on widely varying types of businesses." (Senators May Pick Ex-Invesco Lawyer Aguilar for SEC, People Say, 8/9/07)

Campos to Step Down: Action Needed

SEC Commissioner Roel C. Campos announced that he intends to leave the Commission in a month's time and plans to return to the private sector. The official announcement touts Campos' many accomplishments. "As the first Hispanic Commissioner, Mr. Campos helped recruit talented minority employees to the SEC and helped establish a diversity initiative for the agency." However, it makes no mention of his role in advocating proxy access.

A blog post by Subodh Mishra of ISS gets directly to the point. "The departure of Campos, long a champion of investor rights, will come as a blow to advocates of proxy access and other measures deemed friendly to shareholders."

The post goes on to note, "under federal law, two of the SEC's five commissioner seats are to be filled by members of the political party that doesn't control the White House. Accordingly, Senate Democrats will recommend a replacement for Campos to President George W. Bush, who would then nominate the individual for confirmation by lawmakers...Back in 2005, when Nazareth succeeded former Democratic Commissioner Harvey Goldschmid, securities lawyers told ISS that among the names under consideration were Columbia University law professor John Coffee, veteran Washington securities lawyer John Olson, and Joel Seligman, president of the University of Rochester." (Democratic Commissioner to Leave SEC, 8/9/07)

The Council of Institutional Investors, Social Investment Forum, labor organizations and other shareowner advocates should be seeking consensus around a few good candidates that will advocate for access and other shareowner rights. One well qualified name being mentioned already is Luis Aguilar. Mr. Aguilar was unavailable for comment at the time of this post. For hints of where he might come down, see Corporate Governance: Does Mexico Finally Get It? (The Metropolitan Corporate Counsel), Latin American Association Names Luis A. Aguilar Of McKenna Long & Aldridge LLP as New Board Chair, and Luis Aguilar Named Lawyer of the Year by Hispanic National Bar Association.

More early 8/9/07 coverage at Campos moves tilts political balance at SEC, MSNBC and Campos out at SEC; Atkins may soon follow, FinancialWeek.

Quick Bites

Ralph Ward’s Boardroom INSIDER (8/07) points to the Gap and Progressive Insurance for putting director information, governance policies, and an email address all on one informative page to facilitate communications between shareowners and board members.

John Chevedden points out that lost in coverage of the Lear battle for control is the fact that item 4 on the proxy, which began as his shareowner proposal, attained overwhelming support for the annual election of all directors. For: 68,417,605; Against: 1,752,187; Abstain: 73,237.

Take a look at theRacetotheBottom.org. J. Robert Brown has been posting some interesting commentary on the relationship between Delaware law, which held that approval of compensation by a board with a majority of independent directors will result in the application of a the business judgment rule, and the recent conviction of Gregory Reyes, the former CEO of Brockade of 10 counts of fraud. Brown also posted and astute analysis of an article in the WSJ on Payments to Terrorists at Chiquita Brands and the Role of the Board of Directors as a failure of corporate governance. This is not a case where a company learns about a bad practice and immediately coming clean. "It is the story of illegal payments that were known at the top levels of management, continued for seven years, went to a violent terrorist group, and were self reported only when the entire board and outside counsel learned about them."

ISS reports Investors Protest Apple’s Past Option Grants with high withhold votes against directors "in an apparent protest over the computer company’s past stock-option practices" and high support for three pay-related proposals.

Jim Hightower awards a "Gooberhead Award" to Congress, especially Rep. Tom Price who "wails that poor, beleaguered CEOs should not be compelled by bad ol' government to let in the voice of the corporate owners." (CEOs Fight Corporate Democracy, 8/3/07)

CalPERS Board Votes to Exempt Itself From the Law

2007 OAL Determination No. 1, filed by James McRitchie, found that the CalPERS Notice of Election, governing CalPERS elections, contains underground regulations and cannot be legally enforced. To address that problem the CalPERS Board proposes Amended Board Election Regulations. Unfortunately, the newly proposed amendments risk identity theft of members who must include the last six digits of their Social Security number on circulating nomination petitions. Additionally, the proposed rules attempt to allow the Board to change nomination requirements, such as the number of signatures required, without a 45 day comment period and other safeguards required by law. It is ironic that the Board's response to the Determination finding certain requirements to be "underground regulations" is to propose to be able to write new "underground regulations." James McRitchie the publisher of CorpGov.net and a member of CalPERS, submitted public comments on August 8, 2007, including proposed amendments in double underline and strikeout format.

CalPERS has a well deserved worldwide reputation for advocating good corporate governance practices, so why does the Board seek to exempt themselves from legal requirements that govern the rulemaking process? They have no authority to do so. Board members argued for years that the Constitution exempted them from rulemaking requirements. However, that argument was thoroughly rejected by the Superior Court in Connell v. CalPERS and 1999 OAL Determination No. 18, filed by James McRitchie. Board members also have a fiduciary responsibility to members. Why are they putting members at risk of losing thousands of dollars to identity theft by requiring that widely circulated nomination petitions include the last six digits of member Social Security numbers? If you know or can guess where the member lived when they registered, you know the whole number, since the first three digits are assigned on that basis.

If you agree that the CalPERS Board should both follow the law and not put their own members at risk from identity theft, send an email to Joe Parilo, Acting Regulations Coordinator, at joe_parilo@calpers.ca.gov. Mr. Parilo will present all comments, any proposed amendments, and suggested responses to the Board. The public comment period ends August 27, 2007. No, you don't have to be a CalPERS member to comment.

permalink: http://www.corpgov.net/news/archives2007/August.html#CalPERSBoardVotestoExemptItselfFromtheLaw

Take Back

Daniel Weintraub reports that the Orange County Board of Supervisors voted late last month to consider taking back a pension increase granted to public safety employees in 2001 -- on the grounds that a portion of that increase represented an unconstitutional debt and an illegal gift of public funds. Counties and cities all over California -- and their retirees, many of who are members of CalPERS -- will be following this action closely. (Orange County considers taking back pension hike, Sacramento Bee, 8/9/07)

CalPERS Decreases State Contribution

For the first time in five years, the CalPERS Board ruduced the state's contribution. By smoothing out the impact of investment returns over a 30-year period, calculating the value of local retirement plans over 15 years instead of three, and requiring a minimum contribution even when there is a surplus, the Board hopes to placate Republicans who have been advocating lower benefits or converting to a defined contribution plan. (CalPERS cuts state payment, Sacramento Bee, 8/08/07)

What Happened to Triple Bottom Line Returns?

CalPERS is partnering with Premier Pacific Vineyards to clear-cut 2,000 acres of forest in northern Sonoma County, the state's largest single conversion of forestland to vineyards ever. (Forestlands to vineyards: CalPERS, what about water and principles?, Sacramento Bee, 8/08/07) CalPERS usually does a better job of considering environmental, social and governance concerns. What happened to seeking triple bottom line returns? Where is Phil Angelides now?

Surveys

I encourage all board members to take a quick survey by TheCorporateCouncil.net on Lead/Presiding Directors and to review the results of their recent survey on Earnings Releases and Earnings Calls. I also recommend those dealing with proxy issues subscribe to CompensationStandards.com, so they can benefit from reading Borges' Proxy Disclosure Blog and many other excellent posts.

Flat Green

Tom Friedman says, "Green is the new Red, White, and Blue." (New York Times - Sunday magazine of April 15, 2007. However, according to Cliff Feigenbaum of the Green Money Journal, "this rapidly approaching future for our country is also global. Internationally, corporate accountability will include Environmental, Social, and Governance (ESG) factors as corporate management come to the inescapable conclusion that any financial analysis that excludes these factors cannot safely predict a company's long-term profitability. According to several of our writers, the next 15 years will see the full integration of ESG into financial analysis and corporate decisions to reflect a triple bottom line." (Essays on the Future: Looking Ahead, Summer 2007) Yes the world is flat.

See also Green Is Good For Business. "Companies like General Electric and DuPont use sustainable practices to reshape their supply chain management, while Nike and Wal-Mart focus their environmental efforts on one of the most widely traded resources in the world." Download a "pocket-sized" shopping guide developed by Climate Counts. Print it in landscape at best quality so that you can actually read it. (CRO, 8/8/07) For a good overview, see The Shifting Sands of Shareholder Value by GMI Research Analyst Naveen Reddy on how environmental, social and governance factors are affecting the investment profession. "Investment managers may not want to save the planet but many now see ESG analysis as a key component to attaining superior investment performance and uncovering opportunities to enhance shareholder value." Ah yes, saving the planet could be seen as just a byproduct of increasing profits.

More Sentences to Follow

With a 15-year prison sentence for securities fraud looming, former Adelphia chairman John Rigas claims he was simply “in the wrong place at the wrong time” and did nothing illegal, according to a report today in USA Today. Gregory Reyes, the former head of Brocade Communications Systems Inc., was found guilty of all charges in a trial related to the backdating of stock option grants, becoming the first chief executive convicted by a jury as part of a broad U.S. crackdown on the practice. (Adelphia honcho Rigas, headed to prison, says he was in wrong place at wrong time; and Brocade's Reyes found guilty on all 10 backdating charges, Financial Week, 8/7/07) We can expect the backdating scandal to snare many more in the near future.

Direct Democracy

They have it in Switzerland. More and more countries are adopting national referendums, a process in which legislatures develop laws and put them up for a popular vote. The Democracy Foundation’s National Initiative hopes to do it in the United States through a web site called Philadelphia II. Unfortunately, it takes either a constitutional convention called by two-thirds of state legislatures or a two-thirds vote in both houses of Congress. (Power to the People: The Democracy Foundation's Plan to Create a Fourth Branch of Government, Mother Jones, 7/30/07) Not something we're likely to see anytime soon. Maybe this is what Cox has in mind for Electronic Shareholder Forums? Unlikely.

More importantly, the SEC is now posting comments submitted on both S7-17-07, the "nonaccess proposal" (comments) and S7-16-07, the "hedge fund proxy access proposal" (comments). It looks like Anonymous is bitter. I predict, with two competing resolutions, a lot of confusion and overlap between comments on both. Comments are due by Oct. 2.

New Handbook

The Conference Board issued a revised handbook to assist boards of directors in the performance of their duties. The new Corporate Governance Handbook 2007: Legal Standards and Board Practices is "an up-to-date compendium organized by the variety of functions in the director's job description, including: nominee selection and election process, diversification of professional expertise and background, delegation of authority to board committees, conduct of board meetings, adoption of governance guidelines, succession planning, engagement of outside compensation consultants, disclosure procedure and internal control oversight, strategy design and risk governance. A final chapter discusses what issues the board should consider to ensure appropriate D&O liability insurance coverage." This is a must have for directors and those who assist them in their duties who don't want to be left in the dust.

Financial Week Takes GAO at Face Value

Financial Week reports on GAO-07-765: Proxy Advisory Services, concluding that ISS is "nearly conflict-free" and "none of these advisers are all that influential." (Top proxy adviser frisked by Congress: 'They're clean,' 8/6/07) If you believe the later, I've got a bridge I'd like to sell you. Oh, wait, it already fell down. The best analysis of the report still comes from Broc Romanek see Second Thoughts on Proxy Advisory Services below. The best solution is still that proposed by Mark Latham.

CalPERS Moves Profitable Strategy to Emerging Markets

"There are few business areas where morality and money overlap, but Calpers has for years deftly used one to corner the market on the other, writes Heidi Moore for Financial News.

"At $245bn, Calpers is the largest and most stable of US pension funds and it has blazed a trail by teaming up with activist hedge funds such as Breeden, Relational Investors and Hermes in the UK. It expects to put more money into corporate governance – an estimated maximum of 8% of its $150bn equity portfolio – recruit staff, buy equity stakes in activist managers, such as Breeden and Shamrock, and continue investing in companies in partnership with activists... Its corporate governance fund is up fivefold over five years."

The article goes on to recount several of CalPERS' partnerships, noting that much of their corporate governance efforts have centred on the US and other developed markets. Focus is soon expected to include international emerging markets. CalPERS "has moved from an antiquated model of grading and banning investment in countries such as China, Russia, Venezuela, Pakistan and Egypt, which may have resulted in the pension fund losing out on $200m in potential profits, according to consultants." (Calpers sets benchmark, 8/6/07) That's something I recommended in my Asian Development Bank speech of 2002.

New MBA Program on Sustainability

Marlboro Sustainability MBA program looks strong and exciting. They provide all the elements of a traditional MBA, while focusing everything through the lens of sustainability. Bill Baue, who writes for SocialFunds.com and cohosts Corporate Watchdog Radio, is one of several well qualified and interesting faculty members. Much of the learning is geared through the internet with one meeting a month from Thursday through Sunday in beautiful Brattleboro, Vermont.

Coming to Their Senses on DB Plans

A study of the 638 Fortune 1,000 companies by Watson Wyatt Worldwide that sponsor defined benefit plans showed that only 4%, or 25, froze their plans in the last 12 months, ended April 30, down from 7% the previous year. Growing pension surpluses provide a disincentive to move away from defined benefit plans, which cost less to provide the same dollar income to retirees than do defined contribution plans or hybrids. (Brighter picture for DB plans, P&I, 8/6/07)

PAX World Begins Dialogue on "Democratic" Proxy Access Proposal

Julie Fox Gorte, PhD., Senior Vice President of Pax World Management Corp. is among the first to begin the dialogue on how responsible investors should respond to the SEC's proposed rulemaking,  S7-16-07, which raises the threshold for submitting proxy access proposals from the current $2,000 of shares held for a year to 5% of the shares held for a year. Andrew Shalit of Green Century Capital Management tems it the "hedge fund proxy access proposal, because if it passes, hedge funds will be the only ones with proxy access."

"Perhaps it is time to bring democracy to the corporate boardroom, where the typical election — like Saddam’s Iraq and the former Soviet 'republics' — consists of a ballot of management’s handpicked candidates running unopposed for the privilege of representing shareholders," writes Gorte. The 5% threshold is too high. "The result is the same: shareowners will have no access to the proxy ballot and directors will be nominated by corporate management rather than by the shareowners they are supposedly elected to represent."

"But the plot thickens," because "this proposal may permit the creation of a much higher hurdle for shareholders to jump — such as a minimum percentage holding rule, or a bylaw prohibiting any nonbinding resolution being offered, or other hurdle — before allowing any shareholder access to the proxy whatsoever, not just those concerning proxy access for director elections, but anything."

Gorte then recounts the importance role shareholder resolutions have played in increasing management's responsiveness to important environmental, social and corporate governance issues. "Denying shareowner access to the proxy ballot is simply trampling on corporate accountability, pure and simple. It is important that all of us who care about corporate accountability, and governance, and social responsibility, oppose these proposed changes as forcefully as we can," she concludes. (Democracy in America: Corporate Proxies, the SEC, and the Corporation, 8/1/07)

Nicely done; we need many many more such statements. The public should not be forced to choose between S7-17-07, the "nonaccess proposal," and  S7-16-07, which raises the threshold required to access unreasonably and threatens to reduce or eliminated nonbinding resolutions.

Investment News Favors Proxy Access

An editorial in Investment News calls on Cox to vote "in favor of greater shareholder democracy. Perhaps the 5% ownership threshold is too high, though coalitions of shareholders should make it reachable. Perhaps the one-year holding period is too short. Perhaps it should be two years; after all, it is long-term shareholders who are most interested in strong management focused on long-term performance.

It is Mr. Cox’s responsibility as chairman to devise a workable solution for better shareholder democracy that is fair to all shareholders, not just management shareholders, individual shareholders or institutional shareholders.

He must ensure that in putting some reins on management through more responsive directors, he does not hand control of the board, and ultimately management, to special-interest groups at the expense of other shareholders. (Choose in shareholders’ favor, Mr. Cox, 8/6/07)

Pension Blues

It came in too late for Friday afternoon but I think it is still worth posting, since we can always use a little humor.  "Inspired by those who bring attention to serious issues through humor, Dr. Susan M. Mangiero, PG president and founder, and Mr. Steve Zelin, the Singing CPA have co-created a (hopefully) memorable ballad about the state of affairs in pension land. Mangiero adds 'Pension Governance, LLC is committed to helping fiduciaries do a better job of identifying, measuring and managing financial risk. We hope the song is a friendly reminder of the hard work ahead.'" Click here to listen to the MP3 file. Play time is just over four minutes. (Pension Governance EZine, 8/3/07)

Employee Ownership in Context

A “study of studies" by Eric Kaarsemaker, of York University, commissioned by the Foundation for Enterprise Development reviewed the past 30 years of research on employee ownership. A significant majority of nearly 130 studies around the world found favorable effects; only 10% found negative effects. The following is reproduced from Beyster Institute's Leading Companies Online Magazine - Employee Ownership and Its Consequences: An international study of employee ownership research (Register with Beyster's mailing list to get valuable updates.):

A key limitation associated with many of the studies of employee ownership to date, however, is that the positive effects of employee ownership depend to a significant degree on the context in which the plan operates, but those specific conditions that contribute to successful employee ownership strategies remain largely unknown.

Kaarsemaker suggests future research focus on what he calls the “5-fits” model, which looks at employee ownership from different perspectives and better identifies the specific factors that influence how such plans work in actual practice. These five conditions that are likely to influence the effects of employee ownership include:

1. Person Fit, or the alignment between employee ownership and individuals’ personal traits and characteristics. For example, some people care more about money and status than others, and some people are more risk-averse than others.
2. Internal Fit, or the alignment between employee ownership and other organizational practices, in particular people management or human resource management practices. For example, employee participation in decision-making is often thought to be a necessary condition in order for employee ownership to yield favorable results.
3. Strategic Fit, or the alignment between employee ownership and the company strategy. Companies operate in a specific market context, and ideally have a strategy to create and sustain competitive advantage, to stay ahead of competitors and earn above-normal returns. Ultimately, company strategy is executed by the workforce. Employee ownership plays a role in aligning worker interests with the company’s strategic priorities.
4. Organizational Fit, or the alignment between employee ownership and organizational characteristics like industry, size, history, organizational culture, reasons for adopting employee ownership, capital sources, and organizational life cycle. For example, there is a difference in the impact of employee ownership between, on one hand, the case of a retiring owners selling a healthy company to its employees, and on the other hand, the case of an employee buy-out as a last resort for a troubled company. The use of stock as incentive compensation in fast-growth companies represents another entirely different dynamic.
5. Environmental Fit, or the alignment between employee ownership and the broader institutional and cultural context of the firm. Much of the research reviewed in this study, for example, focused on U.S. and U.K. companies which operate in a different context than continental European, Asian or multi-national companies operating in many different cultural contexts.

ISS' Crystal Ball

What's Next for Corporate Governance? ISS looks into its crystal ball and concludes that increased shareowner power is leading to engagement:

While a substantial increase in the level of shareholder proposal withdrawals is the most tangible evidence of the trend toward dialogue, other indicators also suggest that engagement is taking root and is measurably altering the governance landscape.

The creation this spring of an investor-issuer working group to tackle the nuances of advisory voting on executive compensation is one key example. The decision by pharmaceutical giant Pfizer—a governance trailblazer on such issues as director resignation policies and compensation disclosure—to formally engage its top shareholders is another.

Meanwhile, the growing use of the Internet to foster and promote communication between corporate managers and owners, coupled with the relative paucity of high-profile "vote no" campaigns during the 2007 proxy season, also serve as potent reminders that investors and corporate issuers are favoring constructive engagement over confrontation...

Since the corporate scandals of 2001 and 2002, traditional activist investors have primarily targeted large corporations, according to ISS records on shareholder proposals, with many smaller companies falling under the radar. But that trend maybe changing, analysts say, noting how many hedge funds have successfully targeted S&P MidCap and SmallCap firms.

More on Proxy Proposals

Bill Baue posted his always interesting perspective in SEC Chair Cox Votes For Two Opposing Proxy Access Proposals--Both May Curtail Shareowner Rights (SocialFunds.com, 8/2/07). J. Robert Brown comments on testimony at the Senate Committee on Banking, Housing and Urban Affairs (The Senate Speaks on the Securities Markets, TheRacetotheBotton.org, 8/2/07) as does Subodh Mishra of ISS (Dodd Warns on Access, ISS Corporate Governance Blog, 7/31/07)

Mace Insecurities

"Never a dull moment at Mace Security International," posts Jonathan Berr at phillynews. (Pirollo rolls, 7/31/07)

Ronald R. Pirollo, of Langhorne, Pa., has resigned as chief accountant and controller of the troubled Mount Laurel seller of the self-defense spray. The one-line annnouncement comes about a week after CEO Louis D. Paolino Jr. announced the surprise purchase of an online services company called Linkstar. It comes barely a month after Pirollo himself won a guarantee of extra pay in the event of a board takeover or removal of Paolino. And that step came on the heals of Paolino's own embezzlement allegations against a former employer and shareholder demands that Paolino's board open itself up to new members.

Andrew Shapiro, whose Lawndale Capital Management is Mace's largest shareholder, reviewed the possible reasons, or mysteries, for Pirollo's sudden departure after eight years at Mace in an e-mail to PhillyInc: "It is unclear if this immediate resignation was as a result of embezzlement by the company's Florida division controller, historical internal control questions leading to late regulatory filings, problems with last week's acquisition of Linkstar or other factors." Further confusing the situation were recent comments by Paolino about his frustration with the security business and his growing interest in the online world.

I haven't seen anything in the print press, so thought I'd pass this along. Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC, which has an ownership stake in Mace and is a 13D filer.

Second Thoughts on Proxy Advisory Services

As I noted the other day, the GAO released its report on proxy advisory services (GAO-07-765: Proxy Advisory Services). Like many who rush through all the mail that piles up, I didn't really say much about the report, other that to quote a few passages that implied the SEC did not identify any major violations, even with potential conflicts of interest, and that large institutional investors aren't totally reliant on such services in voting their proxies.

P&I appears to have gone a little overboard in an article entitled GAO: Proxy advisory firms' influence overblown. (Compare with Is This the Most Influential Man on Wall Street?, SmartMondy.com, 10/16/02. Has ISS really gotten less powerful in the last five years?) Thankfully, this morning I woke up to a much more thoughtful read under the heading GAO Report on Proxy Advisors: No Smoking Guns at TheCorporateCounsel.net Blog (8/1/07). In it Broc Romanek poses six questions the GAO should have asked. Of the six, the most interesting to me is the following:

4. Lack of investigative research - A big flaw in the report was taking at face value that many of these institutional investors said they make independent decisions. Yes, some do. But how many of them, when asked, would be expected to say: “Yep, most of the time I just vote the way they tell me.” Not any of the smart ones, because they have a fiduciary duty to vote.

Remember that most of these investors hold positions in thousands of companies; it would be a monumental task to conduct independent research about each item for each issuer's ballot. To do so, an investor would have to have a staff along the lines of a proxy advisor to adequately do the job. The reality is that investors are trying to keep their expense ratios down - and even the larger investors typically have only a few employees dedicated to vetting voting issues.

Romanek gets to fundamentals by pointing out that even the largest institutional investors only have a few staff devoted to researching proxy issues for thousands of companies. Therefore, they really are more dependent on ISS than they would like to acknowledge. However, a brief analysis of ISS by Mark Latham doesn't provide much solace to those of us who worry about how much focus is actually given to proxies and how shareowners vote.

Latham quotes ISS, “Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” He then goes on to observe:

We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.

I agree, that's why I have long supported Latham's notion that "all shareowners of a company can solve the freerider problem by paying for voting advice as a group instead of one investor at a time. If we can pay with company funds, then all are paying together in proportion to the number of shares owned, thus in proportion to any benefit in share value from improved voting." Of course, "the trick is to keep the advisor selection and payment procedure free of influence from the board of directors" and to come up with an easy and expeditious way for shareowners to select a proxy advisor for more in-depth coverage. (Proxy Voting Brand Competition, Journal of Investment Management, First Quarter, 2007)

So far, Latham has been more successful in applying his model of brand competition to university than to corporate elections. (see VoterMedia.org) Of course, the students of today will be the CEOs, directors, and fiduciaries of tomorrow. Just as there were early proxy access adopters, such as Apria Healthcare (2003) and Comverse Technology (2007), innovative companies will soon acknowledge the increased credibility an independent analysis of their proxy can provide. Just as all hire an "independent" auditor, they will soon begin funding proxy monitors. To ensure true independence, they should be asking shareowners to vote on their selection.

Yes Virginia, We Are Heading for a Retirement Crisis

The National Retirement Risk Index (NRRI) concludes that even if households work to age 65 and annuitize all their financial assets, including reverse mortgages, nearly 45% may not be able to maintain their standard of living in retirement.  That is, these households are projected to have replacement rates — retirement income as a share of pre-retirement income — that fall more than 10% short of a target rate (65% to 85% of preretirement income) designed to maintain their pre-retirement living standard.  More realistic assumptions regarding earlier retirement and reluctance to annuitize 401(k) balances or tap housing equity would put the percentage ‘at risk’ considerably higher, as would the inclusion of rapidly growing health care costs. 

The Center for Retirement Research at Boston College found that in 1992, only 20% of those aged 51-61 were at risk of not meeting their pre-retirement standard of living in retirement, but by 2004, 32% were at such a risk, and broadening the age range raised that level to nearly 45%.

Regardless of the approach taken, those age 51-61 in 1992 were doing fine in terms of retirement saving. About 80% were on track to maintain their standard of living in retirement; only about 20% were expected to fall short. But the early 1990s were in some sense the “golden age” of retirement income. People 51-61 approaching retirement still faced a Normal Retirement Age under Social Security of 65, compared to 66 in 2004. There were more one-earner couples, which resulted in higher Social Security replacement rates. And 80% of those with pensions still had defined benefit plans, compared to 65% in 2004 for the similar age group. Interest rates were also higher in 1992 than 2004, producing greater income streams from annuitized wealth.

Unless households begin to save more or work longer, the NRRI will continue to increase as the Social Security Normal Retirement Age rises to 67, the shift from defined benefit plans continues, retirement periods become longer with increased life expectancy, and the one-income couple virtually disappears. Yes, there really is a retirement savings crisis. (Is There Really a Retirement Savings Crisis? An NRRI Analysis, 8/07)

Proxy Access Legislation Possible

Banking Committee Chairman Christopher Dodd, put SEC Chairman Christopher Cox on notice that he would consider a legislative proposal for proxy access if the SEC cannot resolve the issues. Dodd and other Democrats on the panel also expressed doubts about the merits of the proxy-access proposal, since it would require shareholders owning at least 5% of the company's stock to push for such a change, which would keep "even large institutional investors such as Calpers" from filing. (Dodd Warns on Access, ISS Corporate Governance Blog, 7/31/07)

Cox said the electronic shareholder forum part of the proposal, designed to facilitate greater online interaction among shareholders and between shareholders and management, could be one way to put together a group that collectively owns five percent of a company's stock. (US lawmaker says could consider proxy legislation, Reuters, 7/31/07)

Employment Opportunity with AFSCME

Fantastic position available with AFSCME, responsible for coordinating, developing and conducting investment educational and training programs! Here's a real opportunity to help AFSCME members understand investment concepts and skills to help secure their retirement future and family savings. Plus, you'll be working with the union that, more than any other, has led the important fight for proxy access. According to the announcement, the deadline to apply is August 10, 2007. Don't wait.

CEO Dismissals Up

Worldwide, boards of large corporations are dismissing four times more CEOs today than in 1995. "While a handful of CEOs are dismissed for illegal or immoral behavior, the vast majority get the ax for dismal financial results stemming from a significant deterioration in the company’s core business. On average, an ousted CEO’s company achieves only half the profit, cash flow, and market capitalization of a comparable company led by an effective CEO for the same length of time."

"Fewer than 5% of CEOs were fired in 2005, not an excessive number (for example, it’s about half the proportion of employees who are fired). The story about CEO dismissals isn’t how many are being fired now but rather how few were removed in 1995—only 28 in 2,500 companies." (The Hidden Good News About CEO Dismissals, Chuck Lucier and Jan Dyer, Harvard Business Review, 7-8/07)

Waitzer Heads Effort at York University

Ed Waitzer, former chairman of the Ontario Securities Commission and a lawyer at Stikeman Elliott LLP, has been appointed to the newly funded Jarislowsky Dimma Mooney Chair in Corporate Governance, a joint initiative between Osgoode Hall Law School and the Schulich School of Business at York University in Canada. The position was created by a $2-million in funding from shareholder activists Stephen Jarislowsky, William Dimma, a businessman and former dean of the business school, and Gary Mooney, president and COO of Fidelity National Financial.

"I felt for many years that securities laws in Canada have been made and approved by anybody but the investors. It's one of the reasons why the OSC and others have such tremendous trouble pursuing people who break the laws," says Jarislowsky. The newly created chair is part of an effort to build a corporate governance center at York. Mr. Waitzer will be responsible for raising corporate governance issues in the public through writing and speaking opportunities, conducting research and presenting papers and holding seminars on such issues. (M&A lawyer leads corporate crusade, Financial Post, 7/31/07)

News from July 2007 and June 2007

Back to the top