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Current News and Commentary. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest. Your ad clicks help pay the bills.
Proxy Access News TheCorporateCounsel.net Blog by Broc Romanek carries an important article, "Reliant Energy Sues to Exclude Shareholder Access Proposal," which discusses Reliant Energy's lawsuit to allow exclusion a shareholder access proposal. Romanek's article carries a link to the complaint (Reliant Energy Inc. v. Seneca Capital LP, case number 07-376) available to subscribers to thecorporatecounsel.net. UnitedHealth Group, the other company facing an access proposal, is arguing that AFSCME v. AIG doesn’t apply. They are incorporated in Minnesota, which requires bylaw proposals come only from shareholders with at least 3% of the company’s voting power. D&O Insurance Costs Down Advisen Ltd. reports a 5.5% drop in D&O premiums in the fourth quarter of 2006, and a decline of almost 30% since the end of 2003. The decline in D&O premiums since 2003 followed a 100% jump in those premiums between 2000 and 2003. The Stanford Securities Class Action Clearinghouse reported that 110 securities fraud class-action lawsuits were filed in 2006, down from 178 in 2005 and well below the 10-year average of 193. (D&O rates flirt with free fall, FinancialWeek, 1/30/07) Academic Roundup Manifest-I presents a summary of recently released academic papers on international corporate governance and corporate social responsibility issues. Not All IPOs Go to London Sarbanes-Oxley has poisoned the well, according to participants at a seminar, sponsored by the parent company of the New York Stock Exchange and Stanford University's Rock Center for Corporate Governance entitled "Can Our Capital Markets Be Saved and Do They Need Saving?" 56 companies backed by venture capitalists went public in 2006 in the United States, raising a total of $3.72 billion, the highest number and largest amount raised since Google went public in 2004, according to Dow Jones VentureOne. A Thomson Financial survey of all U.S. IPO activity shows that the 189 IPOs last year raised nearly $43 billion, more than the $41.4 billion raised by 558 deals in 1997. In other words, there were fewer but higher-quality deals. (IPOs still love U.S. markets, Fortune, 1/31/07) ISS Board Pay Study Among the significant findings reported in an interview with Carol Bowe posted on the ISS were the following:
Motive Behind P2P Deals Questioned WSJ reports that CEOs are in a position to exploit their own office and ownership positions to pursue private-equity deals that serve them best. "A few executives are pursuing deals for weeks or months without alerting their boards. Others are subtly threatening to quit if a company isn't sold and delivered back to their buyout buddies." Several examples are provided. Boards are slowly changing their ways, demanding that chief executives seek permission -- not forgiveness -- when even exploring the possibility of a private-equity hook up, says James Woolery, a partner at Cravath Swaine & Moore in New York. "Boards shouldn't have to deal with grenades that come from inside their own tent." "Perhaps the best chance for reform comes from the shores of Australia. There a group of top managers was forced out of their jobs, after helping to launch a management-buyout plan for a utility called Alinta Ltd." The article concludes that a high-profile firing might be the "only way to get through to the next crop of executive free-lancers and canoodlers." (Fine Line of Selling, Selling Out, the Firm, 1/30/07) "Increasingly, shareholders and directors are asking a fundamental question: If managers can create so much wealth for private owners, why can't they do the same for public shareholders?" Writing for WSJ, Alan Murray says "the fault lies less with a private-equity market that is generating superior returns than with a public-company market that is generating lousy ones. Investors would be better off if public companies could clean up their own houses, and get rid of the high-priced middleman." (Private Equity's Successes Stir Up A Backlash That May Be Misdirected, 1/31/07) Advice to Boards: Don't Constrain Policies or Raise Expectations Writing for the New York Law Journal, David A. Katz and Laura A. McIntosh, warn boards not to raise expectations. Although "it generally is considered best practice to have a supermajority of independent directors," they advise saying ."the board will have 'at a minimum' a majority of independent directors in order to allow for flexibility in board composition as directors leave and join the board and as the board and management contemplate succession issues." Similarly, "the board of directors should not pick a single fixed number of directors" but should indicate a willingness to increase its size "to take advantage of the availability of one or more outstanding candidates." While companies may seek diverse candidates in terms of age, sex, race and other characteristics to benefit from a range of viewpoints, board policies should not "create expectations for shareholders and other stakeholders that may or may not be fulfilled at any given time depending on the availability of candidates with particular characteristics." Other common elements of board policy include:
"A board of directors should not constrain itself with mandatory governance policies except to the extent required by law," they conclude. (Time to Review Policies on Board Composition Qualifications, 1/30/07) Opinions Point to Illegal CalPERS Campaign Activities Anyone familiar with the movement to improve corporate governance in the United States knows that CalPERS, the giant California pension fund, has often taken a lead plaintiff role to protect shareowners and ensure corporations follow the law. Unfortunately, CalPERS, its board members, and their campaigns have not been beyond reproach in their own governance practices. For years the Board insisted they were exempt from laws, such as the Administrative Procedure Act, because of direct authority granted by the California Constitution. However, OAL (based on my prior petition) and the courts have determined the Board is not above the law. Continued use of "underground regulations," especially those which open members to financial risk from identity theft, is a breach of fiduciary duty, undermines the credibility of efforts by CalPERS in the area of corporate governance, and makes the entire system more vulnerable to attack by those who seek to destroy it as a defined benefit plan. Although the Board rejected my Draft Petition for Underground Regulations Determination in June 2006 to change rules that put CalPERS members at risk for identity theft, the Office of Administrative Law has now issued a determination that the Notice of Elections, which includes the Procedures for Becoming a Candidate and the Election Schedule, contains underground regulations. Hopefully, this new determination will lead CalPERS to conduct a rulemaking to address the issues I raised. On another front, I also received an opinion from California's Legislative Counsel that Board candidates and their supporters cannot use state meeting rooms and facilities for campaign purposes and that use of such facilities during the recent election was a violation of section 8314 of the Government Code. The incumbent's candidate statement solicited e-mail to his state e-mail address, another apparent violation of Government Code sections 8134 and section 19990. Ignoring such "minor" laws fits into an unfortunate pattern for Board members and leaves many wondering what other laws they may be violating. When candidates register with CalPERS they are given a packet of various laws they must follow. That package should include information on the legal prohibitions against using state resources for campaign purposes. Access Vote, At Last! ISS reports that Hewlett-Packard has included a bylaw proposal filed by four pension funds in its proxy after the SEC expressed “no view” on the company’s request to omit the resolution. SEC commissioners again put off consideration of whether to revive a draft rule to allow shareholder access. Chairman Christopher Cox said the agency will take more time to craft “a carefully considered proposal that will ensure there is one, clear rule to protect investors' interests in all jurisdictions during the next proxy season." According to the ISS report, at least two other companies have asked the SEC’s staff for permission to exclude access proposals this season. "UnitedHealth Group, which is seeking to exclude a bylaw proposal by the California Public Employees’ Retirement System, also argues that the AIG ruling doesn’t apply because UnitedHealth is based and incorporated in Minnesota. The company supported its Jan. 11 no-action request with a letter from a Minnesota law firm that noted that shareholders in Minnesota-incorporated companies must hold at least 3 percent of the company’s voting power to propose bylaw amendments. Reliant Energy also has filed a no-action request to exclude a proxy access proposal, the Washington Post reported." (HP Investors to Vote on Access, Governance Weekly, 1/26/07) On Borrowed Time Borrowing shares has allowed speculators to gamble that a company's stock will drop, and then vote for decisions that will ensure that it does, according to a report from the WSJ. Often, individual shareholders who hold the stocks in margin accounts don't know their stocks and voting rights have been borrowed. Thankfully, stocks in cash accounts aren't affected. "The value of securities borrowed on any given day has reached $1.6 trillion after several years of double-digit growth, according to Astec Marketing Research Group Inc., a New York capital-markets research firm." (my emphasis) CalPERS reported in October that it made $129.4 million in net income from lending securities for the year ending March 31, 2006. "Paul Atkins, a Republican SEC commissioner, expressed concern in a speech this week that empty-voting and other techniques should be considered as the SEC looks to tackle other shareholder proposals. That could delay the SEC from moving forward in resolving whether shareholders are permitted to nominate their own directors on corporate ballots." (How Borrowed Shares Swing Company Votes, 1/26/07) Hermes, one of the largest pensions in the UK, has called for share borrowing to be outlawed. CalPERS, CalSTRS and others in the US should do the same. Shareowners Unite on Exec Pay Issue Public pension funds, labor funds, asset managers, foundations and members of the ICCR, organized by the AFSCME's Employees Pension Plan and Walden Asset Management filed shareholder resolutions at 44 corporations to give shareowners an advisory vote on executive compensation packages. “We are focusing on companies where exorbitant pay has been lavished on CEOs despite a failure to deliver results commensurate with their compensation,” said AFSCME President Gerald W. McEntee. “Shareholder say on CEO pay will be the overriding issue of the 2007 proxy season,” AFSCME’s McEntee said. Ninety percent of institutional investors and 61 percent of corporate directors think the current executive compensation system overpays executives, according to recent studies by Watson Wyatt. The United Kingdom passed a law in 2002 requiring publicly traded companies to give shareholders an up-or-down advisory vote on executive pay, and the U.K. system has since successfully restrained the growth rate of CEO compensation there. (Institutional Investors to Press Companies for a Shareowner Vote on Executive Pay, 1/25/07) SEC Paralyzed Broc Romanek reports the SEC decided not to express a view as to whether Hewlett-Packard can exclude an AFSCME shareholder proposal seeking a by-law amendment that would allow for a form of shareholder access. He also offers the following observation: "Although a "no view" response may provide some comfort to a company that the SEC will not bring an enforcement action if it excludes the proposal, it is probably more likely that a court would compel inclusion since there is no Staff decision for a court to defer to - or consider - in making its decision...albeit the courts haven't been following the SEC's lead anyways in recent decisions, like the AFSCME one. Hewlett-Packard is expected to file its proxy materials within a few days and it will be interesting to see what appetite for risk they have after the pre-texting scandal." (Corp Fin Expresses "No View" in Hewlett-Packard Shareholder Access Response, TheCorporateCounsel.net Blog, 1/23/07) One Degree of Separation The more connections board members have, the more likely they are to end up with “friend of a friend” links to the company’s CEO. A study by Barnea and Guedj of 3,000 companies found that firms whose directors were the most well connected, and which paid their CEOs most lavishly, underperformed the market. A CEO of a firm which is in the top quintile of connected firms receives a 10% higher salary and a 13% higher total compensation than a CEO of a firm which is in the bottom quintile of connected firms. Markets work best, James Surowiecki notes, when people make independent decisions about worth. They stop working well when people simply imitate what others are doing, or when non-market factors (like how well you get along with the boss) intrude. In the end, the very things that make people likely to join a board—connections, business experience, sociability—are also the things that make them less effective once they do. Kenneth Langone, the board member who engineered Bob Nardelli’s hiring at Home Depot, was also the head of the compensation committee that approved Dick Grasso’s extravagant payday at the New York Stock Exchange, and was on the G.E. board’s compensation committee that approved Jack Welch’s luxurious retirement package. Langone is what an epidemiologist might call a supercarrier of the executive-pay virus. (The Sky-High Club, The New Yorker, 1/22/07) (But, Mom, All the Other Kids Have One! - CEO Compensation and Director, Barnea and Guedj, 6/2006) Split Chair/CEO at WFMI Should Be Supported Alyce Lomax, writing for Motley Fool, questions John Chevedden's shareholder proposal to split the roles of CEO and board chair at Whole Foods. "Whole Foods CEO, chairman, and co-founder John Mackey has always been modestly compensated by prevailing standards for CEO pay, and he went still further recently by accepting $1 per year in salary and donating his stock options." Also in its favor, according to Lomax, is that Whole Foods "has been known to listen to shareholder activists (its animal-compassion standards came about through shareholder agitation, for example)." Yes, "Mackey did cause a stir at last year's recent annual meeting by denying shareholder presentations" and that "wasn't the friendliest move," she writes, "but is a successful and profitable retailer like Whole Foods, which over the course of its history has shown itself to be a well-run company, a strategically sound place to start agitating for such big changes at the top?" While Lomax "can't help wondering whether this particular proposal is barking up the wrong tree," I believe it should be supported. Mackey's behavior at last year's annual meeting demonstrated that even brilliant CEOs can make major blunders. As Chevedden's proposal notes, "an independent Chairman could have prevented the negative press from our 2006 annual meeting" because they would have handled the meeting differently. (See proposal #6 on the proxy.) Instead of allowing shareowners to present their resolutions when the items came up on the formal agenda included in the proxy, the company shuffled discussion of resolutions to the informal question and answer session, after votes on resolutions had been counted. During the Q&A session, the representative for the Green Century Balanced Fund (GCBLX), which filed a resolution asking the company to report on alternatives to packaging with toxic endocrine disruptors, voiced disappointment with how the company was running the meeting. Mackey reportedly responded saying that "if he didn't like it, he should buy stock in a different company." After that incident, I did a little research on Whole Foods by obtaining a company governance profile from The Corporate Library. One finding that struck me was the apparent lack of policy at Whole Foods to have the directors routinely meet without the CEO present. Although I brought this lapse to the attention the head of their Shareholder Services office and had several interactions, including a 45 minute phone call, Whole Foods never indicated an intention to change current practice by holding such meetings. Mackey has grown wealthy from his stock holdings in Whole Foods; he can certainly afford to appear generous by taking little or no pay. However, he may also have a predilection to not allowing descent or encouraging debate. A separate board chair may prompt directors at Whole Foods to act with greater independence. That kind of insurance is worth supporting. (Trouble at the Top for Whole Foods?, The Motley Fool, 1/23/07) (Disclosure: James McRitchie, the publisher of CorpGov.Net, is a shareholder in Whole Foods Market) CalPERS to Take Private Investments CalPERS may begin managing retirement money for people who aren't public workers, putting it in competition with private mutual fund companies such as Fidelity Investments and Vanguard Group, according to Russell Read, the fund's chief investment officer. "There is the significant possibility of getting significant fee income," Read told the board at a meeting in Napa, Calif., on Monday. "We're looking at capitalizing on our strengths." (CalPERS may manage funds of private investors, LATimes, 1/23/07) CalPERS trustees urged officials to move slowly, citing myriad pension and securities legal issues that need to be sorted out before the fund could move with an expanded statewide, or even national program. Some board members said they did not want to jeopardize the fund's tax status for members. CEO Fred Buenrostro said the fund will conduct a customer survey to gauge interest in such investment products. (CalPERS expanding horizons, SacBee, 1/23/07) Singapore and Hong Kong Rank Highest The formal regulatory environment and market perceptions of corporate governance practices in nine East Asian economies diverge on a number of fronts, concludes a working paper released by The Centre for International Governance Innovation (CIGI). Scorecard on Corporate Governance in East Asia, is authored by Stephen Y.L Cheung, City University of Hong Kong, and Hasung Jang, Korea University. The funded study employs two surveys to measure the perceptions of fund managers and analysts in nine East Asian economies (China, Hong Kong, Indonesia, Malaysia, the Philippines, Singapore, South Korea, Taiwan, and Thailand) against the OECD framework. The paper concludes as follows:
BRT Flip Flops John J. Castellani, of the Business Roundtable (BRT) argues the SEC has consistently upheld a ban on proxy proposals on the issue of board elections. Opening proposals to election issues, he believes, would lead to 'special interest directors' who pander to the narrow interests of the shareholders who nominated them.” (Market Risk , WSJ, 1/20/07) Although Castellani references AFSCME vs. AIG, he appears ignorant of both the court's findings and the history behind proxy access. Before institutional investors began to win majority votes, the BRT wasn't concerned about resolutions designed to change the rules for future elections. In 1977, they recommended the SEC “permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” In the late 1980s, they realized such resolutions would soon have consequences. Financial Services Database CalSTRS and CalPERS launched a database of 721 emerging managers and financial service providers covering 11 asset classes. Among the largest categories, one-third of the firms are traditional managers; 28.4% are hedge funds; 13.6% are private equity funds; and 8.9% are broker-dealers. The purpose of the database is to capture the universe of emerging financial service firms, create an industry reference guide, promote information transparency, and broaden the opportunities for adding value to institutional investors' portfolios from a largely untapped pool of talent. Avoiding "Corporate Pirates" Writing for USA Today, Matt Krantz writes subscribing to a newsletter or data service that pinpoints stocks with questionable practices could be a good way of investing in a possible Enron. A few popular ones include Gradient Analytics and The Center for Financial Research and Analysis. The Corporate Library, also keeps comprehensive data regarding companies' governance standards. "These services, though, can be quite expensive." (Looking for Mr. Goodbuy: How to avoid stocks of corporate pirates, 1/19/07) Emerging Markets According to a recent McKinsey report, Mapping the global capital markets, the eurozone was the largest regional contributor to growth in world financial assets, with 22% in 2005. Emerging markets accounted for 21%, or $3.1 trillion. The US weighed in with 20% of total growth. Japan accounted for 14%, after five years of low to nonexistent growth; the UK accounted for 8% and the rest of the world 16%. "Given the small size of financial systems in emerging markets (just $15 trillion in assets), it is noteworthy that their growth nearly equaled that of the eurozone and exceeded that of the United States—by far the world’s largest financial market. Emerging markets now account for 14 percent of global financial assets, up from just 7 percent a decade ago." Growth in emerging markets heightens the need for corporate governance consultancies, such as HIM Governance, which is the sole agent in the Asia-Pacific region of the Policy Governance® model, created by Dr. John Carver and is also an appointed agent of Governance for Owners, co-founded by Mr. Peter Butler, an independent provider of shareholder engagement and corporate governance services for long-term equity owners and fund managers. Please continue to let us know of service providers, potential links and articles of importance so that we can better meet the needs of readers around the globe. CalPERS Seeks Reform at Shaw Group Executive compensation promises to be one of the big issues during this year's proxy season. ISS is tracking well over 100 shareowner proposals on their watchlist. One example is CalPERS, which asked Shaw Group shareowners to support their proposal to require shareowner ratification of any Shaw Group severance packages worth more than 2.99 times an officer’s salary and target bonus. “The CEO employment agreement that the Compensation Committee adopted in 2001 provides for a daily renewable contract guaranteeing a perpetual 10-year term, a 10-year salary and bonus continuation, as well as a $15 million non-competition payment in the event of severance or change of control,” according to a letter sent to 5,000 shareowners from Christianna Wood, CalPERS Senior Investment Officer. CalPERS notes that while the CEO’s recent offer to reduce the term of his severance contract from 10 years to 3 years was “a positive event,” it applies only to one individual and falls short of “a formal change in compensation policy that cannot be reversed” for all senior executives. See 1/17/07 press release. Final Call for Registration Directors Forum 2007 will bring together 50 of America's top corporate governance authorities. Attendance for this two and a half day conference is limited to 250 for maximum interaction with speakers. Keynote Speakers:
Directors & Management panelists from companies in-the news: Pfizer, Coca-Cola, HomeDepot, EMC, Krispy Kreme, Ameriprise Financial, Time Warner, General Mills, Target, HealthSouth, AstraZeneca, McDonald's, and others. Shareholder Panelists: TIAA-CREF, CalPERS, CalSTRS, Council of Institutional Investors, AFL-CIO and AFSCME and others. Financial Week Names "Payparazzi" One of Federico Fellini's characters inspired the word paparazzi—those celebrity-swarming photographers. In the case of executive compensation, Financial Week (1/15/07) calls agenda-setters The "Payparazzi,'' which include:
Listen to a podcast with one of the payparazzi Rich Ferlauto, who handles shareholder activism for the American Federation of State, County, and Municipal Employees (AFSCME), on Corporate Watchdog Radio. Ferlauto discusses pension funds, shareholder democracy and corporate governance. Currently, shareholders cannot nominate candidates for corporate boards of directors, and those directors can be elected on a single vote. A federal appeals court recently ruled in favor of AFSCME against the American International Group in allowing the union access to the corporate ballot to nominate directors. Ferlauto also discusses the move to establish majority vote director elections that is gaining steam. He criticizes the SEC for failing to support shareholder rights. Corporate Watchdog Radio is a 29-minute program with news and interviews on corporate accountability, environmental sustainability, and socially responsible finance. Co-hosted and co-produced by journalist Bill Baue (who writes for SocialFunds.com and Business Ethics magazine) and environmental attorney/filmmaker Sanford Lewis. One minor quibble I have with Felauto's presentation is his reference to the "business community," when what he was actually referring to is corporate management. Shareholders, the owners of business, should certainly be considered part of the "business community." Hearings Coming The Financial Times reports that "signs are emerging of a Democratic effort to boost shareholder rights in the US after a top lawmaker said he planned to hold 'informational hearings' on the harmonization of regulatory systems between the US and Europe. Paul Kanjorski, the new chairman of the House of Representatives sub-committee on capital markets, insurance and government sponsored entities said 'the time is ripe' to examine the issue. His call comes after Barney Frank, Democratic chair of the House financial services committee, said last week he planned to pass a bill by the summer that would legislate greater shareholder involvement in setting chief executive ( salaries." (US corporate governance hearings, 1/16/07) First, Do No Harm At the annual Reuters Regulation Summit in Washington, SEC Commissioner Roel Campos sent a mixed message: "Investors aren't just asking, they're demanding it ... If we don't produce something in that realm in the first quarter of this year, or at least begin the process with a proposal, then I think we are hugely disappointing investors." However, he also suggested the SEC's best response to the court (AFSCME v AIG) may be to let the ruling stand, say nothing and see what happens.
Investment News, in a 1/15/07 editorial advises SEC need do nothing on proxy access. Exerpts follow: "The problem here is that corporate executives have forgotten they are employees."
SRO Criticized Dan Jamieson, writing for Investment News, warns that merger of NASD and the New York Stock Exchange regulatory units in a new single self-regulatory organization has corporate-governance experts worried. "I think that's a terrible system," said Nell Minow, chairman of The Corporate Library. The new SRO will "end up with a board of friends and buddies," said Thomas Kirchner, president and portfolio manager of The Pennsylvania Avenue Funds in Washington. There will be "no [board] accountability" in the new SRO, said Les Greenberg, securities attorney who also heads the Committee of Concerned Shareholders. (Proposed SRO's governance faulted, 1/15/07) Gates Foundation: Powerless to Align Corporate Governance with Mission Patty Stonesifer, CEO of Bill & Melinda Gates Foundation responds to the LATimes (A foundation states its case, 1/14/07):
Based on Sonesifer's logic, one wonders if she is among the vast majority in the US who also believe there is no point in voting in political elections. Something is incredibly wrong with our framework of corporate governance when the CEO of a major foundation investing billions and billions believes their investment practices have little impact on social issues. A study last year by the Chronicle of Philanthropy found that 30 of the 50 largest U.S. foundations did not try to influence companies through their investments. Three out of five foundations left such decisions up to money managers, who rarely use their shareholders' votes to challenge company policy, even if that policy is thwarting the foundation's broader mission. (Gates Foundation faces multibillion-dollar dilemma, Seattle Times, 1/14,07) According to a press release from the Social Investment Forum, foundations such as the Nathan Cummings Foundation, The Needmor Fund and the Tides Foundation have joined in sponsorship of shareowner resolutions on issues such as climate change, governance reforms, and diversity reporting. Ford, Rockefeller Brothers, and The Boston Foundation have developed and utilized active proxy voting policies to guide them in using their voice and vote with companies where they are investors. Foundations such as Ford and MacArthur use "Program Related Investments (PRIs) to bolster the impact of their grant dollars through community development investing."
I hope the Gates Foundation comes to its senses. Take the SIF up on their offer of assistance. Develop voting policies that align with Foundation values. Advocate for increased shareowner involvement in nominating and selecting board members. In Nell Minow's unforgettable words, "boards of directors are like subatomic particles--they behave differently when they are observed." More vigilant shareowners are also more likely to be "socially responsible," in the true meaning of that term, increasing triple bottom line returns (adding economic, environmental and social value). The Gates Foundation should get on board. Death of DB in UK A UK survey found that only 21% of 170 survey respondents offered DB plans to new employees. Of those 32 companies, 11% said they plan to stop offering them within two years. For those of us who see pension funds as part of the solution (see, for example The New Capitalists: How Citizen Investors are Reshaping the Corporate Agenda), this possibility presents a real problem. Without pension funds, who will act in the long-term interest of owners to hold managers accountable? Selling Out FinancialWeek reported back in December that corporate executives at US companies are now selling $63 of company stock for every $1 they buy. Nearly $8.5 billion was sold by top executives, compared with $133 million purchased by corporate insiders. (Observed, 12/11/06) In the same issue, 76% of polled economists see a hard landing is likely. However, they also note that "odds can rise and fall by as many as 20 percentage points in a day." (The Wisdon of Ecomonists, 12/11/06) Options Backdating Another Symptom of Corporate Governance Bill Baue tells an important story in Study Links Options Backdating to Corporate Governance Weaknesses (SocialFunds, 1/12/07), from companies arguing against a Financial Standards Accounting Board (FASB) rule mandating stock option expensing, to Lucian Bebchuk's study identifying a correlation between CEO and outside director manipulation of stock option timing and other governance problems. "Grant events were more likely to be lucky when the firm had more entrenching provisions protecting insiders from the risk of removal [and] when the board did not have a majority of independent directors," state the researchers in the paper. "And outside directors' luck was correlated with CEO luck." Like outrageous CEO pay, backdating is just another symptom of poor corporate governance. The new Harvard study provides further evidence that simply being "independent" isn't enough; directors, as Bebchuk has emphasized, need to be dependent on shareholders. Foundation's Revolving Thoughts The Gates Foundation apparently did some further reassessing on the investment side. Their new statement stresses the problems with screening and then emphasizes that they plan to stick to their central focus on grant making, rather than being diverted to look at issues of companies CSR records. This is certainly not the opening door many of us had hoped for. Here are a few brief excerpts:
They go on to essentially explain that assessing social and political issues is complicated and is better left to "organizations that do work on those issues—together with governments and all of their legislative, executive, and judicial resources—play a critical role. We do not want to duplicate that role."
But they still leave open the option of proxy voting in a modest way.
We encourage everyone who knows this powerful couple to encourage them to put a little more thought into screening, investing with a tilt toward best practices or away from worst practices, and also to shareholder activism. Employing these tools in some reasonable mix could certainly further the goals of the Foundation. Board Marked for Lack of Care The Louisiana Municipal Police Employees’ Retirement System sued the directors of Caremark Rx, contending that their unanimous backing of the company’s $21 billion merger with CVS over a rival $26 billion bid from Express Scripts improperly benefits Caremark executives at the expense of shareholders. As reported by Gretchen Morgenson, "under the terms of the deal, nine Caremark executives will join the combined company and Mr. Crawford will become chairman of its board and receive an estimated $48 million in exit pay. While he would probably receive a similar amount if Caremark sold out to Express Scripts, Mr. Crawford might not be asked to join the combined company under the terms of such a deal." Apparently, the CVS deal also guarantees a job at the merged company for Mr. Crawford’s son, Andrew. CVS agreed to cover any costs associated with stock option backdating at Caremark, most significantly 4.6 million options granted to Mr. Crawford, which generated $262 million, the Tennessee lawsuit contends. (A Public Pension Fund Sues Directors of Caremark Rx, NYTimes, 1/11/07) Too many boards seem to exercise more duty, loyalty, and care to CEOs than to shareowners. That could change, as more boards adopt majority voting and if the AFSCME v AIG decision is left to stand, allowing shareowner access to the proxy. Gates Foundation to Evaluate Holdings The announcement comes two days after the LATimes published the second article in a two-part investigation on conflicts between the foundation's purpose and its investments. As predicted, if the Gates Foundation took action to reconcile its mission and their investments, others would soon follow. The LATimes now reports the David & Lucille Packard Foundation and the William & Flora Hewlett Foundation, both among the nation's 10 largest, are also re-evaluating their investments to assess social and environmental effects. For the first time, according to Cheryl Scott, the Foundation's chief operating officer, the Gates Foundation will conduct a methodical review to find out if "there are cases simply where the situation is so egregious it will cause us not to invest." (Gates Foundation to review investments, 1/10/07) "It's very, very complex," Scott said. "Let's say I don't invest in oil companies but I do go and buy gas with my car. Let's say I don't buy gas for my car, but I use rubber tires. Where do you draw the line?" (Gates Foundation to review investments, Seattle Times, 1/10/07) Of course, that's a reasonable question. However, to draw no line at all makes no sense. Several of those interested are now posting to Seattle Times' blog How should the Gates Foundation handle investments? SEC Changes Clarified CFO.com reports, "the commission isn't requiring the reporting of the grant date fair value of option and equity awards at all — it's just moving them to another table. What's more, it's providing arguably more disclosure by requiring the fair value of each individual award rather than just aggregate disclosure. Thus, the commission contends, investors will now see both the aggregate and the vested numbers — the best of all possible worlds, since it's debatable which figure is more useful." (Exec Comp: The SEC's Side of the Story, 1/11/07) Weil, Gotshal & Manges Briefing Seven Things Shareholders Want Directors to Understand in 2007, by Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas, offers guidance to boards about the expectations and concerns of shareholders and how to address them. While warning against a tick box approach, they provide excellent advice under the following headings in a short article well worth the read:
Compensation Advice from PROXY Governance In a press release on Home Depot and Nardelli's contract, signed in December 2000, PROXY Governance called for better vigilance of new CEO employment contracts by boards and compensation committees. Among the steps that PROXY Governance recommends that boards and compensation committees take when negotiating new CEO employment contracts are:
DB Future Pensions & Investments and Oxford University launched a survey on the future of defined benefit plans. Readers can complete the 25-question survey in about 15 minutes. Gretchen Morgenson cites Brian Foley, an independent compensation consultant in White Plains, for several ideas the new SEC rules failed to include:
Morgenson ends her article, More $200 Million Parachutes? Don't Be Shocked (NYTimes, 1/7/06) with "shareholders can do their part by withholding their support for any director who doesn't try to cut back on excess pay. That could make the coming proxy season more entertaining than ever." According to ISS (Focus Remains on Options, ‘Say on Pay’), labor funds, public pension funds, and individual activists have so far filed more than 30 “say on pay” proposals that seek an advisory shareholder vote on compensation. That proposal, which was introduced by AFSCME last year, averaged roughly 41% support at seven companies in 2006. Companies that don't want to get nailed by shareowner proposals, compensation consultants, and shareowners who want to know what the current best practices are for executive compensation should subscribe to Compensation Standards, published by Jesse M. Brill, and edited by Broc Romanek. View a free copy of their Winter 2007 edition newsletter. You can't go wrong with their full refund guarantee. Their newsletter, Internet site, and conferences are consistently among the best in the business. See also, Jan.-Feb. edition Deal Lawyers — their new M&A newsletter on the latest legal M&A developments, complete with practice pointers. Gates Foundation Investments At Odds With Mission An article in the LATimes, Gates Foudation's cross-purposes (1/7/06), draws attention to the issue that endowment holdings work at cross purposes with the philanthropic goals of the foundation. The authors cite, as an example, an immunization drive against polio and measles in the Niger Delta supported by the Bill and Melinda Gates Foundation while investments in Eni, Royal Dutch Shell, Exxon Mobil, Chevron and Total are responsible for flares creating an epidemic of bronchitis, asthma and blurred vision among the same population. As reported, Bill and Melinda Gates require investment managers "to keep a highly diversified portfolio, but make no specific directives." Steve Viederman, while at the Noyes Foundation, probably did more than anyone to educate foundations to align their investments with their mission. The Educational Foundation of America has screened its assets for more than a decade, and partnered with As You Sow, according to the Director of their Corporate Social Responsibility Program, Conrad MacKerron. They've filed scores of shareholder proposals, mostly on environmental issues. Several other small and medium-size foundations screen investments and file proposals. Nathan Cummings Foundation has been a leader in recent years. Their are plenty of strategies that could be used to align the values and investing of foundations. They could screen out many entire industries, such as Calvert does. They could screen for "best of class" practices like Light Green Advisors. They could take a very activist stance with shareholder resolutions, such as As You Sow. Or they could combine strategies. The point is that, as Conrad MacKerron notes, "most very large foundations have done nothing. Few foundations have proxy voting policies or make conscious proxy voting decisions, let alone screen their investments." MacKerron concludes:
Democracy Now!'s Amy Goodman interviewed Charlie Piller, the lead reporter of the LATimes article. He voiced issues that have been discussed for years in the SRI community -- the disconnect between mission (5% of Gates funds) and investment (95 %), and also noted that things would be different if the Gates Foundation were at least examining these implications and making deliberate choices, instead of setting up a firewall between mission and investment. (see Freshfields fiduciary duty report) Let's hope articicles like Gates Foudation's cross-purposes result in a wake-up call that will have impact. If the Bill and Melinda Gates Foundation lead, others will follow. What is a Gadfly? Gadflies Get Respect, and Not Just at Home Depot (NYTimes, 1/5/06) describes the increasing ability of shareowners to influence corporate governance. The article focuses primarily on the activities of Ralph V. Whitworth who, through his fund Relational Investors, pressed for new leadership at Home Depot. Whitworth has been a standout example of how to add value through corporate governance advocacy since his days heading United Shareholders Association. But gadfly, really? Socrates, according to Plato's writings, pointed out that dissent, like the tiny (relative to the size of a horse) gadfly, was easy to swat, but the cost to society of silencing individuals who were irritating could be very high. "If you kill a man like me, you will injure yourselves more than you will injure me," because his role was that of a gadfly, "to sting people and whip them into a fury, all in the service of truth." Yet, with the ability to purchase $1 billion of Home Depot’s stock through Relational Investors and give $1 million to charity so that Sir Paul McCartney will play at his wife’s 50th birthday party, can we really call Whitworth a gadfly? Excess Pay and Arrogance: Deadly Combination Gretchen Morgenson sees the resignation of Home Depot's Robert L. Nardelli as "a victory for shareholders hoping to force corporate directors to be more accountable on the increasingly incendiary issue of executive pay." Yet later she writes, "Mr. Nardelli’s biggest error, and the act that may have set his demise in motion, was his shocking decision to run the annual meeting last May alone, insisting that his directors stay away and limiting questions from the shareholders." "It seems that 'my way or the highway' — Mr. Nardelli’s message to Home Depot’s beleaguered shareholders in recent years — does not play that well anymore." (A Warning Shot by Investors to Boards and Chiefs, NYTimes, 1/4/06) By that standard, I wonder what Ms. Morgenson thinks of John Mackey. At last year's Whole Foods meeting the company flouted SEC regulations rule 14a-8(h)(3), which requires that the "shareholder or his or her qualified representative attend the shareholders' meeting to present the proposal." Instead of allowing shareowners to present their resolutions when the items came up on the formal agenda included in the proxy, the company shuffled discussion of resolutions to the informal question and answer session, after votes on resolutions had been counted. During the Q&A session, the representative for the Green Century Balanced Fund (GCBLX), which filed a resolution asking the company to report on alternatives to packaging with toxic endocrine disruptors, voiced disappointment with how the company was running the meeting. Mackey reportedly responded saying that "if he didn't like it, he should buy stock in a different company." His arrogance seems to rival that of Nardelli and the stock has also lost ground. However, we don't hear any calls for Mackey's removal. Let's face it, Nardelli's outsized pay package was the major factor. (Disclosure: James McRitchie, publisher of CorpGov.net owns shares in both Home Depot and Whole Foods Market.) See also NYTimes editorial, Out With the Old:
Manne Misses the Mark Henry G. Manne, Dean Emeritus of the George Mason University School of Law and an adjunct scholar with the Cato Institute, calls for repeal of not only Sarbanes-Oxley but also the Williams Act and state anti-takeover provisions, the Investment Company Act of 1940, the Securities and Exchange Act of 1934 and the Securities Act of 1933. The WSJ opens 2007 by providing this fringe thinker space for a commentary entitled "The 'Corporate Democracy' Oxymoron." (1/2/2007) Manne begins by recounting the familar argument that advocates of democratic corporate governance inappropriately fuse political ideals and market institutions. He writes, voting "to select the central management was the most obvious and the cheapest solution" for determining who selects management. "There is no room in this scenario for contested elections or nominations to be made willy-nilly by the shareholders. Both of these ideas are part and parcel of the political version of elections." However, what is an "election" without choice, without the possibility of a contest? In Manne's world of thought, or lack of it, words lose the essence of their meaning. He goes on to accuse those of us who advocate greater democracy in corporate governance as having "a hidden agenda, most usually either a greater degree of government control over private enterprises, or more power to unions via their control of pension funds." Greater democracy does run some minor risk that those with "hidden agendas" will make gains...but they will do so only if they can convince the majority of shareowners to vote with them. The more frequent result of greater democracy in corporate governance will be that managers will better align their activities with the interest of owners and that government policing will be reduced because owners will have the tools to ensure direct accountability. The market mechanisms Manne says he favors work best when owners can't be ignored. The following are two letters to the WSJ editor in response to Manne's commentary:
Frank Advice The SEC recently decided that companies won't have to declare the size of stock option grants at the time of issue. Instead, only a portion of the grant will be revealed to shareholders in any single year. WSJ commentators write "this is a bad decision." Barney Frank, the incoming chairman of the House Financial Services Committee, reportedly finds it odd that the SEC should backtrack on options disclosure at a time when the options backdating scandal has highlighted the tendency of executives to game their compensation arrangements. The commentators conclude, "its decision to rubber-stamp the imperfect disclosure of option grants looks like a textbook case of regulatory capture. Mr. Frank might use his new powers of oversight of the SEC to investigate this." (SEC Takes Step Backward On Disclosure of Options, 1/2/06) Broc Romanek guides his readers through Floyd Norris' blogs and other documents. (Floyd Norris: A Little More on the SEC’s Forgetful Chairman, TheCorporateCounsel.net Blog, 1/3/06) Munger Doesn't Mince Words Berkshire Hathaway's VP, Charles T. Munger, is interviewed in the 1/1/07 LATimes ('I would not allow directors to be paid'). Among the more intresting statements:
Munger thinks one way to address excess CEO pay is to put it to a vote of shareowners. One important measuer he didn't raise in the interview is getting money managers to vote. Check compensation by pulling up your company's proxy statement using the SEC's Edgar database and searching for "DEF 14A." In my opinion, CEOs should get a substantial portion of their return from company stock, rather than high salaries and options. Few Women on Board No Seat at the Table: How Corporate Governance Keeps Women Out of America's Boardrooms
And more women on boards will improve corporate governance. Researchers found that 94% of boards with three or more women (compared to 58% of all-male boards) insist on conflict-of-interest guidelines; that more female than male directors pay attention to audit and risk oversight and control; that women, more than men, tend to consider the needs of more categories of stakeholders and; that women, more than men, tend to examine a wider range of management and organizational performance. The findings reveal that 72% of boards with two or more women conduct formal board performance evaluations, while only 49% of all-male boards do; that companies that provide boards of directors with formal, written limits to authority have a greater percentage of women directors than do organizations with no formal limits to authority and; organizations that provide boards of directors with formal orientation programs have a greater percentage of women directors than do organizations with no such program. Interestingly, Branson notes that post-Confucian cultures in Asia, which put family and clan above the individual, are similar in some ways to women, who are known primarily as team players, not rugged individualists. Perhaps more women CEOs and board members in US firms will bring stunning economic success, like many companies in Asian countries have experienced. One thing is certain, careful consideration of women would double the potential talent pool and that is likely to have a big payoff. A copy of the Commission’s press release is available on the SEC’s website. Deliver relevant ads to thousands of influential readers each day. Click "Advertise on this site" in the ad above. Back to the top Equal access? The SEC's rulemaking, S7-19-03 (comments, Editor's: 1, 2 & 3) would have been a weak first step. Compare the petition Les Greenberg and I filed to allow shareholder proposals to elect directors: Petition File No. 4-461, which the Council of Institutional Investors said "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." See Equal Access - What Is It?, Inside Track interview, ad. Evolution at Solicitation of Public Views Regarding Possible Changes to the Proxy Rules and Sharehol Back to the top
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by Douglas M. Branson is an important book to begin 2007. By 2005 women were earning 35% of MBA and 42% of law degrees. Despite the fact that 62% of working women contribute half, or more, of their households' income and they are now graduating from college at substantially higher rates than men (
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