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Current News and Commentary. January 2007, February 2007, March 2007, April 2007, May 2007, June 2007. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest, updated 5/25/07. Book bites. GAO-07-765: Proxy Advisory Services What follows are a few brief quotes from the GAO report's "Results in Brief": Various potential conflicts of interest exist among proxy advisory firms that could affect vote recommendations, but SEC has not identified any major violations in its examinations of such registered firms... Large institutional investors reported that their reliance on proxy advisory services is limited because these institutional investors (1) conduct their own research and analyses to make voting decisions and use the research and recommendations offered by proxy advisory firms only to supplement such analyses; (2) might develop their own voting policies, which the advisory firms would be responsible for executing; and (3) might contract with more than one advisory firm to gain a broader range of information on proxy issues... The fact that large institutional investors cast the great majority of proxy votes made by institutional investors and reportedly place less emphasis than small institutions on such research and recommendations could serve to limit the overall influence advisory firms have on proxy voting results. SEC Posts Access Rules for Comment The SEC posted its proposed rules on proxy access. S7-17-07, Shareholder Proposals Relating to the Election of Directors, is what Commissioner Nazareth called the "nonaccess proposal." Skipping down to the text, I see it attempts to clarify the position adopted by the SEC in 1990 by inserting the words "relates to election" but doesn't delete the word "an," which was previously interpreted as relating to a specific election rather than elections in general. S7-16-07, Shareholder Proposals, is the proposal that 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. The rulemaking would also amend disclosure requirements to require additional information about proponents of these proposals and the proponents of nominees under the procedure if adopted "Finally, the proposed amendments would revise the proxy rules to clarify that participation in an electronic shareholder forum that may constitute a solicitation would be generally exempt from the proxy rules." Public comments must be received within 60 days of these proposed rules being published in the Federal Register. I'm sure we will all have much more to say on these proposals once we have read and analyzed them. In the meantime, ISS posted The SEC Splits on Proxy Access on 7/30/07.
CalSTRS and CalPERS Under Attack... Again Just as CalSTRS and CalPERS post 20.1% and 19.1% returns respectively, former Assemblyman Keith Richman's newly formed "California Foundation for Fiscal Responsibility" is working on a voter initiative to establish statewide limits on the retirement benefits offered to all new government employees in California's Constitution. At CalPERS, about 75% of the money paid out in benefits comes from investment returns. The other contributions are evenly split with about 12.5% from employees and 12.5% from public employers. The initiative would cut pensions by 30 - 65%. Governments would need to dramatically raise salaries to more closely approximate those in the private sector for similar levels of education to attract nurses, teachers, scientists, police and other essential workers. Richman's big scare tactic is the liability for health care that has to be reported because of new accounting standards. That liability "was not a crisis 30 years ago, it was not a crisis yesterday and it is not a crisis today," in the words of state Controller John Chiang. "And if we work toward a plan to pay this obligation in a reasoned manner it will not be a crisis 30 years from now." Instead of funding health care on a pay-as-you-go basis, these funds need to be paid out of an invested trust. CalPERS is well on its way to establishing just such a system that may eventually pay 75% of the costs. (Big gains for state's pension funds, SFGate, 7/24/07; Jim Hard: Public service work deserves support, SacBee, 7/25/07; Paying retiree health costs, SacBee, 7/26/07; and Another View: State should reduce new employee benefits, SacBee, 7/29/07) If Richman really wants to enhance fiscal responsibility, he should be circulating a petition to create national health insurance. Currently, the US spends more on health care than any other country...15% of GDP, expected to reach 19.6% of GDP by 2016. Yet, in 2000, the World Health Organization assessed Americans' overall health at 72nd among 191 member nations. In the US, 31% of health care dollars go to administrative costs, double the overhead in Canada. (Health care in the United States) My guess is that Richman's primary motivations extend way beyond "fiscal responsibility." One obvious motivation might be friends who want to feed at taxpayer expense. If public pensions are cut in half, public employees will need to save much more on their own. It costs 0.37% to administer the CalPERS defined benefit plan. Individuals generally pay about 1.5% in mutual fund, brokerage and other fees for their investments and, of course, few will get anywhere near the same returns as CalSTRS or CalPERS. Second, and a related motivation, Richman may hope to resurrect his political career. Anyone who can cut public pensions in half can expect massive political donations, especially from money market managers. However, the biggest reason may be the role CalPERS, CalSTRS and other public funds have taken in corporate governance. When the Howard Jarvis Taxpayers Association attempted to put an initiative on the ballot a few years ago, their president, Jon Coupal, said the proposal seeks to end "the social engineering and corporate governance agenda” of CalPERS. Why do powerful forces want to reduce public pension funds? Because pension funds are the primary check on the power and greed of corporate CEOs. CalPERS and CalSTRs have been leaders in the effort to bring accountability to corporate boardrooms. In November 2004 they announced their next major target - CEO pay. Cut the assets of public pension fund or at least slow their growth and you partially disable the most powerful voices for long-term investors. Could that have something to do with the current attack on public pension funds in California? ESG Index for India Environmental, Social & Governance (ESG) index in works for India by credit rating agency Crisil, Standard & Poor’s, KLD Research & Analytics and the Confederation of Indian Industry (CII). The ESG index, to be launched in 2008, would rate companies on corporate governance, ownership structure, shareholder rights, transparency & disclosure, use of natural resources, response to climate change, labour rights, employee & customer relations and corruption. India would be the second emerging market to have a sustainability index, after the Bovespa Corporate Sustainability Index in Brazil. Private equity funds have infused $4.2 billion in clean technology start-ups and other alternative energy companies since 2000, including $1.8 billion since 2006. Goldman Sachs recently found that ESG leaders in energy, mining & steel, food & beverages and media outperformed the MSCI World Index by an average of 25% since August 2005, and 72% of the companies on the list outperformed their industry peers. (Profits won't be the bottom line, ET, 7/27/07) Call for Mandates in South Africa "Mervyn King, Len Konar, Derek Cooper and Michael Katz - all members of the King 2 committee - are directors of companies such as JD Group, Sappi, Standard Bank, Liberty and Nampak, which have failed to adhere to recognised standards of corporate governance," according to the Business Report (Investor activist outlines lapses of governance, 7/27/07) "If the members of the King 2 committee aren't adhering to good corporate governance standards, then who can be expected to?" asked shareholder activist Theo Botha. At a seminar in Johannesburg, Botha called for an independent oversight body to monitor adherence to corporate governance in South Africa. Botha supported his call with a list of incidents undermining of governance standards in which no one was called to account ranging from barring the press to an AGM to improperly terming directors "independent. Globalization Backlash Citizens in the US and Europe see globalization as overwhelmingly negative, according to an an FT/Harris poll. shows are looking to governments to cushion the blows they perceive have come from the liberalization of their economies to trade with emerging countries. To dampen the negative effects, citizens in the US, Germany, UK, France, Italy and Spain want their governments to increase taxation on those with the highest incomes. In Europe, a large majority want governments to go further and to impose pay caps on the heads of companies. (Globalisation backlash in rich nations, FT, 7/22/07) Long-Term Capital Lawrence E. Mitchell, author of The Speculation Economy: How Finance Triumphed Over Industry, warns that "say on pay" measures aren't likely to change motivation or behavior that drive CEOs to game the system. The root problem is the growing preeminence of finance over operations. Mithchell points to a 2005 survey of CFOs who said they would mutilate their own companies to keep stock prices high. Derivative traders increasingly control the direction of the market with instruments that have little or nothing to do with the production of goods. Additionally, NYSE share turnover was 118% in 2006 (up 30% since 2000). How do we reduce the churn and create shareowners, instead of shareholders or share-renters? Royal DSM NV's proposed and then withdrew the idea of a 'loyalty dividend' of 10% to shareowners that hold for a minimum of three years. (DSM withdraws proposed loyalty dividend program, Chemie.DE Information Service, 4/4/07) Mitchell's proposed solution is that the terms of capital gains taxes be tied to industry. For the auto industry that might be a tax on 90% of gains if sold in the first month, tapering to tax-free after seven years. "Perhaps the right time period is two years in the software industry, or four years in computer hardware." I hope the idea gets legs. Yes, as Mitchell admits, it may take some trial and error to determine the proper time-frames and "yes, finance would still dominate. That appears to be our destiny. But at least it would be in the service of business, rather than the other way around." Back to the top Majority Tips "We have reached the tipping point for majority voting," says Patrick McGurn of ISS. "The question becomes, when does majority voting trickle down to mid-cap and small-cap companies?" This season, more than half of majority voting proposals were withdrawn;140 proposals on majority voting were submitted and over 90 were withdrawn. As of June 30, 50 majority vote proposals have been voted on. Support for majority threshold voting in director elections averaged 49.3% at the 29 meetings where results have been reported. Social Funds reports that "a record number for proposals were delivered to companies and a record number of proposals were withdrawn by proponents: 1150 proposals were penned and 270 plus proposals withdrawn, according to Institutional Shareholder Services (ISS), a provider of corporate governance solutions to institutional investors. This huge number of withdrawals points to a new meeting of the minds between boards of directors and shareholder activists." (Executives and the Environment: Looking Back at Proxy Season 2007, 7/27/07) Zac Bissonnette BloggingStocks carries a couple of interesting posts by Zac Bissonnette. Should the SEC be doing more to improve corporate governance? His answer is yes. "Why shouldn't we have more shareholder democracy? It seems like nearly every prominent investor is on the side of stronger corporate governance: Warren Buffett, Carl Icahn, and...Mark Cuban." Why don't we have more shareowner democracy when almost all investors support it? Because managers make visible political contributions using corporate funds; investment fiduciaries don't. Investment group calls for resignation of Whole Foods CEO cites a call from CtW Investment Group for Mackey to step down from the position of board chair. Change to Win, a coalition of labor unions, owns some 900,000 shares of Whole Foods. "With Whole Foods under mounting legal and regulatory scrutiny, its share price down 37% in two years, and Mackey's leadership in question," the group wrote, "we do not believe the creation of a special committee alone is sufficient to restore investor and regulatory confidence in the company and its management." As a Whole Foods shareowner, I hope the message is getting through. Sustainable for Internal Ops or Green Technology Twenty international companies made the sustainability cut this year per KLD and SustainableBusiness.com: Best Water Technology (Vienna: BWT.VI) (Austria), Canon (NYSE: CAJ) (Japan), Comverge (Nasdaq: COMV) (USA), Chipotle Mexican Grill (NYSE: CMG) (USA), First Solar (Nasdaq: FSLR) (USA), Fuel Tech (Nasdaq: FTEK) (USA), Green Mountain Coffee Roasters (Nasdaq: GMCR) (USA), Groupe Danone (Paris: DN.PA) (France), Herman Miller (Nasdaq: MLHR) (USA), Interface (Nasdaq: IFSIA) (USA), Land Securities (London: Land.L) (UK), NIKE, Inc. (NYSE: NKE) (USA), Novozymes (Copenhagen: NZYM.CO) (Denmark), Ormat Technologies (NYSE: ORA) (USA), Precious Woods (Geneva: SWX: PRWN) (Switzerland), Renewable Energy Corp - REC (Oslo: REC.OL) (Norway), Royal Philips Electronics NV (NYSE: PHG) (Netherlands), Schmack Biogas AG (Frankfurt: SB1) (Germany), Vestas (Copenhagen: VWS.CO) (Denmark) and Whole Foods Market (Nasdaq: WFMI) (USA). Google, Inc. (Nasdaq: GOOG) received Honorable Mention. (Twenty Diverse Companies Make the Sustainability Cut, Social Funds, 7/26) Reports from Wharton Conference George Andrew Karolyi's Has New York Become Less Competitive in Global Markets? Evaluating Foreign Listing Choices examined decisions re listing on U.S. and London stock markets from 1990 to 2005 and found that once key characteristics of the companies are factored in, the gap disappears. According to the paper, the bulk of the difference is due to a rise in foreign firms listing on the London Stock Exchange's Alternative Investment Market (AIM). When AIM launched in 1995, there were two listings; by the end of 2005, there were 220. Karolyi noted that the average AIM firm has only $11 million in total assets and would be too small to qualify for listing on any of the U.S. exchanges. "Before you jump to the conclusion that this is evidence of New York losing market share, remember most of those firms wouldn't qualify for the listing in New York," said Karolyi. "It's apples and oranges." Rene M. Stulz's Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relations between Corporate Governance and Shareholder Wealth found "the difference in governance from the U.S. firm is strongly related to the valuation." Financial Globalization, Governance, and the Evolution of the Home Bias, presented by Frank Warnock, "despite the disappearance of many barriers to international investment, the home bias of U.S. investors toward the 46 countries with the largest stock markets did not fall from 1994 to 2004." They theorize that "since foreign investors can only own shares not held by insiders, there will be a home bias toward countries in which insiders --including local investors and management -- own a large stake in corporations." (The Impact of Good Governance on International Investing: The 'Home Bias' Effect and Other Issues, 7/25/07) Status Quo Kara Scannell in the Wall Street Journal (Cox Splits Vote on Proxy Access, 7/26/07) and many others refer to the SEC's Republican backed "nonaccess proposal" as the "status quo." However, it isn't. Under the status quo, any shareowner who has held $2,000 worth of shares in a company for a year can introduce a binding or nonbinding resolution on proxy access. The actual status quo is the same as pre 1990, before the SEC changed its interpretation without amending the rule through the required public comment process. In 1981, for example, Union Oil had to include a proposal permitting 500 or more shareholders to place nominees on the corporate ballot, with no threshold on the number of shares held individually or collectively. Just as shareowner proposals looked like they would begin to win majority votes, the SEC issued a series of no-action letters in 1990 ruling that proposals concerning board nominations could be excluded. That's what AFSCME v. AIG was all about. The SEC can't reinterpret its rules without going through the rulemaking process and allowing an opportunity for public comment. The SEC's Rule 14a-8 allows companies to exclude a shareowner proposal that ''relates to an election.'' The court said the word ''an'' meant a proposal that applied to how elections in general would be conducted could not be excluded, although one that applied to only a single election could. Since that's the way the SEC had also interpreted the rule before 1990, the court found that the commission had changed its interpretation of the rule without giving a proper explanation or going through the rulemaking process. (A Public Airing for Proposals on Shareholders, NYTimes, 7/26/07) Under the status quo, three such resolutions were submitted this year. Two got less than a majority vote; one got more. Special interest groups didn't hijack any companies. The sky did not fall. We had many years of experience pre-1990 and now one proxy season post-AFSCME v. AIG. Let's not go back to an era where shareowners were stripped of their rights. Peter Kinder wrote an interesting blog the other day on the use of "precatory" to describe nonbinding resolutions (No ‘Precatory’ Proposals, I Pray Thee, 7/25/07) "Precatory proposals," he wrote, "is a phrase apparently invented by Leo E. Strine, Jr. Strine is a lecturer at Harvard Law School and a judge in Delaware, and he is no friend of non-binding resolutions. He’d like to see them abolished." "It’s the last word in The American Heritage definition that carries the sting. ‘Supplicate’, the Oxford English Dictionary says, means ‘To beg, pray, or entreat humbly," writes Kinder. "Begging: that’s what ‘precatory’ implies –shareholder advocates have the same relation to what they are asking for as a street person has to spare change, the same relation Oliver Twist has to the gruel." Similary, I also try to use the term "shareowners," instead of "shareholders," in the hope that people start thinking of themselves as owners instead of holders. Of course, shareowners, even more so than the "death tax," is so pervasive that I often slip. SEC Approves Conflicting Rulemaking Proposals Option 1 would allow 5% holders (holding for a year) to propose amending bylaws, which allow proxy access and have such proposals appear on the proxy if they are in compliance with state laws. It wasn't clear if the proposal would also allow proposals to exclude precatory resolutions of any kind from the proxy or if that is simply one of the questions posed in the release about the value of advisory resolutions. The proposal would also require substantial disclosures of those 5% holders and would clarify limited liabilities with regard to shareowner forums in order to encourage dialogue between shareowners and with management. The 5% holder or group would need to file 13G (or 13D in some cases), and tell investors who they are and how they have related to or engaged with the company over time. With regard to web forums, during the recent roundtables it was apparent that companies did not want to have to monitor both the proxy process and the web. I would think after the mess created by the CEO at Whole Foods most managers would be reluctant to participate, given the associated risks. Shareowner advocates didn't seem to embrace this prospect either. A second proposal was also approved. That proposal seeks to address AFSCME v. AIG by reiterating the SEC's arguments presented through an amicus brief in that case. If this proposal is adopted, we can expect SEC staff to again start issuing "no action" letters for shareowner proposals (binding or precatory) that propose proxy access or any other change to a corporation's election process (such as requiring that the names of two nominees be placed on the proxy for each director position up for election). I would also expect AFSCME to go back to court on the issue. Whether or not simply reiterating the Commission's position through a rulemaking, without really explaining what made the SEC change its interpretation of the rule in 1990, would be sufficient to overturn AFSCME v. AIG is up for speculation. Commissioner Campos expressed his concern as to whether or not the 5% threshold is too high, especially for shareowners at large companies, suggesting 1% or some other threshold may be appropriate at such firms. He also expressed concern that the proposal, if adopted, could allow companies to eliminate nonbinding proposals. In discussing option 2, he questioned staff who then expressed concern that the rule may not really address AFSCME v. AIG, leaving the SEC exactly where it is today...taking no opinion and not issuing "no action" letters on access proposals. However, Commissioner Atkins later clarified with staff that they would be applying the Commission's rules and the Commission's interpretation (and, therefore, would be issuing "no action" letters if the rule is adopted...at least until a court decides differently). Commissioner Nazareth called option 2 the "nonaccess proposal" and said that by floating two proposals the SEC runs the risk of turning one on its head. We could end up with "nonaccess," combined with the ability of companies (maybe even by a vote of directors, not shareowners) to reduce or eliminate precatory proposals. Commissioner Casey couldn't support option 1 because it wasn't comprehensive and doesn't address many of the issues brought up at the recent roundtables. She questioned why the SEC should allow precatory resolutions that often allow a small group of shareowners, with the consent of management, to achieve changes that aren't approved by the majority of shareowners. Casey would have liked to see something more comprehensive -- perhaps several proposals. (see SEC floats controversial proxy-access plans, MarketWatch, 7/25/05) Commissioners Roel Campos, Annette Nazareth and Chairman Christopher Cox voted to issue the proposal to expand shareholder access. Commissioners Paul Atkins, Kathleen Casey and Mr. Cox voted for the proposal excluding shareholder access to company ballots. (SEC issues conflicting proxy plans, Investment News, 7/25/07; SEC to Consider Proposals On Shareholder Influencem, WSJ, 7/25/07) Cox clearly preferred option 1. However, his vote for option 2 clarifies that he wants a rule in place by the next proxy season. If he can't get agreement on option 1, he will move on option 2. In his opening remarks, he cited the Committee on Capital Markets Regulation, which "observed that '[o]verall, shareholders of U.S. companies have fewer rights in a number of important areas than do their foreign competitors.' And they added that '[t]his difference creates an important potential competitive problem for U.S. companies.' As one way of addressing that need, the Committee recommended that the SEC take the opportunity of the court's decision in the AIG case to ensure 'appropriate access by shareholders to the director nomination process.'" Cox went on to say:
I'm sure we will all have more to say on these options once they are posted to the SEC's website and we can finally read them. Social Investment Forum Chair Tim Smith, who also is senior vice president of Walden Asset Management, and SIF CEO Lisa Woll issued a joint statement:
The latest attempt marks the sixth time since 1976 that regulators have attempted to change the way corporate board members are elected. "Our basic view is that providing shareholders access to the proxy ... is not a good path to go down because it just advances the agenda of special interests," Michael Ryan, executive director of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness, said Tuesday. "That's probably too high a threshold to offer meaningful access," said Amy Borrus, deputy director of the Council of Institutional Investors. (SEC offers competing proposals on shareholder access to proxies, International Herald Tribune, 7/25/07) Listen to Marketplace (or here) where Les Greenberg, who got the whole access ball rolling with me in August 2002 (see Petition File No. 4-461 See Equal Access - What Is It?), says the right of shareowners to place nominations on the corporate proxy is like "corporate campaign finance reform..." an important check and balance on corporate directors. Without it there is no accountability. The US Chamber of Commerce thinks no such rights are needed. They don't trust owners to have a say in such decisions . According to the Chamber, shareowners should only have the right to vote for directors or withhold their vote. They should have no right to place nominees on the corporation's proxy...even though they own the corporation. The public has 60 days to weigh in. SEC Webcast Open Meeting, Wed., 7/25, 10 a.m. Shareowner groups vow to mount a vigorous attack on any changes limiting their ability to file non-binding corporate resolutions, a topic on the SEC's agenda. About 1,300 non-binding resolutions surfaced at corporate meetings in 2007, involving corporate governance, social and environmental issues. Many have been getting 40% to 60% of votes cast, demonstrating the growing clout that shareowners. Before you listen to the webcast, send the Commission an email using Domini's Action Alert. Save shareowner rights. According to reports, the SEC will consider two options. One would make all proposals for proxy access binding on public companies if they win a majority of votes representing the company's shares. However, the option would also require that proponents together own at least 5% of the corporation's stock to get such proposals on the ballot. The SEC said the proposals could be crafted any way the shareholders want so long as it comports with what is permissible under state law. In addition, the SEC says it will encourage companies and shareholder to engage in online forums. According to the report by CNN, shareowners would then be limited to nominatina one director on a company's annual proxy statement. Forbes says "the other alternative is closer to the status quo, allowing companies to keep off their proxies shareholder proposals related to the election of board members." However, that was the status quo only since 1990 and prior to AFSCME v. AIG in late 2006. Prior to that time and after that decsion, any shareowner with $2,000 of stock could, and now can again, place such resolutions on the corporate proxy. The US Chamber of Commerce and the Business Roundtable have been the most vocal opponents of proxy access for shareowners in any form. The Social Investment Forum, the Interfaith Center on Corporate Responsibility and Institutional Shareholder Services have all voiced opposition to a 5% threshold and eliminating the possibility of non-binding, or advisory, resolutions. (SEC Debating Shareholder Proposals, Forbes.com, 7/25/07; SEC Proxy Plan May Spur Debate, WSJ, 7/25/07; and SEC likely to rule on proxy issues, CNN, 7/25/07) The 5% threshold makes such proposals nearly impossible even for large "universal" shareowners like CalPERS, which normally owns no more than 1/2 to 1% of a company's stock. Instead, it would favor short-term hedge funds which more frequently take large stakes for a short-term. Shareowners would be better served if the SEC took neither of the proposed actions. SEC as Social Policy Advocate The SEC has taken down its "web tool," which attempted to identify companies doing business in countries designated by the State Department as "State Sponsors of Terrorism." These included Cuba, Iran, North Korea, Sudan, and Syria. There apparently were instances when the annual report was out of date, causing the information provided by the web tool to be inaccurate. J. Robert Brown, argues (The SEC, Corporate Disclosure, and State Sponsors of Terrorism, TheRacetotheBottom.org, 7/21/07) "the terrorism web site goes way beyond this and is unconnected to the Commission's mission of promoting accurate and complete disclosure. It inserts the Commission directly into social policy and the political thicket, a place that independent agencies usually try to avoid." Dispute Over Fundamentals Pensions & Investments includes an article by Douglas Appell (Wilshire report sees only smoke in index, 7/23/07) in which reports on a new paper from Wilshire Associates, “Fundamentally Active.” It finds wanting the “claims and myths” of "fundamental indexation" strategies, which use measures such as dividend payouts or sales, rather than market capitalization, to determine a company’s weight in a core stock index. Proponents include Robert D. Arnott, chairman of Research Affiliates LLC, Pasadena, Calif., and Jeremy Siegel, senior investment strategy adviser with fundamental index shop WisdomTree Investments Inc., New York. Robert J. Waid, a vice president with Santa Monica-based Wilshire and head of index research for Wilshire Equity Analytics, appears to say cap-weighted indexes are flawed because they attempt to overweight overvalued companies and underweight undervalued companies but no one can determine with any confidence which are which at any given point in time. Arnott said Waid’s own data show the RAFI 1000 delivered superior annualized returns for the five years ended Dec. 31, 2004. The RAFI 1000 returned 6.5%, vs. 5% for the Dow Jones Wilshire Large-Cap value index and 6.1% for the Dow Jones Wilshire 2500. Protect Shareowner Rights Domini Social Investments makes it extremely easy to send an e-mail to the SEC. (No more excuses!) Please customize their message, urging the SEC to protect our right to file advisory resolutions under Rule 14a-8, including the right to file proxy access resolutions on future board elections. Simply modify the form to add related specific concerns and click "Send email." Your message will go to Christopher Cox, the chairman of the SEC, and to the SEC's email box for public comments. Please note that your name (but not your email address) may appear on the SEC website. Just a Few Bad Apples On his blog, This Week in SRI (On Shareholder Proposals, 7/20/07), William Michael Cunningham makes a dire prediction that the SEC will "impose a number of rules that virtually eliminate shareholders’ ability to file resolutions. These may include a 5% ownership rule or unreasonably restrictive time limits governing the filing of resolutions. We believe the SEC will offer shareholders improved communications and access to corporate management via on-line tools, like bulletin boards or 'chat rooms.' Having done so, they will claim to have improved shareholder access." Cunningham then goes on to post a long list of "unprecedented corporate and market institution fraud and malfeasance." I hope Cunningham is wrong. Obviously, shareowners are winning a lot more resolutions. Management seems more willing to talk and implement measures that prompt proponents to withdraw their proposals. Pfizer wants to sit down a chat with its largest investors and will probably webcast the event. Still, as John Mackey (under a disguised identity) once told me on the Yahoo message board, "This issue is about 'power'--nothing more and nothing less." (see also Rachel Beck's Whole Foods CEO anonymous online chats put his trustworthiness into question, San Diegeo Union Tribune, 7/20/07) With Enron and Worldcom we were told it was "just a few bad apples." Not many believe that now, especially anyone who has read Cunningham's list. Well, here's your Friday afternoon musical download. Yes, it is dated and maybe politically incorrect, but just for fun have a listen to Just A Few Bad Apples. Proxy Access Wins at Last! ISS Governance Weekly reports that shareowners of Cryo-Cell International, a small cap biotech firm in Florida, became the first to approve a proposal on proxy access. The non-binding measure was filed by David Portnoy of a “13D Group,” which owns 13.2% of the company and waged a proxy fight for all six seats on the company’s board. Portnoy's dissidents weren't able to unseat any directors but if the access plan is adopted by the board, shareowners or groups that own 5% stakes for more than two years would be allowed to place one nominee on next year's proxy. The resolution provided for additional shareowner nominees if the board is expanded. Earlier this year, a binding proposal at Hewlett-Packard received 43% support and a non-binding resolution won a 45% at UnitedHealth Group. The SEC is reportedly considering imposing a 5% threshold for all shareowners to bring access bylaw proposals. (Proxy Access Gets Majority Support for the First Time, 7/19/07) My own opinion is that shareowners should remain free to tailor proposals to each company's individual situation. One size does not fit all.
CalPERS Proposes Changes to Election Rules CalPERS is the most important corporate governance activist. Yet, too frequently, their own governance practices could use additional scrutiny. In January the Office of Administrative Law made a determination in favor of my petition that the Procedures for Becoming a Candidate and the Election Schedule adopted by CalPERS contain "underground regulations." Now CalPERS has proposed rules to come into compliance. However, the proposed regulations would allow the Board to set qualifications for candidates, such as how many signatures will be required on election petitions, prior to each election without going through the rulemaking process. "In setting the minimum number of petition signatures, the Board will consider the goals of ensuring candidates have a minimum level of support." Isn't it odd that incumbents would be participating in setting the qualifications of their opponents just before each election, such as how many signatures they will need to gather? In 2003, CalPERS joined with other funds in placing an ad in the Wall Street Journal to support shareholder access to the corporate proxy for the purpose of electing shareholder nominees. (see Council of Institutional Investors brief, Equal Access – What Is It? for background on my petition to the SEC, which reopened interest in “equal access”) Included in the CalPERS sponsored ad was the following:
Of course, the same admonition applies to CalPERS itself. The proposed rules have many other flaws, such as putting members at risk of identity theft, which I hope to analyze before submitting formal comments. Those who believe candidate qualifications at CalPERS should not be subject to the Board's whim should comment on the proposed rules by August 27, 2007, via fax at (916) 795-4607; via email at joe_parilo@calpers.ca.gov; or by mail to the following address: Joe Parilo, Acting Regulations Coordinator Back to the top Governance and Performance of Family Business In South-east Asia, family owned and controlled companies comprise more than 80% of the larger or listed companies. However, the model of family business varies from country to country as well as organization to organization. Governance issues such as maximizing family and business potentials, board practices & leadership, roles that independent outside professionals play, external capital access & growth, succession planning, relationships with minority investors, agency problems, risk profile and management, etc. are of concerns to many entrepreneurs, business, executives, professionals, market intermediaries, regulators and academics. Oh, That's Who Was Such a Jerk Rachael Beck, national business columnist for The Associated Press, called yesterday to alert me to the fact that I had tangled with John Mackey on the Yahoo board last year after attempting to get Whole Foods Market to allow shareowners to present their resolutions during the annual meeting. Read interchange here. (I think there were more...but this gives a flavor.) Of course, at the time, I had no idea that "rahodeb" was Mackey. Like many on the boards, he just seemed a little impolite. For example, he took a "love or leave it" stance, advising me to "sell your stock--and invest your money into a company that you feel is more 'responsive' to your personal issues." (3/13/06) He also told me several times that if I thought barring shareowners from presenting their proposals was illegal, I should sue. On 3/14/06, he said, "The fact that Corporate Library has downgraded Whole Foods is not important to me and most other investors. Who cares?" I pointed out that about 89% of Whole Foods stock is held by institutions. "Ratings by The Corporate Library, Institutional Shareholder Services, Glass Lewis, and others can have a profound effect on the market (and their change in ratings could account for some of the recent slippage at WFMI). You can find, for example, the ISS rating (probably out of date) for WFMI at Yahoo under company profile, then under the "corporate governance quotient." A low score can push the price of the stock down. It can also change the outcome of corporate elections. An endorsement by ISS of a resolution will often mean a 20% increase in affirmative votes. Individual investors are under no legal obligation to vote intelligently. However, institutional investors are required to treat their vote as any other asset, exercising their various duties, such as the duty of care. I've never had much luck raising concerns about shareowner rights on these boards. Those who post seem much more interested in playing on rumors and short term swings. At least Mackey demonstrated some interest in the subject. Beck asked where I thought Whole Foods should go from here. As indicated in the article below, I like the fact that the board is finally investigating and that Mackey apologized. I also like their recent corporate governance reforms that I recommended to them last year. (The Board adopted a formal governance policy, which includes executive sessions, stock ownership guidelines, lead director, and set guidelines to avoid the over extension of directors who serve on other boards, among other provisions.) I still think Mackey is a genius at knitting acquired firms into the Whole Foods culture and, despite calls for his resignation, think he should remain the CEO. However, it is obvious the board needs to take a stronger oversight role. John Chevedden proposed a resolution to split the CEO and chair position that appeared on this year's proxy. If the board doesn't take this action, Chevedden should bring the resolution back. If he does, I doubt folks like Motley Fool's Alyce Lomax will again be "wondering whether this particular proposal is barking up the wrong tree," since Whole Foods "has shown itself to be a well-run company." For a review of legal issues, see 'Rahodeb' postings improper?, SFGate.com, 7/19/07. Yes, I still own shares in Whole Foods and I hope to get off this jag of writing about it soon. Watch for Rachel Beck's article this weekend in your local paper and online. Advice to the Sock Puppet Afternoon Update: Whole Foods Market Inc.'s board of directors said today that it has formed a special committee to conduct an internal investigation into the anonymous online postings made by the company's chairman and chief executive officer, John Mackey, over a roughly eight-year period. Mr. Mackey apologized for his actions. "I sincerely apologize to all Whole Foods Market stakeholders for my error in judgment in anonymously participating on online financial message boards," Mr. Mackey said. "I am very sorry and I ask our stakeholders to please forgive me." (Whole Foods Launches Probe Into CEO Mackey's Web Posts, WSJ, 7/17/07) Finally. John Mackey, the CEO of Whole Foods Market, used a fictional identity on the Yahoo message boards for nearly eight years to, as the New York Times put it, "assail competition and promote his supermarket chain’s stock, according to documents released last week by the Federal Trade Commission." The article goes on to inform readers that "this digital-age deception has a name, “sock-puppeting,” and a precise definition — the act of creating a fake online identity to praise, defend or create the illusion of support for one’s self, allies or company." (The Hand That Controls the Sock Puppet Could Get Slapped, NYTimes, 7/15/07) As a shareowner in Whole Foods concerned about all the publicity surrounding Mackey's behavior, I emailed their investor relations office.
I went on to praise Whole Foods for its corporate governance reforms and to recommend hiring a high profile corporate governance expert to review Mackey's postings for potential legal violations and to advise on additional corporate governance changes. For the sake of their reputation and for my portfolio, I hope they take such action and I hope we will finally get a sincere apology from Mackey. As is frequently the case, Broc Romanek's post (The Whole Foods' CEO Message Board Fiasco: It's the '90s All Over Again!, TheCorporateCounsel.net Blog, 7/17/07) is one of the most informative, referencing FAQs on Cybersmears and Message Boards that he wrote at least five years ago. Romanek goes on to cite Professor Jay Robert Brown's "The Race to the Bottom" Blog (Corporate Disclosure and the Internet: The Odd Case of John Mackey and Whole Foods), which should help put shareowners like me somewhat to rest:
A few comments from other bloggers: Credibility and authenticity are what builds trust between people. John Mackey has been inauthentic... (Mackey's Actions Support The Case For Authenticity, PR Communications by John Cass, 7/17/07) Mackey doesn’t think he’s done anything wrong. His response to the criticism that the CEO of a major company was posting unwaveringly bullish comments anonymously in financial bulletin boards reminds me of that scene at the end of A Few Good Men, when the Marine, after being dishonorably discharged, shouts, “We didn’t do anything wrong! Hal, what did we do wrong?! We didn’t do anything wrong!” ...It’s harder when the good ones fall. I still think the company is good and their practices are outstanding. I think their thousands of employees are truly excellent people who want to do good. I just wish that they didn’t have to go home and explain to their families and friends why their CEO made 1,300 bad decisions to write anonymously on financial bulletin boards. (Hubris and Hiding Poke a Hole in Whole Foods, Know HR Blog, 7/17/07) Mackey would have served himself and his company better had he been open and honest when commenting online. Whole Foods has a good enough reputation that they don’t need an anonymous cheerleader sneaking around chat rooms and blogs...Getting CEOs and CMOs online to talk directly with customers can be a good thing – for customers and marketers alike. Let’s hope the government doesn’t scare the lawyers into advising the top corporate folks to zip it up. (David Reich: Whole Foods CEO: Busted!, 7/17/07) On one hand, we can get a chuckle at chuckleheads like Mackey who play games on the Internet in hope of boosting his fortunes with comments about cute haircuts. However, what does it say about how Wall Street execs see investors? Do they think all of us are suckers who will buy Whole Foods stock just because Mackey has a cute 'do? (Who Knew Whole Foods Market Sold Spam?, 7/17/07) For the most part the posts themselves are not exceptional but for the fact they are written by Whole Foods' CEO. This fact does make them distinctive and sad at the same time. You would think a CEO's judgement would be more intact. ...Now we know what CEOs do. We just thought they made better and more brilliant decisions than they often do. (What CEOs really do with their time, Dolores Parker, 7/17/07) Although he's been trying to address the situation on his blog, I can't help but think this approach isn't really helping. I mean, after those anonymous posts it's hard to take the guy seriously when he says he's pleased his supporters have discovered "an open, honest, candid communication by a company's CEO." Dude, you were hiding behind a made-up name! How "open" and "honest" were those posts you made as "Rahodeb" on the Yahoo message forum?!...All I can say is I'm glad I don't have to work for this guy. (What Was Whole Foods CEO John Mackey Thinking?!, Joe Wikert's Publishing 2020 Blog, 7/16/07) Peer-to-Peer Generated Governance Changes Almost half (45%) of portfolio managers and buy-side analysts surveyed by Bigdough think it is beneficial for an activist shareholder to have a seat on a target company's board. Only 5% say activism is not helpful in unlocking shareowner value. However, Bigdough also found no clear sign that mainstream investors are jumping on the coattails of activists by increasing their existing investments in targeted companies. A huge number of respondents - 86% - believe activism will keep growing and 85% believe shareowners should have a "say on pay." (Mainstream investors get behind activism, CrossBoarderGroup.com, 7/13/07) Certainly most listen to large institutional investors, from activist public pension fund CalPERS to hedge funds like Bridgewater Associates. Pfizer's board has even invited a group of its largest institutional investors for a visit this fall. (Pfizer to Meet With Largest Shareholders) But, as Janine Armin, Assistant editor, Corporate Secretary magazine notes, What about the little guy? Although I applaud Pfizer's initiative, I question how they will comply with Reg FD, which requires that all investors get the same information at the same time. I've called Pfizer's Andy McCormick at 212-733-5469 several times to request that such meetings be webcast. They're researching it. Perhaps your call will tip the scale. Leaving out the small shareholder is something the SEC is currently considering as well. One possibility raised at recent roundtable discussions is eliminating the right to file nonbinding resolutions under Rule 14-a-8. Other possibilities include:
In a recent (July 4th) letter to SEC Chairman Christopher Cox, activist John Chevedden wrote, "More 95% of the shareowner resolutions filed in the last 35 years have been 'advisory,' yet they have had a profound and identifiable impact on business thinking and decision making in corporate board rooms." Chevedden goes on to recount the Gilbert brothers, who won the right of shareowners to submit resolutions so that shareowners could police potential “fraud and mismanagement” in the companies they owned and how it took 50 years to actually win a majority vote. Along the way there were many court battles and in the SEC v. Transamerica Corp., 1947, Gilbert's efforts got the court to write, “a corporation is run for the benefit of its shareholders and not that of its management.” Chevedden goes on to document how the tide is turning. "In 2007 at least the following 42 advisory proposals by individual investors won majority votes in a single year." He goes on to list those which, I believe, are mostly or entirely from his own group of shareowners. Then Chevedden notes, "additionally in 2007 there were 20 non-binding shareholder proposals, each submitted by individual investors, that were transformed into successful binding company proposals." He ends with the following: "I strongly oppose any move to take away shareholder rights to file advisory resolutions – especially as they are attaining an apex of success as shown above." Of course it is the fact that shareowners are now winning majority votes that has led managers to call for the end of these hard won rights. Lisa Woll and Tim Smith, of the Social Investment Forum, wrote similarly to Senator Jack Reed and Representative Barney Frank asking them to urge Chairman Cox "not to weaken shareholder rights to file resolutions by crafting amendments that would make it substantially more difficult for investors to sponsor reasonable resolutions." One activist shareholder getting press lately is Eric Jackson, who recently turned his attention from Yahoo to Motorola. According to an article in the Chicago Tribune (Motorola activist wielding cyberclub, 7/13/07), "Jackson, a 35-year-old corporate consultant, owned fewer than 100 shares of Yahoo, but wanted to rally his fellow shareholders. So last winter he created an online offensive, including YouTube videos and a Flickr page, aimed at booting Semel and forcing other changes at the underperforming company." Terry Semel, Yahoo's former CEO, resigned under fire last month. While larger shareowners like Carl Icahn have much more clout, many see an influential role for creative types like Jackson. He told the Tribune that if he could make a reputation for himself, perhaps he could attract money to start his own hedge fund. In January he rolled out Plan B for Yahoo on YouTube, then on to Facebook and, most importantly, his own wiki, like Wikipedia, where shareholders can comment and add their own suggestions. Like the Committee of Concerned Shareholders led by Les Greenberg in the early days of web-based shareowner action, Jackson apparently asked shareholders to pledge shares to the principles laid out in Plan B for Yahoo. Seventy-five investors collectively pledged 2.1 million shares, he told the Tribune. According to the Tribune, "that's a piddling 0.2 percent of Yahoo's share base, yet Jackson made waves." The Tribune article goes on to quote Patrick McGurn of ISS ("The extent to which he used the Internet was unprecedented.") and Charles Elson ("He was quite successful at Yahoo." "The CEO left very shortly thereafter. It's hard to find cause and effect, but he certainly raised awareness.") Now with 134 shares, he is after Motorola, using the same Plan B mode and tools, including an unofficial Motorola wiki. See also Dissident investor targets another company, Cross Boarder Group, 7/13/07. As I recall, Japonica Partners had an internet bulletin board a decade ago soliciting feedback on their targets. I suspect they found they were spending too much time cleaning out crank posts. Peer-to-peer discussion tools have become more sophisticated and are more easily managed now. If Jackson's techniques of more sophisticated electronic collaboration by shareowners really can make a difference, and I certainly believe they can, perhaps we'll see a renewed interest in these tools by Japonica Partners and adoption by long-term activists such as Providence Capital and Relational Investors. I'm not sure I'd want to invest in a hedge fund run by Eric Jackson, given his apparent limited investment experience. However, I could certainly see a place for activists such as him in helping to publicize and direct shareower campaigns initiated by hedge funds. Another internet campaign worth mentioning is that of Richard Macary and the AVI Shareholder Advocacy Trust. The Trust's central goal is to improve the quality of AVI Bio Pharma's management. It seeks contributions from shareowners and other interested parties to pursue "changes at the Company for the benefit of all like-minded AVI BioPharma shareholders." It is our position that markets are just beginning to recognize the value that peer-to-peer shareowner actions can have. Much more can be expected as technology increases our ability to communicate. BRIBEline TRACE, a non-profit membership association of multinationals, introduced BRIBEline, a secure, multi-lingual web-based mechanism through which companies and individuals can anonymously report bribe demands by answering nine multiple-choice questions. No names are requested or collected, and reports made to BRIBEline are not used for investigations or prosecutions. Instead, the information is aggregated and publicly reported by country and by sector (the customs service, the judiciary, etc.), shining a spotlight on the worst offenders, providing companies with an additional risk mitigation tool, encouraging governments to reduce corruption in their ranks and helping those working to increase transparency and reduce bribery more effectively target their efforts. From their website:
Retention Those who hold asset allocation funds tend to hold them longer, and as a result, experience better returns, according to Dalbar Inc.'s 2007 Quantitative Analysis of Investor Behavior, which examined real investor returns for equity, fixed income and asset allocation funds between 1987 and 2006. Investors held asset allocation funds an average of 5.2 years, equity funds 4.3 years fixed income funds 3.7 years. As reported in the WSJ, "the Pension Protection Act will encourage retirement plans to automatically enroll investors and place their contributions in an established group of qualified default investments. Asset-allocation funds, such as target-date and lifecycle funds, are expected to be among the final list of qualified default investments, which has yet to be determined." However, asset-allocation funds underperform equity funds, according to the Dalbar report. The average equity fund investor's 20-year annualized return jumped to 4.3% from 3.9% in 2006, while the average fixed-income fund investor's return was 1.7% and the average asset-allocation fund investor gained 3.7%. (Protecting the Investments of Bad Investors, WSJ, 7/12/07) Moody's finds a similar problem at private equity firms. "Given that they don’t need to put out quarterly earnings reports, private equity-owned companies could theoretically focus more on long-term investments—a luxury not afforded public companies—but according to Moody’s, they don’t.Getting investors to take a long-term perspective is key to improving their returns and ensuring better corporate governance. (Private equity no longer Wall Street’s favorite son, Cross Boarder Group, 7/10/07) Back to the top WFMI's John Mackey Needs Help Whole Foods' founder and CEO John Mackey posted many messages on Yahoo's stock forums for about eight years, ending around August 2006, WSJ reports (Whole Foods CEO Mackey Posted Comments on Stock Message Board, 7/11/07). Mackey, using a pseudonym, routinely cheered Whole Foods' financial results, trumpeted personal gains on the stock, and bashed rival Wild Oats. "At a minimum," former Securities and Exchange Commission chief Harvey Pitt told the The Wall Street Journal, Mackey's hiding behind a pseudonym was "bizarre and ill-advised, even if it isn't illegal." (The Five Dumbest Things on Wall Street This Week, TheStreet.com, 7/13/07) Many shareowners of Whole Foods, including the publisher of CorpGov.net, believe in their mission. Their motto — Whole Foods, Whole People, Whole Planet — emphasizes sustainability. Mackey has been a leader in developing what at least appears to be a participatory team-based workforce, in purchasing renewable energy, and in so many other areas. For at least eight years, Fortune named WFMI one of the best companies to work for. I still have little doubt that Mackey is a genius at developing the company. Yet, he obviously needs help. Recently, he fired back at the FTC, which is attempting to stop WMFI from buying Wild Oats, with a 14,000-word rant on his blog, accusing them of "bullying tactics," failing to do its homework, and taking out of context "macho posturing" by executives that is common to competitive organizations. Maybe "macho posturing" isn't as common as Mackey thinks. I wish John Chevedden's shareowner proposal to split the roles of CEO and board chair at Whole Foods had passed at this year's shareowner's meeting. One of the things that prompted that resolution was the 2006 shareowners meeting. 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, 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 outburst, 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 directors routinely meet without the CEO present. Although I brought this lapse to the attention of 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 its practice by holding such meetings. As the founder, a substantial shareowner, CEO, and board chair, Mackey holds a dominant position at the company — too dominant. The best course for Mackey would be to apologize to those he deceived on the Yahoo boards, those he insulted at the 2006 meeting, and probably to others as well. Split the chair and CEO positions, have executive meetings without his overbearing presence and take the focus off Mackey's personality flaws. For its part, the FTC should also leave Mackey's pronouncements and personality out of the equation. Concentrate on how much of a monopoly the proposed merger would create. If they do, I'm sure they will find that a merged WFMI won't be displacing the organic-food segment, increasingly owned by mainstream chains such as WalMart, Safeway, Kroger, Wegmans, Publix Super Markets, and others. Update: Forbes.com points out the hypocricy of Mackey's use of a secret identity in his webpostings, given public statements such as the following (Mackey's Alter Ego, 7/12/07):
SEC May Seek to Nullify Shareowner Rights Under a draft SEC proposed rule being circulated to an unidentified select group, only shareowners who own 5% of a company's stock would be allowed to propose amending the corporations bylaws to enable access to the proxy for shareowner director nominees . The reported memo also outlined a "no-hold" period, meaning that a shareholder who wanted to put forward a proxy proposal could do so immediately after buying the shares, rather than having to hold shares for any specific length of time. "Not only is 5 percent unworkable, it would be a field day for hedge funds or anyone to come in," said Rich Ferlauto, a director with the American Federation of State, County and Municipal Employees. "It would be taking a good principle to give shareholders long term access and turning it on its head." Management groups, such as the Business Roundtable, understandably oppose proxy access because it gives what they call "special interest groups" such as labor unions and public pension funds more control over how companies are governed, even though any changes would require agreement by owners holding at least a majority of a corporation's shares. "It's clear that there isn't an easy compromise. I don't see anything we could support that organized labor could also support," said David Hirschmann, senior vice president of the U.S. Chamber of Commerce. (U.S. SEC mulls 5 pct ownership for proxy access, Reuters, 7/10/07) Five percent is a very high threshold. Even extremely large shareowners such as CalPERS, the nation's largest pension fund, typically hold less than 1% of the shares in any corporation. Getting funds together to form groups would be difficult, especially given reporting requirements for owners holding 5% or more of a company's shares. Currently, as confirmed by AFSCME v. AIG, shareowners only need to hold $2,000 of stock for at least one year to file binding or nonbinding resolutions. Shortening or dropping the holding period would be is nonstarter, since it would tilt the proxy-access process to hedge funds rather than long-term investors. According to reports, the SEC draft also addresses nonbinding resolutions by allowing "firms and shareholders to develop their own alternative route for handling nonbinding bylaw changes, provided it complies with state law and is approved by a majority of shareholders. The SEC staff would continue to weigh in on nonbinding bylaw changes at firms that haven't opted for an alternative resolution, according to those familiar with the plan." (SEC Proxy-Access Plan Draws Fire, Forbes.com, 7/10/07; SEC Proxy-Access Proposal Draws Fire From Investors, WSJ, 7/11/07) If the SEC moves forward with such a proposal, long-term shareowners would not only lose the rights recently confirmed by AFSCME v. AIG to propose changes involving the election of directors but could also lose the right to resolutions on everything from splitting the CEO and board chair positions to actions designed to reducing corporate contributions to and risks from global warming. Shareowners should do everything in their power to stall any rulemaking in this area until after the 2008 elections.
TIAA-CREF Gets Proactive Message TIAA-CREF announced a 2% target allocation to proactive social investments within the fixed income portion of its CREF Social Choice account. Within this new target, the fund will invest in publicly traded fixed income securities that finance initiatives in areas including affordable housing and alternative energy, such as hydro-electric power and economic development programs in the United States and abroad. CREF Social Choice had $8.9 billion in net assets as of March 31, 2007, with over 430,000 investors. The account is a balanced portfolio with an overall target asset allocation of 60% equity securities and 40% fixed income securities. “We continue to listen to our participants' views on a wide range of social investing issues and understand that making investments that support social and environmental issues are important to many of them,” said Scott Budde, Managing Director and head of TIAA-CREF’s Global Social and Community Investing Department. “Our new target for proactive social investments in CREF Social Choice will help address a wide range of pressing social problems through market-based solutions that can also generate competitive returns for our clients and is a natural extension of our existing microfinance and community investing programs.” “We applaud TIAA-CREF's leadership in integrating additional socially responsible investing strategies into the CREF Social Choice Account,” said Lisa Woll, Chief Executive Officer, Social Investment Forum. The move was also called "another success" by Neil J. Wollman, long active in organizations to Make TIAA-CREF Ethical. He and others are gearing up for TIAA-CREF's July 17th annual meeting. They are seeking phone calls and email to TIAA-CREF at 800-842-2733, requesting supporters ask CEO Herb Allison to "put Wal-Mart, Nike, Coca Cola, Costco, Chevron, and Philip Morris/Altria on notice that if they don’t clean up their human rights, environmental, and health practices, that CREF will find other companies to invest in.” Tell them if you are in the TIAA-CREF system. The AFT recently passed a resolution calling on TIAA-CREF to Continue Developing Shareholder Activism in Support of Labor Rights in the United States and Abroad. Midwest Air Group Gretchen Morgenson, recently wrote of the nearly $400 million offer that AirTran Holdings, the discount airline, is making for the Midwest Air Group. "While Midwest's stockholders are jumping up and down for the deal, its directors have staunchly rejected it. As a result, some Midwest shareholders wonder whether the board is performing its duty to the company's owners or acting instead to benefit a management with whom it has long been associated." (A Board That Knows Two Words: No Sale, NYTimes, 7/8/07) According to Morgenson, some shareowners think Midwest directors shouldn't have refused for six months to even to meet with officials of AirTran to hear their proposal. Joe Leonard, CEO of AirTran, ways they are "willing to pay for additional value if they could show that the value is there.'' At Midwest's annual meeting last month, two-thirds of the votes were cast against the Midwest directors who were up for re-election and three Midwest directors were replaced with AirTran's nominees. The remaing six apparently have seen the writing on the wall and have finally agreed to sit down with AirTran officials on July 16. Morgenson ends with the following:
Carol N. Skornicka, Midwest's general counsel and secretary reminded Morgenson that ''under Wisconsin law a board can consider other stakeholders, it can consider the interests of customers as well as employees.'' While I certainly favor consideration of such interests, such laws too frequently provide cover for boards to refuse offers that should be accepted. Live Earth Saturday, July 7, is the Live Earth concert. I encourage readers to make a donation to CarbonFund.org. I bought carbon offsets for our Prius and Civic. Music presentations hope to begin a mass persuasion effort to reduce global climate change. It also appears to be an opportunity for advertising hype and greenwashing...still, overall a positive effort. Changing Cup of Tea Has Martin Lipton, the legendary mergers-and-acquisitions lawyer, lost his edge? That's the question asked in WSJ's Sage Advice? 'Just Say No,' 7/6/07) Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, a major law firm in the United States. He specializes in advising major corporations on mergers and acquisitions and is generally credited with having invented the poison pill, a common takeover defense used by public companies in the US to delay and deter hostile tender offers and other unsolicited acquisitions. My read of the article is that while Lipton's hardline tactics may have worked in the past, we have entered a new era and Pfizer's recent announcement that they will hold a forum with their largest investors may be a better tactic than just saying no, which didn't work at Disney, Morgan Stanley, or Home Depot. The article concludes with the following:
Those interested in a little more on Lipton should read You Say Ph.D., I Say Toast by Robert Jackson, Blog Editor, Harvard Law School, on Thursday June 28, 2007 at 12:27 am. FT Discusses Shift in Foundations According to an article in the Financial Times (Socially responsible investment: Practising what they preach, 7/5/07), research by Germany’s Bellagio Forum for Sustainable Development found that more than 43% of foundations surveyed believed using sustainable development or social criteria in managing their assets reduces returns. Only 16% said using SRI criteria increased returns while 15% said it made no difference. That helps explain why only 39% of foundations in the survey coordinated their mission and programmes with their asset management practices, while 61% said there should be no links. The article reports that more foundations are shifting their beliefs and are beginning to use their investment power to achieve their objectives. They are being assisted by a joint toolkit for foundation and charity trustees published last September. Bellagio and the European Social Investment Forum (Eurosif) argued that SRI investment funds often outperform funds that do not use SRI criteria. A study last year by Eurosif identified no fewer than 10 distinct investment strategies adopted by European Socially Responsible Investors. The top four are ethical exclusions, best-in-class, pioneer screening, and other varied positive screens. Sustainability appears to a the new unifying focus, wether pertaining to climate change, global poverty, human rights, or labor rights. Sustainable directions should result in lower risk. The article ends with the following:
Call Pfizer Janine Armin, Assistant editor, Corporate Secretary magazine blogs What about the little guy? and cites my recent post Pfizer to Meet With Largest Shareholders. Although I celebrated Pfizer's decision to meet with its biggest institutional shareholders to confer on governance policies such as executive compensation, I questioned how Pfizer would meet Reg FD, which requires that all investors get the same information at the same time. Ms. Armin position isn't clear but I hope she's joining us. Call Pfizer's Andy McCormick at 212-733-5469 and request the webcast. Don't leave out the little guy; Pfizer should comply with Reg FD. Race to the Bottom Will we see shareholder proposals under rule Rule 14a-8 to reincorporate under the new North Dakota Publicly Traded Corporations Act? Maybe, if J. Robert Brown's July 5th post to TheRacetotheBottom.org gets the attention it deserves. Regardless of any action along those lines, TheRacetotheBottom, a collaboration between students and faculty at the University of Denver, deserves to be copied at other law schools and corporate governance centers as a mechanisim to increase dialogue and understanding. See also the Sturm College of Law's corporate governance page, which will include primary materials from important cases, relevant laws and statutes, and empirical studies and analysis. We've added links to these informative sites at Blogs & Blog-Like and Classes. Eclipse of Private Equity The Economist's The business of making money (7/5/07) includes a nice review of private equity's strengths and weaknesses. Traditionally companies had three main reasons to list their shares on a stockmarket:
Pension funds, insurance companies, and mutual funds faced legal or regulatory impediments to buying unquoted shares, while the public naturally valued the liquidity a stockmarket listing could bring. Nowadays companies have many more options when it comes to raising money. They often have little difficulty in finding capital outside the public market. Additionally, many have had little need to raise capital at all. "Corporate profits have risen to a 50-year high as a proportion of America's GDP. Companies have used the cashflow from those profits to buy back shares and pay down debt." Collapse of the dotcom bubble made lots of options worthless. Options must now be expensed and employees prefer cash, knowing now that stocks don't rise forever. Of course there are the costs associated with being public and the disclosures. The article pays tribute to Michael Jensen's Eclipse of the Public Corporation, written almost 30 years ago who noted the creative destruction of taking on debt, cutting costs, weeding out unprofitable operations and expanding those parts of the business where returns are highest -- all once done under the conglomerate model. "Like a shark compelled to keep swimming forward to catch its prey, they needed ever-bigger acquisitions to make progress." In the end, The Economist argues, private equity firms need an exit route. That "was neatly demonstrated by the recent flotation of Blackstone, one of the largest private-equity groups, on the New York stockmarket and the decision this week by Kohlberg Kravis Roberts, another of the industry's titans, to follow suit."
However, the market may be giving private equity its due. "Bond yields have been rising, making takeovers (which replace equity with debt) more expensive. The high level of corporate profits suggests that there may not be much more to be wrung out of businesses. And the relentless campaign against private-equity tax privileges has made the groups look like easy targets for finance ministers." How Long Should Recommendations Take? Ten years ago the Public Investors Arbitration Bar Association (PIABA) petitioned the SEC under section 192 to: (1) establish the American Arbitration Association as an alternative venue for customer arbitrations; (2) change the composition of arbitration panels hearing customer arbitrations; and (3) provide for a rotational system for the selection of arbitrators. The rule requires the Secretary to refer such petitions to the appropriate division or office for consideration and recommendation to the Commission. From documents obtained through a FOIA request by Les Greenberg, it appears the SEC's willingness to defer to SROs has no time limit, despite the legal requirement that recommendations are required. After 10 years, SEC staff has not made the required recommendation. The Staff wants what it is doing to be considered "normal," but how long should the rights of non-SRO sponsors be deferred? A pdf copy of those documents is available at http://www.LGEsquire.com/PIABA Petition 4-403.pdf. One no longer has to wonder why securities arbitration rule reform (to level the playing field) has not occurred. Greenberg has written extensively on how to improve the securities arbitration process. See his Petition for Rulemaking (SEC File No. 4-502) (severe problems with NASD arbitration and questionable SEC oversight). The Petition has received favorable media coverage, e.g. 9/1/05, Registered Representative Magazine, "The Real Arbitration Nightmare"; 7/31/05, San Diego Union-Tribune, "Stockbroker losses bring no trials, lots of tribulations"; 7/17/05, Pittsburgh Post-Gazette, "Systems for resolving disputes may need an overhaul." However, the SEC has failed to act on it as well. We may see international arbitration first. Ira Millstein Profiled Alia Malek writes a revealing mini-portrait of Ira Millstein (The Observer, 7/5/07), corporate governance's "preeminent lawyer, dean, guru, sage, and statesman," for Portfolio.com. Millstein "began in antitrust litigation at the U.S. Department of Justice in 1949. He moved to Weil in 1951 but always held the mission from Justice—keeping America competitive and therefore strong?—close to his heart, even as he defended companies from antitrust or shareholder suits, empowered institutional investors and boards, or chastised management." One recent focus has been the Aspen Principles, which attempt to focus on long-term value creation. “I’m very interested in what to do about short-termism,” says Millstein. “We have to get the country to stop thinking that capital markets are the be-all, end-all,” he says. “The real wheel is corporate America. That’s what provides jobs, growth, strength for the country. I would ask capital providers, ‘Are you the real game causing corporate America to be more competitive?’ It would be great if they would look at it with us.” To that end, the center that bears Millstein’s name will hold roundtable discussions involving the international business community, investors and regulators. Sister Valerie Heinonen Subscribers to thecorporatecounsel.net can listen to a recently posted podcast "A Chat with One of the Activist Nuns." Sist | ||||