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Current News and Commentary. January 2007, February 2007, March 2007, April 2007, May 2007, News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest, updated 5/25/07. Book bites. Your ad clicks help pay the bills. Pfizer to Meet With Largest Shareholders Pfizer said its board will invite its largest institutional shareholders to a meeting this fall to review the drugmaker's governance policies, including executive compensation. These representatives own in aggregate approximately 35 percent of Pfizer's shares. "We believe this meeting with our shareholders on our governance and compensation policies will give us valuable insights and help us maintain the highest standards in corporate governance," said Constance Horner, Lead Director of the Pfizer Board. "I am personally committed as the Chair of the Governance Committee, as are the Chairs of the Compensation and Audit Committees, to attend these meetings and listen to shareholder viewpoints on governance and executive compensation." (press release, 6/28/07) It certainly is a welcome development. However, as enacted in 2000, the SEC's Reg FD was intended to put all investors on an equal footing when it comes to receiving material information about a company. In order to meet its requirements, companies must provide material information on the basis of widespread dissemination through the filing of a Form 8-K or "through another method (or combination of methods) of disclosure that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public." I would hope the Pfizer Board webcasts its meetings with institutional investors. Although this still wouldn't put small investors on a true equal footing, because they won't have the same face to face access, at least they will have an opportunity to acquire the same information at the same time. As of this post, Pfizer has not responded to my question of webcasting. Further Clarification of SEC Intentions This from a recent post at the ISS Corporate Governance Blog (SEC Quizzed on Proxy Rules, 6/29/07).
Non-binding Proposals Work These 20 binding 2007 company proposals were approved by shareholders and each started as a non-binding shareholder proposal. In other words a shareholder proposal was the trigger that led the company to submit a corresponding binding (and subsequently approved) 2007 management proposal. These 20 proposals show that non-binding proposals do work, says John Chevedden.
KLD Blog KLD launched a Blog to share their insights into current events and emerging trends within the expanding field of environmental, social, and governance (ESG) investment research. According to Peter D. Kinder, President and Co-Founder, they will be posting news, commentary and updates on issues relevant to integrating environmental, social and governance data into investment decision making. Some of the issues they will be blogging on include:
Interesting commmentary on former US Vice President Dan Quayle joining the board of Heckmann Corp., described as a ‘blank check’ company. They also speculate that the SEC could increase the barriers to filing and re-filing shareholder resolutions. "A $100,000 minimum holding for filing is a possibility, as would a 20 to 30 percent vote in favor of a resolution in order to refile the next year." Ugh. Can't we hold out until the next administration? Proxy Access Rule by July Proxy access rules are scheduled for release at the end of July, according to a statement by SEC chairman Christopher Cox before the House Financial Services Committee. “We need to make sure that there’s one rule for the whole country, and everybody understands it, and have it in time for next proxy season,” said Cox. Barney Frank, who chairs the committee, said he will convene a hearing after the proxy rule is released to discuss its implications. (SEC plans proxy access rule proposal within a month, chairman says, Financial Week, 6/27/07) As I have said repeatedly, the best route for concerned shareowners at this point is let AFSCME v. AIG stand and wait until the next administration for any kind of uniform rule. The recent SEC roundtables suggested owners would have to enter a grand bargain to obtain rights we already have. United States: "Empty Voting" Raises Corporate Governance Questions by Christopher G. Cobb, Chase Cole and Marlee Mitchell reminds us that reform is still needed and they advise going slow. "Empty voting," or "vote borrowing" occurs when individuals acquire voting rights that substantially exceed their economic interest in a publicly-held company. This is possible by borrowing shares with voting rights, though the direct purchase of votes is precluded. Some research indicates that empty voting can actually have a positive impact on corporate governance. (see Vote Trading and Information Aggregation) Since it is generally exercised in support of shareholder proposals, in opposition to management, it is more likely to occur when a company is performing poorly. As a result, empty voting serves as a check on poorly-performing management by transferring votes to more informed voters. Conversely, by separating voting power from economic interest, empty voting can undermine a fundamental principle of corporate governance, which is that shareholders will vote their shares in a manner that maximizes the value of their ownership interest in the company. [see The New Vote Buying: Empty Voting and Hidden (Morphable) Ownership)] The authors cite the following widely circulated example:
The authors endorse revising the reporting requirements of Section 13(d) and Section 16 of the Securities and Exchange Act of 1934 to require disclosure of arrangements that facilitate empty voting, such as when a holder of a significant portion of a company's voting rights also holds an offsetting position that eliminates some or all of that person's economic interest in the company. Those borrowing votes should have an obligation to disclose their ownership in derivatives or other hedging arrangements so that others can clearly see if their economic interests are directly opposed to the economic interests of the company. That would help address the negative impacts of empty voting but I would propose we also "fill" empty voting by encouraging the transfer of proxies from retail owners to more informed voters. Shareholders can attempt to influence corporate governance and decision-making through their proxies. However, research time by retail investors is often better spent in assessing buy and sell decisions, rather proxy issues - unless the shareowner has an emotional attachment to the company or wishes to influence corporate values. Investors, for example, receive all of the benefits of designing themselves a better portfolio but in voting they only receive the portion of the resulting benefit associated with their proportional holdings. This tendency to under-invest in proxy research is the “free-rider” problem Mark Latham's Corporate Monitoring Project has been grappling with for years. Latham has met with some success recently through his VoterMedia.org efforts. Although his model provides the ultimate benefits of eliminating the free-rider issue, substantially increasing knowledge around proxy issues and better informed shareowners, it involved a multi-year process at each company. Assignment of proxy rights by retail shareowners to funds based on voting reputation could gain a good portion of the benefit, without nearly as much effort. While the new e-proxy rules have the potential to reduce overall solicitation costs, the Society doesn't believe the rules will significantly reduce costs to solicit retail investors -- and they permit proponents to limit their solicitations to inexpensive electronic solicitations of institutional investors, thereby "depriving retail investors of important information in thereby depriving retail investors of important information in contested elections." As many of you know, 60-70% of retail shareowners don't bother to vote in corporate elections. If shareowners could turn their voting rights over to a trusted individual or institution to vote in their behalf, I think many would do so. My guess is that those willing to accept such proxies and those willing to take the time to file a letter with their broker are more likely to be sympathetic to progressive union, environmental, social and governance goals. Choosing an institution to vote on their behalf would be not unlike choosing their union officials or representative in Congress. As more institutions offer this service, shareowners can find a closer match to their own values with growing competition. Entities could double or triple their voting clout by accepting such proxy assignments. A step further would be a more comprehensive "proxy exchange," which could allow shareowners to easily transfer their voting rights among themselves or to trusted institutions (see Glyn Holton's paper, Investor Suffrage Movement). Such an exchange could cover virtually all public companies, including OTC Pink Sheet firms. One or two funds can get the ball rolling. If your fund is willing to accept proxy assignments from retail shareowners or is willing to consider it, please email James McRitchie, Publisher of CorpGov.net. If you would like to discuss the issues involved in person, please contact me at 916-691-9722 between the hours of 10 and 5 Pacific Time. Back to the top Moody's Concerned Shareholder Power Poses Credit Risk Moody's sees alignment of long-term shareholders and bond holders. Positive developments have included:
Recent push for enhanced shareholder powers cited by Moody's include:
Over 350 companies have adopted a version of "majority voting." Say on pay gaining momentum with proposals at over 80 companies in 2007 and adoption in at least two cases thusfar. Recent shareholder rights cited are:
Moody's believes "several specific rights being demanded by shareholders, in themselves, may have some benefit to bondholders." Their concern is the "sheer pace and scale of change, and the likelihood that short-term investors will be the ones using these powers routinely, not long-term investors." Moody's believes short-term shareholders may abuse their new rights. The fear appears to be leveraged buyouts, debt-financing or simply borrowing funds or selling assets and passing through proceeds to shareholders through dividends or buybacks. (replay teleconference: Special Comment: Expanding U.S. shareholder power increases potential credit risk to bondholders. Expanding U.S. Shareholder Power Increases Potential Credit Risk to Bondholders, 6/2007) The cynic in me sees this recent special comment as a way to generate business for Moody's Covenant Quality Assessment service, since the risk to bondholders from more shareholder rights appears highly speculative. Global Strategy Global Strategy: Creating and Sustaining Advantage Across Borders The chapter on Corporate Governance Issues in International Business provides a good overview of the OECD principles, stakeholder versus shareholder debate and differences in the corporate governance systems typically found in various countries, giving the greatest attention to Anglo countries, Japan, Germany, China, India and Brazil. The authors also discuss the growing demand for foreign directors. Although very brief, the discussion does serve to warn readers that knowledge of international corporate governance is an essential element in global strategies. Books, such as Christine A. Mallin's International Corporate Governance: A Case Study Approach House Financial Services Committee Hearings A Review of Investor Protection and Market Oversight with the Five Commissioners of the Securities and Exchange Commission. Tuesday, June 26, 2007, 2:00 pm, 2128 Rayburn House Office Building.. ISS Blog note. View the hearings live on the web. Position Available Senior Research Analyst -- Climate Change (Social Issues Service) Stop Felony Congressional Pensions At least 20 former members of Congress who were convicted of crimes while in office are collecting or will receive an annual taxpayer-funded government pension check, according to the National Taxpayers Union, at a cost to taxpayers about $1 million a year to fund congressional pensions for felons. InvestmentNews points out that for10 years all attempts at keeping convicted legislators from taxpayer-funded retirements have been killed. To see a partial list of those getting such pensions, see End pensions for congressional felons (6/25/07). See also No Congressional Pensions for Felons, 11/28/06 and House Lawmakers Deny Pensions to Felons, Washington Post, 1/24/07. Letter. Email Congress. Board Evaluations The NYSE listing standards require listed companies to have corporate governance guidelines that address annual board evaluations. Since the Nasdaq doesn't require corporate governance guidelines, it is silent about the need for listed companies to conduct board evaluations – but many Nasdaq companies conduct them anyway as a sound practice. See the results of thecorporatecounsel.net's Survey Results: Board Evaluations. Universal Ownership For academics in the field of corporate governance I have found no publication better than Corporate Governance: An International Review, edited by Christine Mallin. Of course, the publication is also aimed at practitioners. The May 2007 edition, devoted to "universal ownership" should appeal equally to both. Academics will find areas in need of research; practitioners will find many worthy ideas and recommendations. The issue grew out of a conference sponsored by the Elfenworks Center for the Study Fiduciary Capitalism at Saint Mary's College of California. (Download the conference report.) The Center is co-directed by faculty members James P. Hawley and Andrew T. Williams who helped guide development of the Review's issue, as well as contributing the first article. In it, Hawley and Williams introduce the topic, outline challenges and conclude with several opportunities, which I abbreviate here as follows:
The next article by Thomas, Repetto and Dias discussed development of the concept TruEVA, which subtracts from the firm's operating surplus not only its costs of capital but also the environmental damages it imposes elsewhere in the economy. They illustrate its use in a comparison of US electric power companies and found few winners. "The TRUEVA measure is useful to investment managers because it integrates a financial measure of a company's environmental exposure with a superior measure of the company's profitability." I would add that it can also be used to guide NGOs and industry leaders to determine where additional regulatory controls are needed. The third article by Gjessing and Syse take a pragmatic view in the context of a large diversified investor, Norway's Government Pension Fund Global. Although recognizing the theoretical desirability of accounting for externalities, "an investment fund would not be interested in externalities proportional to the welfare loss they represent but rather corresponding to their negative effect on value creation opportunities for the part of the economy that the fund is exposed to." "The relevant question for the investor, however, is what it will cost to effect change concerning those issues in a meaningful way." More to the point, while the investor may be concerned from the standpoint of their whole portfolio as a universal owner, arguments made to the individual company must generally be based on company specific profit maximization. The authors make several recommendations regarding the use of collaborative efforts. Thamotheram and Wildsmith delve further into the difficulties and opportunities for collaborative opportunities and call for a "pension fund futures project" among the world's largest pensions. See also, Putting the UO Hypothesis into Action. Lippman Rosan and Seitchik looks at the specific case of Why Lower Drug Prices Benefit Institutional Investors. Although the authors make a good case in the context of viewing returns as generated by the portfolio as a whole, in my read they fell short in addressing the issue raised by Gjessing and Syse. Of course, that doesn't mean shareholder shouldn't push for lower drug prices. It just means accomplishing that goal will be more difficult. Steven Lydenberg's article posits three types of investors in today's financial markets: Universal Investors, Social Investors and Rational Investors. Lydenberg creatively ties the best of each of approaches these together. Matthew J. Kiernan, proposes a "hierarchy of self-actualisation" for universal owners that moves from ignorance/denial to hollow rhetoric to action. He thinks the "lemming instinct" of the institutional investment community could work to our advantage. "Now that a handful of brave institutions have stepped forward, the next 30,000 could be a piece of cake!" Fittingly, the last article on the subject is by Robert Monks, who along with Nell Minow, coined the term universal ownership in their seminal book Corporate Governance, in 1995. Monks recounts two fundamental challenges. The first is to ensure the participation of the full spectrum of institutions in ownership initiatives. The second is to ensure the enforcement of fiduciary obligations (which Monks was so instrumental in making explicit). Monks challenges readers to "identify a single large corporation, a single foundation, a single mutual fund, a single university - and make it your business to solicit key individuals in that institution with respect to their ownership obligation." With respect to enforcement, Monks sees two possible directions. One would be to create two classes of equity security - "one entitled 'trust stock' with superior privileges to go with increased responsibilities. The other would be styled 'trading stock." The other prospect "is litigation brought on behalf of beneficiaries in a case where the fiduciary's conflict of interest has demonstrably caused damage." Enforcement seems to me the more likely path. With conflicts of interest so widely recognized, it never ceases to amaze me that no case has ever been successfully pursued. This is something I addressed at CorpGov.net in a 1995 commentary and which Monks had been addressing long before that. Some day we will get to the promised land. Trustees Must Spend on Oversight to Insure Competency Earlier this month, Best Practices for Fund Governance discussed release of Best Practice Principles by the Committee on Fund Governance. Fund governance also gets attention in Trustee Competency, a guest commentary in Pensions & Investments (6/11/07). Keith P. Ambachtsheer, Ronald G. Capelle And Hubert Lum, who have done extensive research, argue that good fund governance improves performance. Achieving it requires more education, evaluation, spending. From 1995 to 2004, they found an increase in governance score by one point on our six-point scale equaled an increase in annual performance from 0.4 to 0.8%. However, strength did not carry over to subsequent years. While more research is conducted, they offer the following advice to improve performance (abbreviated here):
See also Pension Funds, Governance, and Organization Design (PowerPoint); The Ideal Pension-Delivery Organization; Pension Fund Governance Today: Strengths, Weaknesses and Opportunities for Improvement) Shareholder Resolutions Should Require Majority Vote An editorial in Pensions and Investments (A relative threshold?, 7/11/07) argues shareholders can't "change the key rule of democracy — majority vote wins — when the votes don’t go their way." Here is are highlights:
As much as I think it is a victory when CalPERS' resolution calling for shareowner access to the proxy for two directors received 42.2% of the vote at UnitedHealth, P&I does have a point. Shareowners need to borrow from the movie line, "I'll be back." The current summer edition of Green Money Journal, which celebrates its 15th anniversary, contains insights on the future from Amy Domini, Hazel Henderson and others. Joe Keefe's “From SRI to Sustainable Investing” caught my eye. According to Keefe, SRI has historically been defined negatively, excluding “sin stocks” that conflict with the investor's values. In contrast, sustainable investment is defined positively - investing in companies that meet positive environmental, social and governance (ESG) criteria. SEC Roundtable Clips and Commentary on Corporate Democracy This week on Corporate Watchdog Radio - Is there too much or too little shareholder activism and democracy? The Securities and Exchange Commission, in recent roundtable discussions, called for reexamination of the rights of shareholders to place advisory shareholder resolutions on the corporate ballot. Sanford Lewis and Bill Baue, Corporate Watchdog Radio cohosts, play excerpts of comments from David Hirschmann of the US Chamber of Commerce, Damon Silvers of the AFL-CIO, Bill Mostyn, Bank of America, and Delaware Judge Leo Strine. Excellent commentary from Lewis and Baue offers additional insights. Subscribe via iTunes and listen as a podcast. Disparities The Corporate Library found in a recent survey that multiple classes of voting stock are in place at more than half of media and entertainment companies, but virtually absent other Household Services-related industries. Only around half of communications services, financial services and retail grocery companies have a formal governance policy posted on their website compared to 90% for residential construction and 100% for health & disability insurance. (Major Disparities in Corporate Governance Policies Continue to Exist Across Industry Groups, press release, 6/20/07) Whole Foods With so much of my own portfolio tied up in Whole Foods, I can't help weighing in on the FTC mess. Whole Food's CEO John Mackey is quoted in their complaint as telling his board: "By buying [Wild Oats] … we eliminate forever the possibility of Kroger, Super Value or Safeway using their brand equity to launch a competing natural/organic food chain to rival us. … [Wild Oats] is the only existing company that has the brand and number of stores to be a meaningful springboard for another player to get into this space. Eliminating them means eliminating this threat forever, or almost forever." Mackey's move is largely a defensive one. If Kroger or another company buys Wild Oats, Whole Foods will immediately face stiffer competition in their upscale segment of the market. If Whole Foods beats them to the punch, others will have to continue building from the ground up. Either way, Whole Foods is likely to sell a shrinking proportion of the organic market. Mackey is also quoted in the FTC's complaint saying that "Wal-Mart doesn't sell high quality perishables...that's why Wal-Mart isn't going to hurt Whole Foods." I'm sure the heads of American car companies said the same of Japanese imports. Mackey is guilty of bluster but not of attempting to form a monopoly. The headline in the WSJ says "CEO's Words May Cook Whole Foods" but the FTC should have to base its complaint on market percentages, not the boasting of its CEO. Objective analysis cannot be derived from Mackey's foot in mouth rambling. CalPERS Ups CorpGov Investments CalPERS announced allocations potentially doubling its investments in corporate governance and hedge funds, from $5 billion to more than $10 billion each. Since its inception in 1996, the Corporate Governance Program has generated annual returns averaging about 15%, compared with benchmark gains of nearly 7%. The strategy entails gaining a competitive advantage by seeding start-up corporate governance funds that invest in underperforming public companies and strengthen their corporate governance practices to improve overall performance. The Risk Managed Absolute Return Strategies (RMARS) Program, which invests in hedge funds, has a 9.5% annualized gain on investment compared with 7.4% return for the benchmark over the past five years. (press release, 6/18/07) ICGN ICGN's 12th Annual Conference and Annual General Meeting will take place in Cape Town, South Africa from 4-6 July 2007 with the support of the National Treasury of the Republic of South Africa and the Johannesburg Securities Exchange. This year's theme is "Corporate Governance - Seizing the Initiative." Back to the top Verizon Shareowners Forum Verizon shareowners have posted a “Forum” to examine the relationship of executive compensation incentives to the company’s achievement of long term enterprise objectives, as a foundation for considering investor decisions about both capital commitment and voting. According to the information posted:
Gretchen Morgenson wrote an article for the New York Times on this development entitled Hear Ye, Hear Ye: Corralling Executive Pay. (6/17/07) Gary Lutin, an investment banker at Lutin & Company, who is chairman of the shareholder forum hopes the Verizon forum will show investors how to get specifics on pay to help them to make informed investment decisions. This test could lead to examinations of other companies' pay practices. ''If you start seeing the people who buy and sell stocks asking these questions, no executive will be caught touting some business plan and then be caught having to say that his bonus is not based on it,'' Mr. Lutin said. Morgenson ends with, "perhaps directors will also pay more attention to ensuring that compensation is more closely tied to strategies executives are promoting. Every day, managers ask their boards -- as well as their shareholders -- to have confidence in their long-term business strategies. But if managers are not betting a large portion of their pay on the success of those strategies, why should investors or directors go along?" An Enron for Every Country Bruce Carton's Best in Class blog began a list of Enron's for each country. So far, he has them for Russia, the Netherlands, France, Australia, Italy, China, Japan and through reader contributions, Spain, Ireland and Germany. There must be more. (An "Enron" for Every Country, 6/11/07) Bebchuk Questioned Bebchuk’s “Case for Increasing Shareholder Power”: An Opposition sets out the view that Bebchuk’s “case for increasing shareholder power” is exceedingly weak. Theodore N. Mirvis, Paul K. Rowe, & William Savitt contend that "Bebchuk’s proposed overthrow of core Delaware corporate law principles risks extraordinarily costly disruption without any assurance of corresponding benefit; that Bebchuk’s case is unsupported by any empirical data; that Bebchuk’s premise that corporate boards cannot be trusted to respect their fiduciary duty finds no resonance in the observed experience of boardroom practitioners (perhaps not surprisingly, as the proposal comes from the height of the ivory tower), and that its obsession with shareholder power is particularly suspect (if not downright dangerous) in light of the palpable practical problems of any shareholder-centric approach." In conclusion, while the authors acknowledge there is room to consider reform in the appropriate case, there is simply no cause for revolution. The "case for increasing shareholder power" should be dismissed. Call for Better Communications Carl Olson, Chairman, Fund for Stockowners' Rights, suggests a good subject for stockowner proposals would be direct access to directors. He cites a typical access provision, which he believes provides a clear message: "Corporate officers stand between the directors and their constituent stockholders. Direct communication is not encouraged--or, in most cases, permitted--with individual directors." (Bringing Directors and Stockowners Together, The Harvard Law School Corporate Governance Blog, 6/11/07) While I'm generally sympathetic to the need for greater communication avenues between shareowners and directors, I don't find Olson's example compelling. "The Corporate Secretary will not, however, forward communications unrelated to the functions of the Boards of Directors such as individual customer complaints, mass mailings, new product or service suggestions, resumes and other forms of job inquiries, business solicitations, advertisements or surveys." This doesn't seem to preclude reasonable communication. A much better case might be made by providing examples of improperly intercepted communications. Unfortunately, Olson provides no such examples. Milstein Center Topic Line-up Next week's (6/17-19/07) Second Annual Governance Forum at the Millstein Center will focus on shareholder rights and shareholder voting. Session 1 is The Grand Bargain: Can Shareholder Participation Be a Substitute for Shareholder Protection? Topics of discussion will include: What is the proper balance between regulation and shareholder rights? What regulatory reform is needed, if any? What new rights are required for shareholders, if any? What is the area of shareholder and board “discretion”? Is Ira Milstein suggesting a grand compromise on proxy access: ending non-binding resolutions in exchange for a limited right to nominate directors? Session 2 is Votes on Pay Policies: Can CEO Compensation be Accountable?" Topics of Discussion will include: Advisory votes on pay policies now appear on every annual meeting ballot in the UK and several other markets. Can the practice work in the US to better align pay with performance? Or could the measure usher in an era of rigid, one-size-fits-all compensation design that stifles entrepreneurship? Would it push boards to focus on value creation? Or could it hand extra clout to a host of secretive hedge funds? Session 3: To Whom Are We Handing Voting Power? Topics of discussion will include: Are there differences in incentives among shareholders that influence voting behavior? Is there a conflict among the interests guiding institutional shareholders? Are institutional shareholders representing the interests of beneficiaries in the decision making? How do “owners” decide how to vote? TheCorporateCounsel.net Broc Romanek and Dave Lynn posted a summary of NYSE filing to amend its proposal to modify the corporate governance listing standards set forth in Section 303A of the Listed Company Manual with the SEC. TheCorporateCounsel.net is also hosting an important and informative live webcast today, 6/14/07, on How to Implement E-Proxy: Avoiding the Surprises and Making the Calculations. Minow to Speak in Santa Ana The Forum for Corporate Directors announced its inaugural Governance Outlook Conference and presentation of the 2007 Director Survey. Nell Minow, co-founder of the Corporate Library, will give the keynote address. Cocktails and hors d'ouevres will follow the program. July 25, 2007 4:30 PM - 7:30 PM. Millstein Center Celebrates Anniversary The Millstein Center for Corporate Governance and Performance at the Yale School of Management marked its one-year anniversary by announcing upcoming events, including:
The Millstein Center also announce expansion of its staff with the appointment of Stephen Davis, president of Davis Global Advisors, co-author of The New Capitalists (Harvard Business School Press, 2006), and editor of Global Proxy Watch, as fellow. vIn addition, three new members have been appointed to the Millstein Center advisory board: John Hill, chairman of Putnam Funds; Denise Nappier, Connecticut State Treasurer; and Joe Dear, executive director of the Washington State Investment Board. (press release, 6/12/07) Also check out their Forum. Global Warming Tackling Global Warming: Challenges for Boards and their Advisors is a great webcast co-sponsored by TheCorporateCounsel.net and the National Council for Science and the Environment. Free access to some of the best minds in the business. Highly recommended. MLPs Carry Governance Risks Moody’s suppresses the credit ratings of Master Limited Partnerships (MLPs) relative to public corporations with comparable financial metrics. Moody's believes that the corporate governance structure of a master limited partnership (MLP) carries credit risk that suppresses the credit ratings of MLPs. The separation of economic ownership from legal control inherent to the MLP structure creates risk that the general partner (GP) can use its control to extract value from the MLP to the detriment of common equity owners and bondholders. Moody's sees the general partner's control as posing five specific types of credit risk, which pose negatives for bondholders.
Disconnect Between Views on Climate and Portfolios The new “Calvert Climate Change/Alternative Energy Survey,” which was conducted for Calvert by Opinion Research Corporation (ORC) and queried 1,094 investors, found that more than three out of four U.S. investors (76%) are concerned “about global warming and what climate change could mean in terms of major changes” during their lifetime and those of their children and grandchildren. Further, nearly nine out of 10 investors (85%) agreed that alternative energy investments -- such as wind, solar and other sources of clean power -- represent a dual opportunity to support the environment and generate profit at the same time. However, only one in five investors who use a financial professional responded affirmatively when asked if they had discussed investing in alternative energy with a financial advisor. (Calvert Launches Global Alternative Energy Fund, 7/13/07, EarthTimes) Mixed Signals on Pay Stock market strength has damped investor enthusiasm for pay reform, according to some governance experts. Still, an average of 43% of shares were voted in favor of say-on-pay proposals brought by AFSCME, up slightly from last year. Yet, there is no unanimity even among such experts around what type of measure is best. Ed Durkin, director of corporate affairs at the United Brotherhood of Carpenters union says company directors can't know what to think about a simple yes or no vote on pay, because shareholders could be approving — or voting against — any number of aspects of a firm's compensation plan, including salary, retirement programs and assorted perks. (Investors reluctant to tackle exec pay, 6/13/07, LATimes) Back to the top Merger Not Termination Under ERISA The US Supreme Court ruled that corporate pension plan sponsors are free to terminate their plans even if the union representing a company’s workers offers to merge the company’s plans with the union’s multiemployer plans. “Merger is not a permissible form of plan termination under ERISA,” the high court said in a decision written by Justice Antonin Scalia. Merger "represents a continuation rather than a cessation of the ERISA regime." If Crown had extracted the $5 million surplus from its plans before merging them with PACE's multiemployer pension fund, Crown would have violated ERISA's anti-inurement provision, the court noted. (Beck v. PACE International Union, U.S., No. 05-1448, 6/11/07). CalSTRS to Set Pay to Play Standard Although somewhat reduced, the ethics standards now proposed by CalSTRS still set a high bar. The proposed rules would require trustees to recuse themselves from investment decisions involving firms that have made a contribution to them. They limit contributions to $5,000 from top officials at a single investment firm and $1,000 from individuals. Despite opposition from powerful business interests, CalSTRS expects to adopt the contribution standards in September. I expect CalPERS and others to follow their lead. (CalSTRS revises rules on pay-to-play, 6/7/07, Sacramento Bee) InvestmentNews Calls for Mutual Action According to an editorial in InvestmentNews, mutual funds are still to eager to appease management. For example, mutual funds supported management’s executive-compensation proposals 75.8% of the time, up slightly from 75.6% last year, even though median compensation of CEOs in the S&P increased 23.6% during the same period. They earned a combined $4.16 billion in 2006, with half raking in more than $8.3 million. "Mutual fund companies appear to be trying to have it both ways, appeasing shareholders by voting for shareholder-compensation-related proposals while also voting in support of managements’ compensation proposals." "It is past time for them to put their shareholders first and support such reasonable shareholder demands as a non-binding or advisory vote on executive compensation plans and compensation plans that truly are tied to long-term performance." (Funds still too eager to appease management, 6/12/07 and Half of CEOs of S&P 500 Index Firms Earned $8.3 Million-Plus in 2006, Money Management Executive, 6/12/07) Putnam Settlement Two former managing directors of Putnam Investments agreed to each pay $400,000 to settle charges of improper trading. (Ex-Putnam directors settle charges, 6/5/07, InvestmentNews) DC Demand Grows for SRI A Mercer report for the Social Investment Forum, Defined contribution plans and socially responsible investing in the United States, finds that 19% of defined contribution (DC) plans already include an SRI option and that 41% of all DC plan sponsors are not currently offering SRI options to investors but expect to be doing so within three years. 81% of plan administrators, 72% of consultants, and 47% of plan sponsors predict an increasing or steady demand for SRI over the next five years. The main forces behind this include a desire to align retirement plan offerings with the mission of the employer (e.g., a focus on corporate social responsibility), internal staff recommendations, and employee/participant requests for SRI options. Other findings include the following:
Insurance Challanges Moody’s Investor Service's report titled “North American Insurers Face Three Significant Governance Challenges,” found increasing regulation is forcing insurers to improve their governance and risk management practices. Boards, the report said, need to “engage actively with management in approving the insurer’s overall risk appetite and specific risk limits.” (Corporate Governance Changing For Insurers, 6/5/07, The National Underwriter Company) Director of Corporate Governance Wanted F&C Management Ltd. is recruiting a new Director of Corporate Governance to play a leading role in the development and execution of F&C’s shareholder engagement strategy and its integration into F&C’s investment management process. Candidates must have a minimum of 15 years of experience in the financial services industry, either directly in Corporate Governance or in a related field such as Fund Management, Investment Banking, Company Secretariat, Auditing or Law. The candidate should also have a keen interest in the social, environmental and ethical aspects of corporate governance. Interested individuals should contact: Karina Litvack, Director, Head of Governance & Sustainable Investment, F&C Management Limited, Exchange House, Primrose Street, London EC2A 2NY. Tel: +44 20 7011 4219, Karina.litvack@fandc.com
Perfect Storm Activist Investors Get More Respect and more press coverage. BusinessWeek says "boards are listening, and shareholder proposals are making headway." "While CEOs used to be able to shrug off shareholder activists, now they do so at their own risk. It is yet another sign that in the battle between owners and managers--the most fundamental governance struggle in business--investors are gaining power." The article documents rising support for investor resolutions aimed at increasing accountability. Next year could be a watershed. "Broker votes," which average about 20% of votes cast and almost always side with management, may be removed from the equation. This would give shareowners real clout at companies where a majority vote rule is in place. Say on pay is gaining and proxy access could be enacted into SEC rules. "Next year is being set up as the proverbial 'perfect storm' season," says ISS's Patrick McGurn. BusinessWeek also reports on "a unique hedge fund of funds filled with the most agitating of managers." UBS Activist Partners (UBS ), which launched in late 2006, spreads investors' money across as many as 12 different hedge funds, each led by a well-known rabble-rouser who pushes for change at underperforming companies. The minimum investment is $500,000. There's a placement fee of up to 2% and an annual asset management fee of 1.5%. All on top of the usual 20% of profits the managers of the underlying funds keep for themselves. (The Ultimate Fight Fund) Will Bush Veto Say on Pay? HR 1257, which has now passed the House, would require public companies to include a non-binding advisory shareholder vote on executive compensation packages in annual proxies so shareholders can either express their approval or disapproval. Its Senate companion, S 1181, was introduced by Sen. Barack Obama, D-Ill., the day the House bill passed in April. The measure is on a list of bills opposed by the current administration, according to a report in the California Chronicle. (President Bush Threatening to Veto and Oppose 2/3 of Bipartisan Measures, 5/13/07) Norway Leads Norway has a bigger share of female corporate directors than any other country. That achievement appears to be the direct result of legislation that requires 40% of each gender on boards by the end of this year or face dissolution, according to the Center for Corporate Diversity. Norway had 6.8% in 2002, when the law was first proposed. Of the 520 public limited companies affected by the law, 55% now meet the requirement. This compares with 14% in the US and 12% in the UK. (Norwegian Companies Add Women Directors Under Threat of Closure, 6/5/07, Bloomberg.com) It will be interesting to see if Norwegian firms change over the next few years as a result of this diversity. Myth Critiqued The May 2007 issue of the Virginia Law Review includes The Myth of the Shareholder Franchise, by Lucian Bebchuk, and five responses to it. The respondents put forward vigorous critiques to Bebchuk’s call for reforming corporate elections. Find links to this important debate on the Review's site and the Harvard Law School Corporate Governance Blog. Options May Face Bigger Tax Bite Sen. Carl Levin, D-Mich., chair of the Senate Permanent Subcommittee on Investigations, is exploring changes that might boost federal taxes - and reduce corporate profits - by scaling back companies' deductions for executive stock options. An investigation by the subcommittee's staff found a $43 billion "gap" for stock options between corporate IRS tax returns and expenses reported in financial statements for December 2004 to June 2005. During that period, U.S. public companies legally avoided billions of dollars in taxes by claiming $43 billion more in tax deductions for options awards than the compensation for options recorded on their books, the staff inquiry found. (Senator: Companies save billions with stock options gap, USAToday 6/5/07) For better coverage, see Options: More Congressional Interest, 6/5/07, TheCorporateCounsel.net Blog. Responsible Investment The United Nations sponsored Principles for Responsible Investment is only one year old, but have already grown to 183 signatories with $8 trillion in assets under the management. Responsible Investment in Focus: How leading public pension funds are meeting the challenge, jointly prepared by The United Nations Environment Programme Finance Initiative and Asset Management Working Group includes 15 case studies of pension funds, most of which are PRI signatories, and describes how pension funds are using strategies and activities from PRI. (Principles For Responsible Investment Quadruples Assets in First Year, SocialFunds.com, 6/1/07)
Climate Change Think California should be granted a waiver to the Clean Air Act to allow it to implement stricter limits on greenhouse gas emissions from cars and trucks? If so, let the US EPA know. Submit your comments, identified by Docket ID No. EPA-HQ-OAR-2006-0173 in the subject line, by one of the following methods:
Addressing climate change is going to get exponentially more expensive with further delays. USEPA notice says comments are accepted through June 15, 2007. See comments from others. From the welcome page, go to the drop-down tab for Advanced Search. Choose Docket Search. Paste EPA-HQ-OAR-2006-0173 in the Docket ID field and hit enter. (No, they don't make it easy.) Best Practices for Fund Governance The Committee on Fund Governance at Stanford Institutional Investors' Forum issued a paper outlining Best Practice Principles aimed primarily at pension, endowment, and charitable funds, which tend to have longer-term investment horizons. Several such funds have campaigned for better corporate governance. This makes them vulnerable to attack when they fail to implement best governance practices themselves. The paper notes that in 2005, institutional investors owned 67.9% of the largest one thousand U.S. public companies. The Committee focused on five key categories, which they believe view "form the fabric of best governance practices:
In a quick glance, I didn't see anything earth-shattering. However, that doesn't mean it isn't an important document. All of it appeared to be excellent advice on the most fundamental issues. I was also delighted to see inclusion of an appendix that reference institutional investors that have published fund governance guidelines, especially the link to CalSTRS, which is adopting far reaching conflict of interest reforms: CalSTRS Healthcare CalSTRS CEO Jack Ehnes testifies before the Governor's Pension Committee, giving a nice overview of teacher healhcare issues. I as shocked that 19% of the survey respondents provide no subsidies for health care coverage for any retired educator. Back to the top Some Shareowners More Equal In June 2007 the European Commission published a study submitted by Institutional Shareholder Services (ISS), Shearman & Sterling LLP (S&S) and the European Corporate Governance Institute (ECGI), on proportionality between ownership and control in EU listed companies. The Study is a key part of the Commission’s efforts to base any policy initiatives it might wish to take in this area on objective data. Some highlights of the Study are:
Here's a list of the CEMs they reviewed:
See ISS Blog, Report on the Proportionality Principle in the European Union, as well as Proportionality between ownership and control in EU listed companies – External Study for the European Commission. Don't hold your breath for a similar SEC study of US practices. Political Disclosure Twelve large U.S. companies - Pfizer, Colgate-Palmolive, DuPont, General Motors, Lockheed Martin, FirstEnergy, Xcel Energy, CIGNA, Chevron, EMC, WellPoint and Aetnarecently - have announced plans to adopt disclosure policies regarding their political spending. That increases the total to 31, according to the Center for Political Accountability. Investors submitted 62 proposals seeking disclosure of political contributions this year, up from 44 in 2006, according to new data from the Social Investment Forum, making this the most popular type of resolution this year. Institutional and individual investors have filed a record 39 “climate control” proposals this year, up from 30 last year. (Proxy bids more than hot air, Financial Week, 6/4/07) Herd Mentality When fund managers or proxy oversight committees casting votes don’t like a particular candidate, they typically won’t say “no” unless they sense that a critical mass of other funds will do the same. That's what Gregor Matvos and Michael Ostrovsky found after analyzing more than 3 million votes by 3,600 mutual funds from 2003 to 2005. “In the future, the company’s management may subtly or overtly withhold critical information about their performance that I need for trading,” Ostrovsky says. A firm that is unhappy with a mutual fund and its parent company may also deny them future pension plan management or investment banking business. There is also a bandwagon effect –– if a small number of funds decide to oppose management it becomes easier for a few other funds to do the same, which in turn makes it even easier for some other funds, and so on. Thus, small changes in the costs and benefits of opposing the management may get amplified and result in large changes in the number of “withhold” votes. (Strategic Proxy Voting, 2006) Corporate Governance in Cooperatives Proceedings report from Corporate Governance and Co-operatives: Peer-Review Workshop held in London, 8 February 2007 is now available on the web, as is a summary, Promoting Corporate Governance in Co-operatives. According to International Co-operative Alliance (ICA) and UN estimates, 1.1 billion people are members of cooperatives, and their economic activity employs 100 million people. This means that they provide 20% more jobs than all of the world’s multinationals combined. Third Roundtable ISS' publication, Governance Weekly, did a great job of summarizing the meeting in SEC Urged to Act With Caution, 5/31/07. Richard Ferlauto, director of pension benefit policy at AFSCME, urged the commission to revise SEC Rule 14a-8 to clarify that companies cannot omit shareholder proposals that seek to establish procedures allowing investors to nominate directors. He and Damon Silvers, associate general counsel with the AFL-CIO, were most vocal in warning against an overhaul of the Rule 14a-8 process to exclude all but binding proposals that relate to state corporate law matters. Ferlauto suggested strengthening shareowner rights by allowing them to override “ordinary business” exclusions if there is support from 3% percent of a company’s shareowners. Bess Joffe of Hermes Equity Ownership Services said, “If you really want to reduce the number of precatory proposals, then enfranchising shareholders with more rights ... would go a long way.” Evelyn Y. Davis called for a four-year holding period and $4,000 minimum stake to file resolutions. Broc Romanek, Editor of TheCorporateCounsel.net Blog, seems to have taken just a bit too much glee in The Evelyn Y. Davis Show, claiming she is a "must see" on the video archive. "Marty Dunn did a fair job of keeping Evelyn under control - but she did get a few good ones in, such as screaming that she is prettier than Nell Minow." It is difficult for me to understand how or why someone at the SEC decided this was the person they wanted to represent individual shareholders. One of the mission's of the SEC is to protect shareholders...maybe the point was, "look at how hard our job is...here is a typical shareholder."? Few on either side of the shareowner/management divide were ready to embrace “electronic shareholder forums," which would require full-time monitoring. Management interests on the panel were represented predictably. One of the sources for some of the trade-off ideas being floated by managers and commissioners appears to have been Leo E. Strine, Jr.'s Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance. The paper presents the Vice Chancellor’s recent remarks at the Spring Banquet for the Journal of Corporation Law at the University of Iowa College of Law. It will appear in the Journal of Corporation Law, with responses by a number of prominent commentators. AVI Shareholder Advocacy Trust Richard Macary, Managing Trustee for the AVI Shareholder Advocacy Trust, provides a fairly comprehensive update on AVI's annual shareholder meeting in Corvallis on May 22nd. Here's just the final two paragraphs, to give readers the flavor:
It's a CalPERS World Nice article in the 5/17/07 Sacramento News and Review, It's a CalPERS world. "Nations from all over the globe are appealing to California’s public employees’ pension fund to invest in their countries? A multinational drug company is going to be called on the CalPERS carpet for its actions in Thailand? And this is just another day at the office?" Yes, this Sacramento institution is of worldwide importance and reporter Ralph Brave tells locals some of the reasons why. Chevedden Reports Direct from John Chevedden, America's most prolific shareowner, in terms of resolutions. These are what Chevedden calls "strong votes on recent holder proposals." Lowe’s (LOW): 72% for Annual Election of Each Director by J. Chevedden These are recent approval votes on binding company proposals that started as 'Pinnacle West (PNW) Annual Election of Each Director: The 2006 proposal on this topic by E. Rossi won 82%. In the News CorpGov.net publisher, James McRitchie, quoted in Wellpoint forces CFO to resign, IndyStar.com, 6/1/07. Zillionaire Beats Ethical Considerations at Stanford I attended the second in the Stanford Law School Fiduciary College Seminar Series on May 30. Five minutes before the panel was to start, it looked like I might be the only one in the room that wasn't either part of the presentation or member of staff. It was quite a different turnout then we had seen for multi-billionaire Sam Zell. I guess Ethical Considerations for Fund Legal Counsel and Trustees in an Environment of Increased Criminal Liability of Fund Fiduciaries, isn't as attractive to law students as learning about what drives private equity. That's really too bad because this seminar actually dealt with tangible issues and provided advice on a subject that law school graduates will likely encounter in their careers. No, this wasn't a gathering of zillionaires but these weren't slackers. All were financially well off. Like Jack Bogle, founder of Vanguard, they "have enough." In a way, I hate to mention the poor attendance because it provided me, and the several others who turned out at the last minute, ample opportunity for "intimate conversation with industry experts," as billed. Unfortunately, you won't find most of these conversations on webcast. Still, I can't help but think we would all be better off if future panels are better attended. Our future may depend on it. Also at Stanford, be sure to subscribe to the informative weekly-email of recent filings of complaints in the area of securities class action litigation put out by the Stanford Law School Securities Class Action Clearinghouse. You might also consider registering for their 13th annual Directors' College, which "brings together leading CEOs, directors, jurists, scholars, and regulators for a rigorous and balanced examination of corporate governance, strategy and compliance at a venue that has become the premier program for director education." Sunday, June 24 - Tuesday, June 26, 2007. Treat Them Like Owners Activism pays, acording to a study published last y | ||||
by Andrew Inkpen and Kannan Ramaswamy integrates academic research and case studies to inform readers about global avenues to competition. Political instability, corrpution, inadequate infrastructure, and closely knit ownership structures are addressed. For example, readers are advised that leapfrogging offers the best window for an MNE to bypass poor physical infrastructure - as in widespread diffusion of cell phone use. Direct state ownership often means partnerships must pursue agendas not directly relevant to shareholder wealth maximization. Family control may emphasize profitability over growth. 