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Current News and Commentary. January 2007, February 2007, March 2007, April 2007, News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest, updated 5/25/07. Your ad clicks help pay the bills. Access Supported by 42.2% at UnitedHealth Group CalPERS and CalSTRS urged the UnitedHealth Group to affirmatively respond to owners of $28 billion in stock who voted for a nonbinding proposal seeking investor access to board election ballots. A similar, but binding, proxy access proposal at Hewlett Packard received a 39% or 43% support, as reported by various sources, in March. Supporters including major proxy advisory services said proxy access is needed to give shareholders meaningful choices among candidates who now serve self-perpetuating boards where incumbents select nominees and decide whether to re-nominate themselves. Few candidates whom shareowners propose for company nomination slates ever get on the ballot under current rules, and nominations of alternative candidate slates are prohibitively time-consuming and expensive. CalPERS Joins $1.1 Trillion Group Opposing ExxonMobil Member CalPERS, which owns 30 million shares of ExxonMobil stock, has joined a group of more than two dozen institutional investors seeking the removal of ExxonMobil board member Michael Boskin due to the company’s inaction on the business risks from climate change. Boskin chairs the board’s Public Issues Committee and his reappointment will be decided at the company’s annual corporate meeting in Dallas. On governance issues, ExxonMobil opposes Robert Monks' resolution that asks the company to separate the jobs of chairman and CEO. It opposes a proposal from Lucian Bebchuk, a Harvard Law school professor and prominent critic of excessive CEO pay, asking the company to give more power to its independent directors to approve executive compensation. It doesn't want to give shareholders a vote on executive comp, either. (Calpers joins groups pressuring Exxon Mobil on warming, Dallas News, 5/29/07; ExxonMobil: Profits and discontent, Fortune, 5/29/07) Check Your University's Endowment The Sustainable Endowments Institute announced grades of "A-" highest cumulative sustainability grades for Harvard University, Stanford University, Dartmouth College, and Williams College. In addition, 26 schools received an average grade of "A-" or better upon assessing only campus operations. The Sustainable Endowments Institute helps demystify the shareholder engagement process by undertaking research and offering on-campus presentations, trainings and mentoring to provide step-by-step support for schools exploring active shareowner options. The nation's colleges and universities have more than $350-billion sitting in endowments. Yet many people interested in issues of sustainability on well-endowed campuses give no thought to what their academic institution is doing with its endowment. Get involved. Cheating Advisors Of the 100 financial advisers interviewed for a survey by Vestment Advisors, nearly 20% said they knew of someone who knowingly had violated compliance rules and regulations. Cited were cheating on computerized training, signing account forms for clients, not sending e-mail to the compliance officer for review and not processing checks the day they were received. Forty-five percent of the respondents, which also included fee-only advisers, branch office managers and compliance supervisors, answered “yes” when asked if they were concerned that an investor would file an arbitration compliant or lawsuit against them. (Advisers often skirt compliance rules, survey finds, Investment News, 5/29/07) Few Understand Basic Investing Principles The MoneyTrack/IPT Investing Secrets Survey (5/10/07) Money-Track surveyed investors on eight basic investing principles:
Just 1% of the respondents understood all the basic principles. Given investment swindle scenarios, such as the opportunity to invest in an options-trading system with guaranteed returns of at least 100%, 43% of investors said they would take the bait. Almost two out of five investors 37% are relying on Social Security for “the biggest part” or “a fairly big part” of their retirement picture. Only 23% of college graduates are expecting to rely heavily on Social Security versus 71% of those with only a high school degree. 35% incorrectly “think a 25-year-old American is MOST likely to come up with a half-million dollar or one-million dollar nest egg for retirement” via an inheritance (21%), winning the lottery (10%) or a major insurance settlement (4%). Fewer than 58% know that “investing in the stock market over the time” is the best path to a comfortable retirement. 63% of all survey respondents said that they were investors. Just 39% understand that a penny doubled in value every day for a month is worth more at the end of that period than a million dollars today. Only 39% understand that diversification is "balancing both risk and return in pursuit of financial returns." A third of investors who have used a financial planner or stockbroker have ever checked out the background of that person with state, federal or industry regulators or self-regulators. Fewer than three out of five understand that stocks had “the best returns over the last 20 years.” Nearly a quarter incorrectly thinks that savings accounts and CDs returned the most and 10% said bonds. Those aged 18-24 were more than three times as likely to identify savings accounts as better for returns than stocks. African Americans (37%) and Hispanics (42%) were considerably less likely than whites (61%) to know that best long-term return comes from stocks. Rule Changes Rule changes that let companies provide shareholders with proxy materials via the Internet using a “notice and access” model take effect July 1. Companies must post proxy materials online and send notices to shareholders at least 40 days prior to the meeting. NYSE amended their proposal to ban certain broker votes to exclude mutual funds, according WSJ. The Investment Company Institute voice its opposition to inclusion of funds in the ban at a recent SEC roundtable. The Securities and Exchange Commission announced it will host a roundtable discussion on June 19th on issues surrounding Rule 12b-1 under the Investment Company Act of 1940, which permits mutual funds to use fund assets to finance distribution of their shares. "When the Commission adopted Rule 12b-1 more than a quarter century ago, the idea was that 12b-1 fees would be a temporary solution to address specific distribution problems, as they arose. But today's uses of 12b-1 fees have strayed from the original purposes underlying the rule, and it is time for a thorough re-evaluation," said SEC Chairman Christopher Cox. "This roundtable will help us review current uses of 12b-1 fees, how those fees impact retail investors, and the interests and concerns of independent directors, who must approve 12b-1 plans. The roundtable also will help us identify and evaluate the possibilities for reforming Rule 12b-1." The 500 largest money management firms saw their worldwide institutional assets under management climb 14.3% and their U.S. institutional tax-exempt assets jump 15% last year, according to Pensions & Investments’ annual money manager survey. Following a 13.5% advance in 2005, the latest gains lifted the top 500 managers’ worldwide institutional assets under management to $24.578 trillion. The top 500 managers of U.S. institutional tax-exempt assets ended 2006 at $11.826 trillion. (5/28/07, P&I) Heightened Scrutiny for Proxy Advisors Recent departures of two key staffers at Glass Lewis, which has 300 clients representing $11 trillion in assets, have sent the No. 2 proxy adviser to the intensive care unit, according to a report in Financial Week. Shattered Glass: Proxy adviser has its back to the wall 5/28/07), quotes competitors on efforts to get customers to jump ship. Financial Week notes that ISS reports having 1,729 clients, with total client assets of $25.5 trillion. "Talk of an initial public offering—ISS was purchased by RiskMetrics Group, a risk management company, late last year—could add the same risk and heightened scrutiny Glass Lewis is now facing," the article notes. Proxy Voting: More Than Mechanics The SEC held its roundtable on 5/24/07. When available, they will post a transcript and webcast archive. Ted Allen, with ISS, posted some observations on their blog. The recommendations on broker voting appear to have broken into three categories:
The Investment Company Institute, which represents mutual funds, said the NYSE rule change should not be applied to funds, which already have difficulty meeting quorum requirements. (Yes, they have more retail shareowners but another probable reason is that most mutual fund boards do substantially less in the way of productive oversight than other corporate boards; so why bother voting?) He warned that solicitation costs for mutual funds would more than double if they were not exempted. Client-directed voting is the least understood of the options. It appears to have been proposed by Stephen P. Norman and the Society of Corporate Secretaries and Governance Professionals (see New Model for Director Elections: Client Directed Voting), and is reportedly favored by Commissioner Paul Atkins. Atkins is the one who appears to have argued that although back-dating executive stock options does create a windfall for executives, that's a good thing, since companies are then able to compensate their executives more cheaply. They can issue fewer stock options or provide lower salaries. So by timing stock options, companies end up saving money, and investors pocket the savings. (SEC Commissioner Paul Atkins Wins the Prize, Robert Reich's Blog, 7/11/06) Devolution of law and economics movement? We should probably just go ahead and eliminate broker votes, especially given the choices currently proposed by Norman, which include only: a) Vote as management recommends However, it might be educational to have further discussions on this topic. Only someone who strictly adheres to the Wall Street Rule (if you don't like how the company is governed, sell) would choose option a. Option b must be for wealthy bomb-throwing radicals who think all businesses are bad but can't find anywhere else to invest. Option c says, "I'm not voting but count me as having voted anyway." (How many legs does a dog have if you count the tail? Four. Counting the tail doesn't make it a leg.) The last two options are a little more interesting and could lead investors to include governance reputation as one factor in choosing a broker. Following the SEC's enactment of rules in 2003 requiring the mutual funds and investment advisors disclose votes and voting policies, there has been some excellent research and reporting on mutual fund voting. (see Using Mutual Fund Proxy Voting Data to Promote More Conscientious Voting, Mutual Funds Inch Toward More Conscientious Proxy Voting on Social and Environmental Resolutions, Fund Votes, and Mutual funds putting 'more effort' into proxy-voting process, IR Magazine) Where is there similar analysis for investment advisors? Serious discussion of client-directed voting could also lead to development of additional options. Andy Eggers has formed a entity, Proxy Democracy. One of its projects is tentatively known as My ProxyAdvisor. Here's part of what he posted as a brief description:
Taking Egger's system one step further would be to facilitate the retail shareowner's ability to transfer their voting rights to a fund with "similar voting philosophies." I've begun some work on this because it seems simple, I think the demand would be there and it could develop greater competition around voting reputation around environmental, social, and corporate governance (ESG) issues. A step further in ease of use, if not development, 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). Elimination of broker voting just takes 60-70% of retail shareowners out of the picture. It doesn't address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at the shareholder's racetrack? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? Norman's idea of client-directed voting, my idea of facilitating the retail shareholder's ability to transfer voting rights, and Holton's idea of a proxy exchange all facilitate the lazy shareowner's ability to make slightly more intelligent decisions based on reputation, although I'm not sure Norman's idea currently offers enough choices to get there. The system being developed by Eggers will still require a fairly conscientious shareowner because they will still need to vote each individual holding. His system, which facilitates the owner's ability to learn how others are voting, may not appeal to the lazy shareowner who doesn't want to go through the voting mechanics. However, like other systems, it could lead to further differentiation of choices through reputational development. Another option around proxy voting would be to facilitate the ability of shareowners to collectively hire entities to research the issues and advise them. This gets not only to the key issue of educating shareowners, but also furthers research...our ability to discover the facts. Institutional investors and wealthy individuals can already avail themselves of the services of investment advisors and of proxy monitoring firms, such as ISS, Glass Lewis, and Proxy Governance. However, as Mark Latham of the Corporate Monitoring Project notes, ISS makes recommendations for more than 10,000 U.S. companies with a research team consisting of more than 20 analysts. He estimates they devote an average of about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. "Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting."
The free-rider issues associated with shareholder individually obtaining proxy services is eliminated under the collectively hired proxy monitor option and the multi-year process of selecting proxy advisors may encourage better informed shareowners to become long-term investors. Latham has tried to implement his proposal at companies via shareowner resolutions. Another variant would be to have the company voluntarily put a resolution on their proxy that allows shareholders to choose to spend say $25,000 of corporate funds to have ISS, Glass Lewis, The Corporate Library and/or some other entity to analyze the following year's proxy issues. Whatever sum, it could be more than such an entity would normally spend on research but much much smaller than investors would collectively have to pay to obtain such a report. A firm undergoing rehabilitation might be the first to seek such services for their shareowners, since they could expect a favorable report of improvement. Perhaps further discussion prompted by the SEC's roundtable can more beyond proxy mechanics to encompass these larger issues.
Chevedden Reports John Chevedden checked in to report "strong votes on recent holder proposals." Time Warner (TWX): 79% for Simple majority vote by W. Steiner. 64% for Right to call special shareholder meetings by K. Steiner Allstate (ALL) Simple majority vote: The 2006 proposal on this topic by E. Rossi won 72%. Back to the top NYTimes: Compensation Committees Have Some Explaining to Do A New York Times editorial says the board of directors at Verizon shouldn't ignore the recent successful vote of their shareholders to give them an advisory vote on compensation packages for top executives. "Ignoring this message would likely give impetus to the legislation in Congress, which is not the place to set corporate salaries, or prompt shareholders to return with a binding proposal." The editorial goes on to call on corporate boards to better explain their decisions regarding compensation. "That explanation should include the extent of financial relationships with the consultants making recommendations on executive pay. The post-Enron reforms forced boards to eliminate conflicts of interest among auditors, investment bankers and others. But little was done to address conflicts of interest among pay consultants who may have other lucrative contracts with the same companies — and strong incentives to please the top executives." (A Say on Executive Pay, 5/26/07) Apollo, From Greek God to Poster Child Gavin Anderson, chairman and co-founder of GovernanceMetrics International, which grades 4,000 companies on governance issues, calls Apollo Group, which operates the University of Phoenix, the "poster child of poor governance." As reported by WSJ, "issues include the company's use of a dual-class of stock, and low marks for not filing a proxy statement, though that isn't required for a company like Apollo, whose shares are controlled by a single person -- in this case founder and acting Executive Chairman John Sperling." (Making Sense of the Risks Posed by Governance Issues, 5/26/07) Management Always Wins the Close Ones The following is an abstract of a draft paper with the above title by Yair Jason Listokin posted at SSRN:
One of Listokin's more interesting recommendations is that vote counts be publicly available as they come in. On May 2, 2007 Professor Listokin blogged on his paper at prawfsblawg. Beth Young, of The Corporate Library, provided a very simple but powerful explanation in addition to those already considered by Listokin for why management appears to win the close ones. "It is not unheard-of for a company to withdraw a management proposal that has already appeared in the proxy statement and been voted on by shareholders if it looks like the proposal will not pass. The effect of this withdrawal is that the vote will not be officially tabulated and reported, thereby removing a sub-50% result from the sample." ESG Factors Compiled by ISS ISS announced availability of its global Sustainability Risk Reports database. "Drawing on an extensive set of over 400 environmental, social and governance (ESG) factors, ISS' in-depth company profiles offer rich qualitative analysis combined with a relative scoring system to help investors assess companies’ ESG performance and compare against industry peers." According to John Deosaran, ISS’ Vice President of ESG Analytics, "with ISS’ Sustainability Risk Reports database, investment managers can identify those ESG factors that best align with their client-driven mandates, and determine appropriate investment weightings, turning compliance priorities into a competitive edge." ISS' sustainability scoring factors encompasses key areas such as carbon emissions, energy use, labor standards and ethics. ISS also analyzes each company’s disclosure practices, adherence to ESG policies and its Board’s oversight of ESG issues. Blood and Gore Interesting interview in the 5/23/07 McKinsey Quarterly with David Blood and Al Gore who discuss Generation Investment Management, which "engages in primary research that integrates sustainability with fundamental equity analysis." Blood says recent adoption of the UN’s Principles for Responsible Investment by asset owners and managers representing over $8 trillion is a good example of the institutional-investment community beginning to commit to a long-term time horizon and the explicit recognition that environmental, social, and governance factors drive value creation. According to Gore, "changes that we’ve associated with very long cycles are now foreshortened and are occurring much more rapidly. Positioning a company to ride out these changes and profit from them often means making stretch investments to change the infrastructure, change the energy source, change the physical plant, and adapt to the new realities." " I recently spoke at a conference, in Copenhagen, focused on carbon trading, with thousands of companies represented. As part of an internal survey, attendees were asked how many of them had internalized their “carbon budget” and begun to drive down their internal emissions. A year ago it was 15 percent. This year it was 65 percent." "As stewards of shareholder interests, boards should be focused on the long-term sustainability of the firm rather than on the market noise." Taming the Giant Corporation The Center for Study of Responsive Law presents a conference on Taming the Giant Corporation, June 8, 9 and 10, 2007. The conference's central, pioneering task is to facilitate discussion, debate and strategic thinking about how to subordinate corporate power to the will and interests of the people. How do we replace the excessive corporate privileges and immunities entrenched in law and the economy? What tools and approaches can empower communities to set parameters on corporate activity? What countervailing institutions should be nurtured to offset concentrated corporate power? Register. Speakers include: Gar Alperovitz - Author of America Beyond Capitalism and Professor of Political Economy, University of Maryland; Lois Gibbs - Executive Director, Center for Health, Environment and Justice; Amy Goodman - Host, Democracy Now!. Alisa Gravitz - Executive Director, Co-Op America; Mark Green - President, Air America Radio; Richard Grossman - Historian and Educational Director for the Community Environmental Legal Defense Fund; Robert Monks - Chairman, Governance for Owners, and Author of the forthcoming Corpocracy; Ralph Nader - Consumer Advocate; Damon Silvers - Associate General Counsel for the AFL-CIO; and many others. CEO Study Released Booz Allen Hamilton released its study, CEO Succession 2006: The Era of the Inclusive Leader, analyzing 2006 CEO turnover at the world’s largest 2,500 publicly traded corporations and the links between CEO tenure and corporate performance, comparing major regions and industry sectors. Key findings include:
Booz Allen studied the 357 CEOs of the world’s largest 2,500 publicly traded corporations defined by market capitalization who left office in 2006, and evaluated both the performance of their companies and the events surrounding their departures. To provide historical context, Booz Allen evaluated and compared this data to information on CEO departures for 1995, 1998, 2000, 2001, 2002, 2003, 2004 and 2005. SEC Announces Panelists The SEC announced panelists for the agency's May 24 and 25 roundtables on the proxy voting process. Yes, I'm biased, but the list appears to be very light on those representing shareowners, although most of the few included are very good. Read comments. US Shareholders Falling Behind Europe Shareholders in Europe "are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07) The report goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads and the argument that wins may focus on short-term vs long-term gains. However, Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, addresses the later issue saying sacrifices for short-term gain would remain exceptions because it was in the interest of short-term investors to sell their shares at a profit, and they could do so only if they found new investors who believed in the long-term potential of the revamped company. In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors' Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education. Although their goals include helping their members to "learn, share, grow and more fully experience the rewards of investing success," I find no mention on their site equivalent to the UK Shareholders' Association's vow to "protect your rights as a shareholder in public companies and promote improved standards of corporate governance." It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers. Arbitration Study Brokers have the upper hand in arbitrations versus investors, that's the preliminary conclusion of a 10 year study. Investors won less frequently over time. The high point of wins for investors in the study was in 1999, when 59% of arbitration cases resulted in some kind of award to investors. That percentage declined to 44% in 2004. Also, the bigger the claim and the bigger the broker, the less likely the recovery. Seth E. Lipner, a partner at law firm Deutsch & Lipner in Garden City, N.Y. says the most egregious conduct comes out of small firms, while he categorizes violations at big firms as "more negligent conduct." Second, big firms can afford to settle cases that have merit, and most times, they do. (Advisors Score Big in Arbitration Study, OWS Magazine, June 2007) For more on the severe problems with NASD arbitration and questionable SEC oversight, see Les Greenberg's petition to the SEC. Best Practices Environmental, social and governance factors (ESG) factors are shaping investment decisions for portfolios well beyond those labeled as "SRI Funds." "Even among the traditional SRI community, longtime leaders have shifted from the traditional approach to one in which they are focused on identifying companies that are leaders in operating their businesses in a sustainable manner based on the notion that these companies will be long term winners—in both sustainability and performance," writes John Deosaran, ISS Vice President, ESG Research Analytics. (Uncovering the Hidden Risks and Opportunities Associated with ESG Research and Scoring, ISS Corporate Governance Blog, 5/23/07) Recent articles in the New York Times and the Washington Post are missing the point. It is now less about screening out sin and more about investing in best practices. Rich Worries "I have the $5 million jet. I want the $10 million jet," says Russ Alan Prince, who has studied the wealthy for more than two decades. But he doesn't see it as greed. Rather, he says, it's simply a reflection of what everyone at every income level wants: something more. " 'Greedy' is the wrong word,'' Prince says. "This is not a bad thing. This is the capitalist model. The desire to keep moving up, to enhance their lifestyle, is critical to having this entrepreneurial society.'' Learn What Worries The Rich? (Forbes, 5/23/07) Proxy Advisor Concerns MMExecutive ran a editorial drawing attention to the fact that "mutual funds, pensions and other large shareholders that rely on two large proxy advisory firms, Glass Lewis and Institutional Shareholder Services, are concerned that new ownership at the businesses might be affecting the quality of the advice they impart, The Wall Street Journal reports." We recently posted news of resignations at Glass Lewis. "The concerns at ISS, which RiskMetrics acquired late last year, are that should RiskMetrics go public, as it is considering, it could beef up its corporate governance consulting business, which would mean it could be more inclined to side with management." (Shareholders Concerned About Quality of Proxy Advice, 5/23/07) Two Million Call for Screening at TIAA-CREF At their mid-May meeting, the 1.3 million member American Federation of Teachers (AFT) passed a resolution very similar to the one passed by the New York State United Teacher's union. The resolutions ask TIAA-CREF to add investment screening on issues of human/labor/civil rights, and to engage their portfolio companies on these concerns, specifically noting industry leaders Wal-Mart, Nike, and Coca-Cola. Irony in Blackstone Buy This, from David Webb, who runs an independent non-profit commentary on Hong Kong's corporate and economic governance known at webb-site.com: "Perhaps the funniest thing about the Chinese Government investing in Blackstone Group's forthcoming IPO is that they will get "non-voting common units". Rather like their own people, really." (China to Buy a Stake in Blackstone, NYTimes, 5/21/07) New Board Recruiting Tool Perhaps since fewer CEOs are available to sit on other boards, perhaps for other reasons, NASDAQ rolled out a system that connects potential board member candidates with boards seeking directors in both public and private companies. Candidates and boards will only be matched once mutual interest has been established to ensure that subsequent conversations are "relevant and productive." According to NASDAQ, Board Recruiting is designed to
This positive development could potentially help boards find candidates with any unique skill they seek. Additionally, although it does not appear designed to do so, shareholder groups may also be able use the tool to search for potential director nominees to suggest to nominating committees or to run themselves, although I haven't been able to confirm that prospect with Board Recruiting. We also added a link to Board Recruiting on our Links page at http://corpgov.net/links/links.html#boards. Back to the top Smoking Gun on Broker Votes Provides Incentive for Reform Roger Headrick's "win" at CVS/Caremark, based on a margin decided by broker votes, is sure to lead to additional calls for a New York Stock Exchange rule change to bar brokers from casting uninstructed investor votes in board elections, reports ISS. "Before this proxy season, all of this was theoretical," William Patterson, executive director of the CtW Investment Group, told Governance Weekly. At CVS/Caremark, "the broker votes were decisive and that's clear." ISS reported that "it appears that 232.852 million broker votes were counted in Headrick's election for his vote total to reach 1,059.76 million. Those 232.852 million votes exceed the 153.41 million difference between the 'for' and 'against' votes that the company reported that Headrick received." The report also quotes sources at the Council of Institutional Investors saying these votes "taint the integrity of the proxy voting process by stuffing ballot boxes for management." Under current NYSE rules, brokers may vote on "routine" matters with shares from clients who do not provide voting instructions at least 10 days before a scheduled company meeting. While shareholder proposals and equity incentive plans are not considered routine, director elections still are. If approved by the SEC, the NYSE proposal to amend Rule 452 and eliminate broker discretionary voting for director elections would apply to annual meetings held after Jan. 1, 2008. (CVS/Caremark Vote Fuels Investors’ Demands to End Broker Votes, ISS 5/22/07) In addition to reforms such as ending broker votes and obtaining proxy access, we need mechanisms to facilitate the ability of shareowners to collectively pay for independent proxy research so we have the information needed to make informed decisions, to pay for advocacy, and to ease the burden of voting. On the education front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Richard Macary's AVI Shareholder Advocacy Trust presents one of the most innovative mechanisms to combine small shareowners to advocate changes in corporate governance. To ease the burden on voters, Andrew Eggers is working to facilitate the ability of shareholders to determine how trusted institutions plan to vote or have voted (see My ProxyAdvisor and ProxyDemocracy), while Glyn Holton has outlined how a "proxy exchange" could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). Duke Dominates Customized Executive Education 678 companies participated in FT's 2007 ranking of customized executive education – designed for a specific company. Duke Corporate Education, which ranks number one in customized education for the fifth year in a row. Schools with an internationally diverse faculty and a global outlook are top of the list of demands according to this year’s survey, as is a growing demand for work on leadership. IMD in Switzerland placed second. Rounding out the top five were Harvard, Iese Business School (Spain) and Babson Executive Education. (Schools get a lesson in listening to their clients, Financial Times, 5/14/07) First Corporate Governance Billionaire Jennifer Mann, of The Kansas City Star, provides a nice bio of Richard C. Breeden, a major shareholder in Applebee’s International, a local firm targeted by Breeden Capital Management. Breeden started out in 1981 as executive assistant to the undersecretary of labor but, as a close friend of the Bush family, rose in power and served from 1989 to 1993 as the chairman of the SEC. Breeden generated criticism when the regulatory agency took no action after now-president George W. Bush was investigated for insider trading after selling a large block of stock in Harken Energy Co. while he was a board member. After leaving the SEC, Breeden set up a consulting firm that specialized in corporate governance, investigating some of the most notorious corporate scandals. He was appointed corporate monitor of WorldCom and other companies by federal authorities and companies themselves. At WorldCom, he earned an estimated $2.3 million for 21 weeks of work, billing $800 an hour. One investigation involved Canadian-born, British-knighted media baron Conrad Black, now on trial in Chicago for allegedly misappropriating $400 million from newspaper company Hollinger International. Canadian weekly Macleans published an article in March titled “How Richard Breeden Became the World’s First Corporate Governance Billionaire.” If you're interested in either Applebee’s or Breeden, check out Applebee's a target with appeal, 5/21/07. RiskMetrics Mulling IPO RiskMetrics Group, which owns proxy advisory firm Institutional Shareholder Services, is considering an initial public offering and is shopping for an investment bank, according to a report in The Wall Street Journal. The move comes after RiskMetrics bought ISS for about $553 million in cash and stock last year. The company may float its IPO as early as the fall, according to people familiar with the situation cited in the report. According to the WSJ, "shareholder clients worry that pressure to generate revenue for a publicly traded RiskMetrics could prompt ISS to bolster its consulting services, which could result in it siding with companies' management more often in voting decisions." "The question is, will the short-term needs of shareholders for value influence the voting policies of ISS?" said Richard Ferlauto, director of pensions and benefits for AFSCME. (Proxy-Advisory Firms Encounter Concerns on Owners' Influence, 5/22/07; RiskMetrics Considers Going Public, 5/21/07) People in Glass Houses Glass Lewis' managing director and research editor, Jonathan Weil who was the first reporter to blow the whistle on Enron, quit. His resignation letter reportedly included the following: "I am uncomfortable with and deeply disturbed by the conduct, background and activities of our new parent company Xinhua Finance Ltd., its senior management, and its directors. To protect my reputation, I no longer can be associated with Glass Lewis or Xinhua Finance." Glass Lewis' head of research, Lynn E. Turner, also quit. According to a report in Barrons, "Xinhua Finance Media's IPO prospectus failed to mention some awkward facts about the company's then-chief financial officer, Shelly Singhal. The 39-year-old Singhal was simultaneously the company's CFO and an investment banker and stock broker who runs the Newport Beach, Calif., firm Bedrock Securities. And since April 2006, Singhal's firm has been under a cease- and-desist order from the National Association of Securities Dealers, as the regulators seek to suspend Bedrock for violating several SEC rules." (Ignoring an Inconvenient Truth, Barron's, 5/19/07 and reprinted at MarketWatch.com) Glass Lewis announcement of Turner's resignation said the company was forming a research development council to "ensure that Glass Lewis' research continues to meet the quality standards, objectivity and independence criteria set by Mr. Turner" and other current research team leaders. (Shattered Glass (Lewis)?, CFO.com, 5/22/07) Pay for Failure You're fired! Take these millions and go, provides a list of several exit pay packages the CEOs in Minnesota-based companies have "negotiated." Lipton's Firm on Offensive Wachtell, Lipton, Rosen & Katz, the law firm that developed the "poison pill defense" to ward off hostile takeovers in the 1980s, is now going on the offensive against activist funds. In a memo the firm clients to “[b]e aggressive and prepared to litigate or inform regulators immediately if there is evidence that funds have violated securities laws—including by failing to disclose the formation of a group, the identities of the group members, and/or the group’s intention.” Companies cannot seek monetary damages under 13(d), but the allegation can lead to other claims, including securities fraud. The 13(d) claim also can create a basis on which to grant a preliminary injunction against the activist funds. The allegation that the funds may have violated securities law also can be used in the public relations wars. Additionally, if “group” activity is found, a claim could be made for profit disgorgement for short-swing trading under section 16(d). When an activist investor, such as Relational Investors, starts pressuring a corporate board to take an action, it’s not unusual for others to follow suit as well. According to Elayne Demby, writing for PlanSponsor, "these activities may look sufficiently coordinated to support the allegation of 'group' activities. The issue is not so much whether or not the company actually can prove that group activity exists that requires a 13D filing, only that there is enough of an appearance of group activity to file a complaint." Richard Koppes is quoted, saying, "Companies tried to use the 13(d) argument on public pension funds 18 years ago, and it did not work then. It is now well established that just because funds agree on a position with respect to a company does not mean that they are acting as a group.” (Running the Fund: Warding Off Activists, 5/21/07) Public Boards Can Learn from Private Companies One of the advantages private companies seem to have over public companies that they pay CFOs, treasurers, controllers and other top financial executives much less than their public company counterparts. According to a study released by Financial Executives International, CFOs at public companies start with salaries $75,000 higher, or as much as 43%, than those of their counterparts in the private world. The median base salary of a public company CFO is in the $251,000 to $275,000 range, compared with $176,000 to $200,000 for a private company CFO. The disparity in bonus payouts is as high as 89%. The typical public company CFO surveyed by FEI receives an annual bonus equal to 41% to 50% of salary, compared with the typical private company CFO, who received between 31% and 40% of salary. Not only are finance officers paid less in comparably sized private companies, they also report having more diverse duties. (Public vs. private salary gap: 43%, Financial Week, 5/21/07) The survey does not appear to have included CEOs. Shift From Accumulate to Income 88% of advisers at the Allianz Income Management Services Summit said that their clients’ major priority now is creating income at retirement. 69% of advisers surveyed said they thought that purchasing an annuity was the best way to provide guaranteed income. "Retirement income will be the market for the 21st century,” according to Robert W. MacDonald , CEO of Allianz Income Management Services. “The companies that can solve this problem will emerge as the leaders.” (Survey shows retirement shift, Investment News, 5/21/07) Mid-Season Proxy Review ISS posted an informative U.S. Mid-Season Review. Support for advisory vote proposals has averaged 42.5% over 18 meetings this year, better than the 40% average support the issue earned at seven meetings in 2006. Support for majority voting has averaged 54.7% at seven meetings, up from 47.7% average support in 2006. Shareholders are showing greater support for proposals that target takeover defenses, such as "poison pills," classified boards, supermajority requirements, and dual-class equity structures. Long-Term Shareowners Put Investors In Their Place: Why pander to people who now hold shares, on average, less than 10 months?, looks like another salvo from the Business Roundtable to justify CEO domination of American business. "Stakeholder" capitalism typically leads to reduced accountability, since employees, customers, communities and long-term shareowners have few mechanisms or forums through which to resolve their differences...other than through elected officials who so frequently are in the pockets of the BRT or Chamber because of their constant need to raise money. However, at closer examination, the views expressed by Clayton M. Christensen and Scott D. Anthony in the 5/28/07 edition of BusinessWeek provide food for thought. To avoid pandering to shareholders that speculate on short-term swings, the authors advise that companies be organized as private conglomerates. They point to Tata Sons in India, Li & Fung in Hong Kong and Cox Enterprises in the US. However, my guess is that at some point the progeny of Barbara Cox Anthony and Anne Cox Chambers, worth $12.6 billion each according to Forbes Magazine, will eventually want the liquidity that comes from going public. However, I agree with pundits Christensen and Anthony: we need to find mechanisms to ensure companies are not governed by gamblers and speculators, be they shareowners or managers. Taking companies private may provide a solution for some, but other options should be explored. The European Corporate Governance Service (ECGS), for example, recommended that shareholders approve Royal DSM NV's proposed introduction of a 'loyalty dividend' of 10% to shareowners that hold for a minimum of three years. (DSM loyalty div scheme wins backing from European corporate governance watchdog, Forbes, 3/14/07) Although DSM stressed the loyalty dividend would not be at the expense of the normal dividend nor would it interfere with the one-share-one vote principle, Franklin Mutual Advisors took legal action. The Enterprise Section of the Amsterdam Court of Appeals ruled that DSM would not be allowed to put the proposal to the AGM because, according to the Enterprise Section, the proposal was in violation of the principle of equality. (DSM withdraws proposed loyalty dividend program, Chemie.DE Information Service, 4/4/07) Equality among shareowners is not a universally accepted norm. Witness dual-class structures at 1-800-Flowers, Marth Stewart Living Omnimedia, Polo Ralph Lauren, Estee Lauder, Google and Dow Jones where B shareowners control more than 75% of votes. (A Class(B) Act, BusinessWeek, 5/28/07) That's not the direction I would like to head, but a new model to encourage long-term owners might have shares change class after being held by the same party for more than 5 years or when traded. I'm sure readers can think of many more options. I'd like to see several explored. Proxy Access at United Health Group? ISS, CalPERS, CalSTRS and the AFL-CIO are all recommending shareholders vote in favor of shareholder proposal #4 at the upcoming UnitedHealth Group Annual Meeting on May 29. Sponsored by CalPERS, the resolution requests the board to set forth procedures for shareholder-nominated directors to be included in the company's proxy materials. I consider this vote one of the most important, if not the most important, this season. The proposal is also a 2007 AFL-CIO Key Vote. Recently Comverse Technology became the first company to adopt a proxy access provision since a federal appeals court ruled last September that the SEC improperly allowed American International Group to omit an access proposal filed by AFSCME in 2005. Comverse announced the proxy access bylaw as part of a series of governance changes as the company tries to recover from a stock-option grant scandal that led to criminal charges against three former executives. The new Comverse bylaw is more restrictive than the access provisions that have been proposed by AFSCME and CalPERS. Under Comverse's bylaw, an investor that owns a 5% stake for at least two years may nominate one director to appear on the company’s proxy statement. By contrast, the bylaw proposal at UnitedHealth Group (and previously at Hewlett-Packard) call for allowing two nominations by investors who collectively own a 3% stake for at least two years. The HP binding proposal received 43% support in March. I'm hoping the CalPERS non-binding proposal gets a higher vote of approval on May 29. The International Corporate Governance Network (ICGN), representing more than 400 institutional investors with more than $10 trillion in U.S. capital under management, has urged the SEC to open the door to proxy access. In an open letter in February 2007, the ICGN said "shareholders should have the right to exercise a meaningful role in the election of directors and that election process should function as a means to ensure board accountability. This right has not been fully realized in the United States." Investor Environmental Health Network In the wake of costly litigation, product sales bans, and reputational damage arising from asbestos, toxic materials in cosmetics and toys, and Teflon-related chemicals, U.S. investors are becoming increasingly wary of toxic chemical risks – in products, in supply chains, and in their own portfolios. The number of companies facing resolutions dealing with toxic product risks jumped from three in 2004-2005 to 17 in 2006-2007, including 13 resolutions introduced for the ‘07 proxy season at such leading U.S. corporations as Apple, CVS, Dow, DuPont, Sears, and ServiceMaster. The Investor Environmental Health Network (IEHN), which represents 20 investment organizations with $22 billion in assets under management, today released the 52-page “Fiduciary Guide to Toxic Chemical Risk.” The guide for institutional investors examines the financial dimensions of toxic chemical risk, including how to quantify such risk, the theory behind the danger posed by toxic chemicals to the wealth of shareholders, and a comprehensive set of action steps that can be taken by investors to translate the long-term threats and opportunities associated with toxic chemical issues into prudent portfolio stewardship. See the video; read the report. The report also contains links to resources on clean production, proxy voting and other resources. Inside Advice A Simple Guide to the Basic Responsibilities of VC-Backed Company Directors, is recommended by Ralph Ward, for "any board that seeks to do a better job, venture-stage or not." The Guide gets right to the specific roles and functions of a good board, with careful discrimination between private and public company boards, as well as independent and affiliated directors. You'll find tips like this and many more each month in Ralph Ward's Boardroom Insider. CEO Flight CEOs fill 53% fewer corporate directorships outside their own companies than they did in 1990, a reduction that has potentially weakened corporate governance through the loss of their experience, knowledge and insight, according to James Drury Partners Inc. CEOs who still serve on outside boards “have reduced their commitments from an average of 2.2 boards to 1.4 boards, representing a decline of 36%,” their report said. CEOs are reducing their commitments to other boards as they “face mounting pressure … to focus virtually all of their attention on running their own companies,” Mr. Drury said in his analysis. “Some may see this as a healthy development, but it is not without a cost. With more and more CEOs limiting their services on other companies’ boards, a vital source of knowledge and ‘real world’ experience is missing from today’s boards. As a result, board deliberations are often less well-informed,” and corporate CEOs “lose access to a potentially helpful personal adviser.” (CEOs ‘flee’ outside boards, Pensions & Investments, 5/14/07) Yes, there certainly are pluses and minuses. However, there's a lot of "real world experience" that could benefit corporations from nonCEOs as well. I'm not convinced this is a bad trend. Frank Appeal Lisa Woll and Tim Smith, CEO and chair of the Social Investment Forum, have written to the office of Congressman Barney Frank concerning the recent discussions to eliminate advisory shareholder resolutions and his upcoming hearing. In it, they express concern "about the alarming trial balloon raised at the first round of the SEC hearings regarding shareholder resolutions and the suggestion that the right of shareowners to sponsor shareholder resolutions be taken away and replaced with an online 'chat room.'" They offer to "provide research and documentation regarding the importance and efficiency of this process." Also concerned? Consider becoming an SIF member. Deal Lawyers The May-June issue of this print newsletter has been posted to the internet. You'll find some blury paragraphs but you'll certainly get a good idea of what you'll be getting if you subscribe. The issue includes:
Try their no-risk trial; they have a special "Rest of 2007" rate, which includes a 50% discount - and a further discount for those that already subscribe to The Corporate Counsel. If you have any questions, please contact info@deallawyers.com or 925.685.5111. No, this is not a paid ad; just thought readers should know of this valuable resource. Exxon Mobil's Fig Leaf Removed Concerned Stanford University alumni have succeeded in getting the Stanford Board of Trustee's Advisory Panel on Investment Responsibility (APIR) to support a shareholder resolution pressuring Exxon Mobil to take immediate steps to reduce the giant oil company's contributions to global warming. The move by Stanford is notable since Exxon Mobil routinely cites its support for the Stanford Global Climate and Energy Project (GCEP) as a major reason for why it does not need to take short-term action on global warming. In 1971, the Stanford Board of Trustees became the first governing body of a major academic institution to adopt a statement on investment responsibility. The trustees created the Commission on Investment Responsibility (CIR), later renamed the Advisory Panel on Investment Responsibility. Where is your school on these issues? (Stanford to Press Exxon Mobil for Action Now on Global Warming, Despite Oil Company's Role in Global Climate and Energy Project, 5/17/07) BadBoardMember.com Over at the Corporate Board Member, Don Morrison ends the May/June edition with a humorous article, "Ready for BadBoardMember.com?" He recounts the flowering of websites dedicated to showcasing transgressions, from a hall of shame to expose people parking illegally in disability parking spaces. (Caughtya.org) to littering (LitterButt.com) to cell-phone abuse and other loutishness (RudePeople.com). Then he postulates the need for board members to expose each other's transgressions. "If, in this governance-obsessed age, a CEO can go to jail for signing off on a faulty financial report, his or her boardroom enablers should at least be exposed to the glare of notoriety." Be careful what you wish for, even in jest. In this case, corporate boardmembers may not be the target. It appears the domain name badboardmember.com is registered to Kerry Kirschner of The Argus Foundation. My guess, in looking at the Foundation's website, is that if Mr. Kirschner intends to expose bad boardmembers, they will likely be of the government variety in Sarasota Florida. Warning: As I post this item, dreckydirectorwatch.org remains available... but that fantasy domain of Mr. Morrison's has less appeal, since it doesn't roll off the tongue as easily. No, I think the future has Mr. Kirschner making a quick sale of badboardmember.com. TIAA-CREF Pressed by 600,000 Teachers In the 2nd quarter issue, Trevor S. Norwitz - a partner with Wachtell, Lipton, Rosen and Katz, goes on a rant in The Devaluation of the Director. "Today's activists want more than influence; they want the ability to dictate to directors, whom they view as their hirelings, and to easily replace any director who does not heed their bidding." "Pending institutional changes like the SEC's e-proxy initiative and the NYSE's proposal to eliminate 'broker no-votes' in director elections will, whatever their merits, magnify the voice of special interests and increase the number of wasteful and distracting proxy fights." Norwitz sees two looming battles: proxy access: "allowing certain shareholders access to the proxy statement" will "boost the power of special interests, stimulate costless proxy contests, and threaten the traditional collegiality of the board." The second is that Delaware courts might actually allow "shareholder activists" to enact binding bylaws that challenge the board's prerogative to manage the corporation." Dismissing the merits of eliminating broker voting because it will "magnify the voice of special interests" seems over the top. Allowing "certain shareholders" access to the proxy isn't designed to "boost the power of special interests." As companies adopt majority voting requirements, any director nominee must obtain a majority vote. That certainly won't lead to a tyranny of "special interests." As for Norwitz's objections to a decision that might arise in Delaware, most companies, including Hilton which I think is still fighting a bylaw proposal on pills from Unite Here's pension fund, provide concurrent power to directors and shareholders to amend bylaws. Norwitz appears to believe any bylaw amendment by shareholders would infringe on the board's authority. However, that reasoning would lead to the conclusion that all shareholder adopted bylaw amendments are invalid... a position that is contrary to the express authority set forth in Delaware law for shareholders to amend bylaws. (Note: The article contains a typo in Mr. Norwitz's e-mail address. The correct one is TSNorwitz@wlrk.com) Much more informative and timely is an article, The Next Committee in the Spotlight, by Richard Koppes, Lizanne Thomas and William Zawotny. Since you can read it online, I won't go into detail. Suffice if to say that convergence of majority voting, proxy access and requirements for direct communications with directors, will lead to more focus on nominating/corporate governance committees. One suggestion I would add to address the issue these authors raise of the need for direct communications, while complying with Regulation FD, is to adopt the Morningstar model. Hold monthly "forums" to answer questions about the business from any investor or prospective investor. Investors submit written questions by email, fax or mail. Morningstar's director of investor relations digs up the answers and reports to shareholders via the internet and the SEC via form 8-K. Also noteworthy in the same issue are "Director Pay in Emerging Firms," by Joseph Rich with Pearl Meyer and Partners, and "How an Advisory Board Drives Innovation," by Susan Stautberg of PartnerCom. Over the years many readers of CorpGov.net have asked me questions on both these issues. These authors provide good advice. Back to the top Take Action on Climate Change Climate change will bring increasingly violent weather, droughts, and rising seas - deeply impacting our lives and economy. Corporations play a major role in creating climate change and its devastating impacts. A growing number of investors are taking action to encourage corporations to reduce their climate change emissions. So far, America's largest mutual funds have been asleep at the wheel, failing to cast even one vote in favor of climate change resolutions. With trillions of dollars in assets, Fidelity, Vanguard, and American funds could play a vital role in encouraging corporate responsibility on climate change and protecting the assets of their investors. Co-op America is sponsoring a campaign to tell them it's time to wake up and take action! Sign their electronic letter and let's see if we can get their behavior to change. Pandora's Box Bill Baue, writing for SocialFunds.com, succinctly summarizes the SEC's first roundtable in the title of his recent article, Opening Up Pandora's Box: SEC Proxy Roundtable Questions Role of Non-Binding Resolutions, (5/15/07). "The idea was floated that only binding resolutions proposing bylaw changes should be allowed on proxies, while discussion of issues currently covered in precatory resolutions should happen online on electronic discussion boards between shareowners and companies. This line of discussion raised concern among socially responsible investors (SRIs)..." The SEC appears to be floating the idea of doing away with precatory resolutions in return for allowing some limited form of access to the corporate proxy to shareowners, for the purpose of nominating and electing a few directors (no change in control). I like Baue's statement, "It is ironic that the SEC is considering denying shareholders a current right of access to the proxy when the event triggering these roundtables was a federal court decision chiding the SEC for…denying shareholders a current right of access to the proxy." If the SEC does away with precatory resolutions on proxies, look for a surge in the number of binding bylaw proposals. I predict that if the Business Roundtable and US Chamber of Commerce win this round, they will end up regretting it. Better for both sides to continue with precatory resolutions and to let AFSCME v AIG take its course. Pay Clarity Nice summary of how the new SEC disclosure rules on executive pay are playing out in Disclosure without clarity (The Kansas City Star, 5/15/07). "If you have the patience of Job and the ability to slog through dense financial jargon, you might be able to divine what grant relates to what year from the footnotes. But don’t count on it, writes Dan Margolies. Stock and option awards are shown only if they have vested. That includes amounts vested from previous years, making it difficult to ascertain how much an executive received in the most recent fiscal year. The new rules “leave plenty of room for companies to drown people in details and poorly written disclosure, hoping that it will scare people off,” said Michelle Leder, whose blog, Footnoted.org, highlights corporate abuses and excesses. Still, most agree they are a step in the right direction. 10Q Detective Blogspotting at Business Week recently posted the following: To read SEC filings with a guide, go to this blog run by David Phillips, an investment newsletter publisher. He focuses on financial-statement "soft spots," such as restructurings, and also takes on issues like executive pay, recently analyzing the actual compensation of $1-a-year CEOs like Yahoo!'s (YHOO ) Terry Semel and Apple's (AAPL ) Steve Jobs. Phillips delves into the data and lets others handle the witty asides, sprinkling in lines from movies and songs. On the payoff to shareholders from Semel's low official salary, he paraphrases Tom Waits: "The big print giveth and the small print taketh away." Phillips doesn't shy from controversy. His latest post is Jesse Jackson Takes His Tin Cup to Energy: Or, Another Day of Playing the Race Card for Personal Gain, 5/11/07. Highly Paid Hedge Fund Managers A list of the world’s most highly paid hedge fund managers includes individuals who earned more than $1 billion last year. In order to have made it into the top 25 , a hedge fund manager had to have earned at least $240 million last year. (Workin’ 9 to 5 and barely making a billion, Investment News, 5/14/07) Say on Pay Gets Majority at Blockbuster A majority of Blockbuster's shareowners voted in favor of a "say-on-pay" proposal at the company's annual meeting, marking the first clear victory by shareholders seeking an advisory vote on executive pay. The proposal received support by 57% of shares voted, according to New York City Comptroller William C. Thompson Jr., who sponsored the proposal on behalf the New York City Employees' Retirement System, a pension fund that owns 157,000 Blockbuster shares. It isn't clear whether the company will adopt the proposal, which was nonbinding. (Blockbuster Investors Back 'Say-on-Pay' Plan, WSJ, 5/11/07) BRT Influences SEC Workshop Unfortunately, I haven't had time to listen to the Webcast of the SEC's recent workshop aimed at reviewing shareholder access in preparation for a proposed rulemaking in early summer. This is something near and dear to me and to Les Greenberg, since our August 2002 petition was credited by the Council of Institutional Investors as re-energizing the debate on this most important topic. (see Equal Access - What Is It?) The brief bits I have been able to read provide, as one observer reported, the possibility of a "truly scary" direction. First, a little more background. After Les and I submitted our petition, which called for a very simple rule change, the SEC came out with a very complicated one-size fits all multi-year proposed process, which would have required various triggers to be met before access would be granted. Although the rulemaking, even with many many serious flaws, received more support than any SEC rulemaking in history up to that date, the SEC became paralyzed by inaction when the Business Roundtable (BRT) opposed the measure. What is truly amazing is that the BRT, composed of 160 CEOs, continues to hold more sway in Washington and New York than millions and millions of American shareowners. More than a decade ago, the BRT dominated the national accounting system by winning an overwhelming "Sense of the Senate" vote that stock options need not be recorded on financial statements as an expense. Citing Lincoln's riddle, "how many legs does a dog have if you call his tail a leg?", Robert A.G. Monks pointed out that just because the BRT successfully pressured the FASB so the value of options weren't required to be reflected, didn't mean they were free, anymore than calling a tail a leg makes it a leg. More recently John J. Castellani, who currently heads the BRT argued the SEC has consistently upheld a ban on proxy proposals on the issue of board elections. Opening proposals to election issues, he wrote, would lead to 'special interest directors' who pander to the narrow interests of the shareholders who nominated them.” (Market Risk , WSJ, 1/20/07) Although Castellani references their very important decision in AFSCME v AIG, he is either ignorant of both the court's findings and the history behind proxy access or he is trying to make another tail into a leg. More likely, he is simply trying to pull our leg with his tale. For years the SEC allowed proposals regarding election issues. In 1980, for example, the Unicare Service proxy carried a proposal to permit any three shareholders to nominate board candidates and have their name placed on the proxy. A similar proposal allowed a “reasonable number of stockholders” to place candidates on the proxy statement of Mobil. In 1981 Union Oil had to include a proposal permitting any 500 or more shareholders to place nominees on the proxy. The court cites many additional cases. Before institutional investors began to win majority votes, the BRT wasn't concerned about resolutions designed to change the rules for future elections. In 1977, they recommended the SEC “permit shareholders to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors.” In the late 1980s, they realized such resolutions would soon have consequences. Back to the current series of workshops, according to a report in the LATimes, the SEC is also reviewing whether companies should set up websites for investors to communicate with one another about pending proposals. Shareholders would make nonbinding proposals on the websites that other investors could vote to adopt, said an executive of a technology company the agency has asked to evaluate the idea. (SEC to propose new proxy rules, 5/8/07) A briefing paper issued by the SEC elaborated further on the website proposal. "An online forum, restricted to shareholders of the company whose anonymity is protected through encrypted unique identifiers, could offer the opportunity for shareholders to discuss among themselves the very subjects that most concern them, and which today are considered - if at all - only indirectly through the proxy process. Such a discussion forum could also provide the opportunity for shareholders to conduct non-binding votes. Moreover, the opportunity for this enhanced level of shareholder participation could be extended 24/7 throughout the year, rather than only at annual meetings. From the company's standpoint, such a shareholder forum could provide much more accurate and frequent information about the interests and concerns of investors." What is feared is that these websites, which typically degenerate posting lies and rumors to pump and dump, profit from options or otherwise seek to manipulate the market, will replace the time tested shareowner resolution rule/process by allowing companies to omit most social and environmental proposals. The May 11 ISS Governance Weekly notes that at the SEC workshop "a Delaware judge, corporate lawyers, and several law professors questioned the value of non-binding shareholder proposals and urged the SEC to limit annual meetings to bylaw amendments and director elections. While investor advocates hope the SEC will allow shareholders to file proxy access proposals, most of the discussion focused on non-binding resolutions and alternative ways to raise concerns with companies, including a proposal to establish secure online forums for investors." Following are some additional excerpts from Governance Weekly:
That's where I hope the SEC comes down. What Greenberg and I began as an initiative to empower shareowners with the same rights we had before the SEC reinterpreted Rule 14a-8, without promulgating any new regulations or providing any explanation, has turned into a nightmare. Thanks to the perseverance of Rich Ferlauto, Damon Silvers, and others at AFSCME who sought justice in the courts, shareowners have finally regained the rights we had in the 1980s. At this point it looks like the best we can hope for is that the SEC continues its internal deadlock and the clock runs out on the Bush Administration. Since the ruling in AFSCME v AIG, shareowners have the recognized right to seek access and it can be done on a case-by-case basis tailored to the individual company. CalPERS, for example, is urging UnitedHealth Group shareowners to support their proxy access bylaws proposal at the company’s 5/29/07 meeting. The proposal would allow two year 3% shareowners to place two candidates on the company's proxy. A bylaw proposal filed by AFSCME and three state pension funds won 43% support at Hewlett-Packard in March. Hopefully, whatever damage the SEC does will be quickly overturned under the next administration, although the BRT has historically had bipartisan support, since they have ready access to corporate coffers to support politicians on either side of the isle. Perhaps, as a sign of things to come, Barney Frank, chairman of the House Financial Services Committee, has scheduled a June hearing to ask SEC chairman Christopher Cox whether the SEC is giving business too many breaks. In April, Frank sent a letter to Cox, worried about news a plan to allow companies to make shareholders sign mandatory arbitration agreements. Prohibiting shareholder litigation "would allow a company to insulate itself from litigation from its shareholders, even when it has engaged in fraud, by making it uneconomic for most individual shareholders to bring suit," he said. (Frank Question: Is the SEC Going Soft?, 5/11/07) Of course that's another issue near and dear to Les Greenberg as an arbitrator/litigator with many years of representing claims against securities firms. Les filed a Petition for Rulemaking (SEC File No. 4-502) and a Supplement with the SEC. See Guest Commentary from Les Greenberg in our April news. (You'll need to scroll down to Guest Commentary from Les Greenberg, since Corpgov.net was built in the stone age of 1995 and were still working with primative software.) My best hope is that the next administration in Washington isn't in the pocket of the Business Roundtable. Then perhaps millions of shareholders will be heard over the din of 160 CEOs who would like nothing better than to maintain their grip on both corporations and government. 21st Century Principles Seven leading academics from the Southern US have revised their 21st Century Governance and Audit Committee Principles for U.S. Public Companies, which was first issued five years ago to address concerns that arose in the wake of the Enron bankruptcy. The 2002 governance principles were endorsed by the Institute of Internal Auditors (IIA). We hope the revised principles also find widespread acceptance. Among the more progressive recommendations are the following:
State of the California Economy A conference on the subject was held at Saint Mary’s College of California on May 9, 2007. The theme was “Toward a Sustainable Environment,” focusing on environmental policy and finance in California, as &# | ||||