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Current News and Commentary. January, February, March, April, May, June, July, August, September, October, November. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest as of 8/9/07. Book bites. Recent Papers of Interest FASB Action Facilitates Empire Building The agency cost hypothesis predicts that managers, when not monitored by shareholders, will make self-maximizing decisions which may not necessarily be in the best interest of shareholders. These decisions include aggressively growing the firm, which reduces profitability and destroys firm value. Beginning with Statement of Financial Accounting Standards No. 131 (SFAS 131), most U.S. multinational firms are no longer required to disclose earnings by geographic area (e.g., net income in Mexico or net income in East Asia). Such non-disclosure potentially reduces the ability of shareholders to monitor. The study found that non-disclosing firms, relative to firms that continue to disclose geographic earnings, experience greater expansion of foreign sales, produce lower foreign profit margins, and have lower firm value in the post-SFAS 131 period. (Hope and Thomas, Managerial Empire Building and Firm Disclosure, Journal of Accounting Research, 2008) Grundfest Proposes Alternative to Access: McRitchie Responds Article II Section 2 of the United States Constitution requires that a majority of the Senate confirm Presidential nominees. It forces the President to negotiate with the Senate in order to obtain the necessary Senatorial approvals. A similar advice and consent mechanism can be replicated in corporate America. Shareholders can be cast in the role of the Senate. The incumbent board can be cast in the role of the Executive. The board can be required to obtain approval of a majority of the shareholder base before a director is allowed to serve. Indeed, there are at least eight substantial reasons to prefer such a system of advice and consent to the variety of proxy access proposals currently advocated by many shareholder rights organizations. Grundfest is correct, it would be simple compared to the complex proposals we've seen from the SEC. Proposals to date look like they have been drafted by the Business Roundtable... if enacted, at least they require so many triggers and so much red tape they would only be used as a last resort. Yet, proxy access could also be very simple. There is nothing like the possibility of being removed and replaced with shareholder nominees to remind board members who they represent and depend on. While Grundfest's model is an improvement that would be sure to yield results at many poorly performing boards, I don't think it would give the same impact on the mediocre or the truly entrenched.
CEO Compensation: Influence of Weak Boards vs Institutional Shareholders We find that grant compensation predicted from board variables predicts poor subsequent performance. This implies that weak boards that overpay CEOs under-perform. Board governance variables therefore have an important influence on managerial compensation and firm performance. Compensation derived from institutional ownership, on the other hand, predicts future over-performance. Institutional shareholders, on average, are able to influence managerial incentives and result in improved performance. (Forsyth, Joetta, Teoh, Siew Hong and Zhang, Yinglei, "Misvaluation, CEO Equity-Based Compensation, and Corporate Governance," October 2007). Black Underestimated Power of Corporate Governance Movement Conrad Black admitted making mistakes in the scandal that led to his conviction for embezzlement and facing a maximum 35-year jail sentence for obstructing justice and plundering $6.1 million from the accounts of Hollinger International. He said he underestimated the strength of the "corporate governance movement." "At least in the United States people know how their system operates and there's a degree of cynicism about this kind of thing. This theory that it's a great rise and fall story, or some sort of Shakespearean or Greek tragedy and that I was misled by my wife and lived to extravagance: it's all nonsense." (Black 'misjudged' force of corporate governance, The Times, 11/30/07)
The Economist on the Defeat of Proxy Access Their opening and closing paragraphs: "YET another attempt to make it easier for shareholders of American public companies to elect the board of directors of their choice has failed, thanks once again to lobbying by bosses anxious to keep pesky owners at arm's length. .... The bosses insist that they are actually lobbying to protect the interests of shareholders as a whole against minority shareholder activists, especially hedge funds, unions and campaigning, single-issue investors. This is nonsense. The fact is, even with proxy access, dissident shareholders would need to secure the votes of a majority of shareholders to change the board. If the majority disagrees with the minority, then it can vote the other way. That is shareholder democracy, and in most other developed countries constitutes part of what it means to be an owner of a public company. In those countries, it is extremely rare for board elections to be contested, and rarer still for dissident shareholders to succeed in getting their candidates elected. What are American bosses so afraid of?" (Shareholder rights and wrongs, 11/29/07) What are the afraid of? Losing control.
Proxy Advisors Reviewed Financial News discusses the forthcoming public offering of the RiskMetrics Group, owner of Institutional Shareholder Services. Also discussed are Glass Lewis, Manifest, the European Corporate Governance Service, Pirc and others. Conerns have been raised over ownership, influence, transparency, conflicts of interest. It is a good overview. (Corporate governance: who is guarding the guardians?, 11/29/07) Access Denied! As expected, the Securities and Exchange Commission adopted a final rule that allows companies to omit shareowner proxy access resolutions. My understanding is that the language proposed in the non-access rule prevailed: "if the proposal relates to a nomination or an election for membership on the company's board of directors or analogous governing body or a procedure for such nomination or election." Apparently, not included in the actual text, but in the accompanying materials, is the Commission's direction that the exclusion only applies to proposals that would result in a contested election. Therefore, it would not prohibit resolutions, such as majority vote requirements for the election of directors, that do not result in an election contest. The NYSE's request to eliminate broker voting was not addressed. The Commission also adopted a rule that provides certain liability protections for shareholder forums. Cox repeatedly brought up the Supreme Court decision of Long Island Care v. Coke, 127 S.Ct. 2339 (2007), suggesting that case creates uncertainty with respect to the decision of AFSCME vs AIG. We must move forward with a temporary final rule and take up the issue of access again next year, when a majority of members of the Commission may be willing to enact such a rule. However, as J. Robert Brown, points out, there is nothing in Long Island Care that suggests a position adopted by an agency by changing its interpretation over time, not through notice and comment, but inconsistently through no action letters and without "reasoned analysis," is entitled to Chevron style deference. As Commissioner Nazareth pointed out during her comments, Long Island Care was decided six weeks before the Commission's July open meeting. It wasn't mentioned at the meeting nor in any of the 34,000 comments received on the Commission's two proposals. If the non-access rule is a temporary fix until the Commission can agree on access language, why is no sunset language included? Given the astute analysis of Brown and Nazareth, it is clear that Long Island Care is simply a pretext for declaring a state of uncertainty and the need to adopt something that at least three Commissioners can agree upon before the 2008 season. Cox's other main argument for moving forward now is that failing to do so would allow an easy end-run of anti-fraud and other measures that exist to protect shareholder. However, as Commissioner Nazareth pointed out, the disclosures required in the other limited access proposal for submitting a resolution were more burdensome than what is required in an actual takeover contest. If a additional protections are really needed, then why not amend the current rules to offer them? Cox is way overboard. His disclosure issue appears to be aimed more at discouraging access resolutions by requiring an overabundance of red tape, than at actually providing protection to shareholders. Disclosures are not required for proponents of majority vote resolutions or of those seeking to have all board members up for election every year. It isn't clear why the mere offering of resolutions, especially nonbinding resolutions, on proxy access should require extensive disclosures. If Cox comes out the spoiler... a foil protecting the interests of the 160 CEO members of the Business Roundtable, Nazareth comes out as the only remaining Commissioner actually advocating on behalf of the interests of shareowners. Federal authority should reinforce, not supplant state law rights, she declared. She favors leaving access decisions up to the shareowners of each individual company. "Responsible management need not fear its shareholders," she said. Corporate governance is not well served by unaccountable directors. US corporate governance practices are on a decline relative to foreign markets. All 40 of the largest markets outside the US allow shareholders to nominate directors, she said. The vast majority of commentators opposed the non-access rule. Access does not result in a tyranny of the minority because a majority is still required to pass resolutions. As for shareholder forums, Nazareth said that while they could be a positive addition to existing mechanisms, to her knowledge not one company has come forth indicating their desire to sponsor one. Clearly, shareholder forums are mostly a fig leaf for the Chairman's failure to propose a successful proxy access initiative. Although, he is correct that none of his 22 predecessors met with success either. That will soon change. Shareowners will not willingly have their rights stripped away. Listen to the archived webcast, I think you'll agree. Once again, the rights of millions of shareowners have been denied to serve the interests of a small cadre of entrenched CEOs and managers who want to remain unaccountable to shareowners. So much for the SEC playing the role of "the investor's advocate." What can we expect next year? My bet is an access proposal so full of red tape that even CEOs will think it is better than what they might face if they wait until after the presidential elections. A new administration might find the rights and votes of millions of people with $20 trillion invested outweigh the wishes and greed of a few hundred to remain entrenched behind federal rules that supplant state law rights. Access Denied: Investors Outraged In the order they came in to my mailbox, below are selected comments on the SEC's 11/28/07 rollback of the rights of shareowners to have proxy access proposals for their director nominees voted on by those who own America's coporations: RiskMetrics Group Responds to SEC's Proxy Access Decision This Morning, Submitted by: Patrick McGurn, Special Counsel The SEC’s decision to reverse its course on proxy access leaves investors’ efforts to enhance boardroom accountability in limbo. Thousands of investors expressed their support for access via the SEC’s comment process and our own 2007 Policy Survey revealed that two-thirds of institutional investor respondents support proxy access at all U.S. companies. Three access proposals came to a vote in 2007, with one being approved, demonstrating these resolutions can move forward without negative impact. We hope well-reasoned and practical rulemaking on the proxy access issue will prevail given the importance of directors' accountability to shareholders. Statement of AFL-CIO President John Sweeney on SEC Attack on Investor Rights Council of Institutional Investors Deplores SEC Move to Curb Investor Rights “This is a sad day for shareowners,” said Ann Yerger, executive director of the Council of Institutional Investors. “The Council of Institutional Investors is deeply disappointed that the Securities and Exchange Commission, which takes pride in its mission as the investor’s advocate, has adopted a rule that weakens investor protections.” The rule bars shareowners from submitting a proxy resolution that asks a company’s board to allow owners to place their nominees for director alongside the board’s on the company’s proxy card. “The SEC’s action muffles the voice of shareowners in director elections,” Yerger said. The Counsil has long urged the SEC to adopt rules that provide a limited path for long-term shareowners to nominate their own candidates on the company proxy card. “A measured right of access would invigorate board elections,” said Yerger. “It would make boards more responsive to shareholders, more thoughtful about whom they nominate to serve as directors and more vigilant in their oversight of companies.” SEC Chair Chris Cox said he wants the commission to revisit the issue of shareowner access to the proxy next year, and only voted to close off avenues to access now to avoid legal confusion until a better rule is approved. But the SEC’s adoption of a no-access proposal will sow legal discord and is a step in the wrong direction. “It makes no sense for the commission to do the wrong thing now but promise to try to do the right thing next year,” Yerger said. "We are deeply disappointed that the SEC took away the right of shareowners to use company ballots to seek approval of director election procedures," said Rob Feckner, CalPERS Board President. "This is a serious wrong turn from the Commission’s duty to adopt regulations that ‘do no harm’ to investors." "Today, the SEC nullified a federal appellate court ruling that has sustained shareowners’ right to use company ballots to post proxy access resolutions. In effect, the Commission has turned back the clock on corporate democracy by withdrawing a shareowner right that is taken for granted in other developed countries." Chairman Cox said this rollback is needed to clarify legal uncertainty about shareowners’ ability to propose by-law changes. He said the SEC will revisit the issue when it has a full complement of commissioners next year. "However, proxy access has created no uncertainty in the market this year," said CalPERS Chief Executive Officer Fred Buenrostro. "There have been no related legal challenges because of this illusory uncertainty. Instead of acting responsibly on this issue with a full Commission, the SEC has adopted a flawed measure that is contrary to the very purpose for which it was established." Statement of Richard Ferlauto Director, Corporate Governance and Pension Investment American Federation of State, County and Municipal Employees (Editor's Note: You've got to love AFSCME and Ferlauto, not only are they outraged, they're fighting back in a meaningful way without hesitation. Even if they lose in the legal courts that are stacked against the interests of labor and investors, they are sure to win the court of public opinion. Should we protect directors who brought us the subprime mess, or should shareowners be able to hold them accountable and nominate replacements? Do we like recessions? No contest. Please ask your union, local or state pension plan to join with them.) The following statement was issued today by Social Investment Forum (SIF) Board Chair Tim Smith, who also is senior vice president of Walden Asset Management, and SIF CEO Lisa Woll: Frank Statement on SEC Action to Restrict Proxy Access I am disappointed by the Commission’s action today to restrict shareholder access to company proxies. The amendments to the Commission’s proxy rules will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns, by effectively precluding shareholders from proposing changes to director election procedures. I believe the Commission should have waited until it was at full membership and was able to deal comprehensively with the issue of proxy access. There was no need to take this piecemeal approach to a problem that should be dealt with comprehensively, as the Commission itself has recognized by proposing broader changes to the proxy access rules. The result of today’s vote is a step backwards for shareholders, as evidenced in part by the thousands of comments received in opposition to the rule, primarily from those representing shareholder interests. I agree with Commissioner Nazareth’s views on the rule, and I want to thank her for her service on the Commission, and in particular for her diligent, thoughtful, and resolute pursuit of appropriate corporate governance and proxy access for shareholders. Statement of Chairman Dodd on SEC Vote on Proxy Access Proxy access is an extremely important issue. These proposals have generated an unprecedented response and concerns, as evidenced by a record 34,000-plus public comments, the overwhelming majority of which were in opposition to the proposals. I would have hoped that the Commission would not have moved forward until current vacancies at the Commission had been filled. A core mission of the SEC is to strengthen rather than diminish shareholder rights and I have concerns about the impact of the rule adopted today on those rights. The Chairman has said that he intends to revisit this issue in the New Year and I will hold him to his word. I believe that shareholder proxy access needs to be thoroughly reviewed and other options explored to ensure that the Commission is not undermining investors’ rights and to promote the stability, competitiveness and growth of our financial markets. Lynn E Turner, former SEC Chief Accountant Chairman Cox has told investors he is on their side and a friend. However, with action like this today, void of common sense and principle as investors who own a company, were denied the right to nominate who oversees management on their behalf, instead, giving management the only right to use the proxy without a cost prohibitive battle. As they say, with friends like that, who needs enemies. Communists and the SEC Proxy Access Vote Interesting blog from William Michael Cunniggham who overheard proponents branding opponents to the Shareholder Proposal (no access) vote as "communists." Even in jest, it seems a bit absurd to label owners who want more control over their property as communists. If they are communists, who are the capitalists? Maybe in their minds the people who work for the communists, like the CEOs, are the capitalists. They've turned reason on its head. Lawmakers Express Disappointment Two prominent Democratic lawmakers--House Financial Services Committee Chairman Barney Frank and Senate Banking Committee Chairman Christopher Dodd--expressed disappointment and said the SEC should have deferred action until it had a full set of five commissioners. In a statement, Frank said the SEC’s action “will leave shareholders with inadequate recourse to influence insular boards that are unresponsive to shareholder concerns, by effectively precluding shareholders from proposing changes to director election procedures.” Dodd said he may introduce legislation to reverse the SEC’s action. “I don't think it's fair,” the Connecticut senator told the Reuters news service. (RiskMetrics Group)
Veaco Group Linked As noted on our Links page, we are constantly scouring the web for the most informative sites on corporate governance and related subjects. For example, we recently added a link to the Veaco Group, which provides services in support of Boards, CEOs, CFOs, General Counsel, Corporate Secretaries and others responsible for corporate governance. We're delighted with this addition because the site not only discusses the firm's capability and experience, it also includes several brief case studies, an informative article on Governance Fundamentals and a link to an interview with Kristina Veaco on the elements of a sound governance program for VC-backed companies. We hope you'll take a few moments to explore this new link. Please let us know when you find other sites we should include and don't forget to check out the Corporate Governance NETwork! NAPF Updates Policy The National Association of Pension Funds (NAPF) updated its Corporate Governance Policy and Voting Guidelines. These include for the first time, high level guidance on environmental, social and governance issues, and guidance on markets outside the UK in recognition of their growing importance to pension funds and investors more generally. NAPF said investors may consider applying the UN principles for responsible investment, which provide a framework for incorporating environmental, social and governance (ESG) issues into their investment decisions. Tis the Season of Giving The Center for Responsive Politics, based in Washington, D.C., tracks money in politics, and its effect on elections and public policy. Below are a few highlights of a recent report. "A power shift in Congress and a wide-open race for the White House add up to record-breaking contributions from the nation's biggest givers," said Sheila Krumholz, the Center's executive director. "There is an intensity to the fundraising for 2008 that we've never seen before, which means the candidates and parties will be all the more beholden to their biggest donors." The typical big-giving industry is now giving 57% of its contributions to Democrats, a shift of 14% from both 2006 and 2004, when the party and its candidates collected only 43% of the money. Individuals and PACs associated with the securities and investment industry, which includes hedge funds and private-equity firms, increased their giving 91% since 2004. Lawyers and law firms, the top industry based on total contributions of $76.4 million, are up 52%. Corporate Governance: Major Political Issue Only for Dodd and Edwards Paul Krugman's column the other day, Banks Gone Wild (NYTimes, 11/23/07), reviewed the "pervasive loss of trust" of our financial system that has been reinforced by the subprime fiasco. He laments that executives "haven't been forced to give back any of the huge paychecks they received before the folly of their decisions became apparent." Krugman concludes: "The point is that the subprime crisis and the credit crunch are, in an important sense, the result of our failure to effectively reform corporate governance after the last set of scandals. John Edwards recently came out with a corporate reform plan, but it didn't receive a lot of attention. Corporate governance still isn't regarded as a major political issue. But it should be." Agreed. Where do the candidates stand on the pivotal issue of proxy access? Myron Kandel, the founding financial editor for CNN, and now president of the New Hampshire Initiative for Corporate Responsibility and Investor Protection is also pushing to know. He was able to interview former Arkansas Governor Mike Huckabee but didn't raise the issue of proxy access. From the conversation, my guess is that Huckabee would take whatever advice the Business Roundtable gives him on the issue... no access. The only two public statements I've seen on the issue from presidential candidates are those from Senator Chris Dodd and John Edwards. Dodd's statement is forceful and went directly to the SEC.
A vague statement form Edwards, included in his program of Restoring Corporate Responsibility and Rebuilding the Middle Class, contains the following:
Where are the other candidates? If you know, please pass any information along.
P&I Advice Pensions & Investments offers good advice on Hiring, firing CEOs (11/26/07). Highlights below:
Whip Hand Podcast The Silicon Valley Chapter of the National Association of Corporate Directors posted a podcast, "How Institutional Shareholders Are Gaining the Whip Hand ...and What It Means for You as a Public Company Director." Hosted by Eric John Finseth of Mayer Brown LLP, it features an interview with Cornish F. ("Con") Hitchcock, Hitchcock Law Firm, who has represented Amalgamated Bank's LongView Collective Investment Fund, the Council of Institutional Investors, and others. The speakers provide an excellent summary of converging reforms that are changing the dynamics of board elections, as well as a brief overview of issues we can expect in the next proxy season. Also archived on the same page as the podcast is my review of the 11/13/07 SVNACD meeting. Investment News Advises SEC to Put Head in Sand Investment News ran a very disappointing editorial on November 26 advising the SEC not to require disclosure of business risks due to climate change. "Since there are so many un-knowns and so much guessing, the SEC should hold off on any new disclosure requirements until the impact of global warming on companies' earnings is clearer," it said. "Investors should base investment decisions on more than conjecture, which is why the SEC should not pressure companies into including estimates that are no better than guesses." (SEC should not require climate change risk disclosure, 11/26/07) The editorial reminded me of an interchange between Dale McCormick, representing the Maine State Retirement System, and former ExxonMobil CEO Lee Raymond at the 2004 ExxonMobil shareowner's meeting. McCormick asked what provisions the company made for damage caused by climate change. Raymond's response was "It's neither likely nor could it be estimated." Pension funds have a fiduciary duty to beneficiaries to evaluate the risks of investments. CalSTRS board members, for example, recently asked staff how the fund's $16.4 billion real estate portfolio might be affected by rising ocean levels due to global warming. They were then presented with a world map from the Washington based World Resource Institute, which indicated areas of in Great Britain, southern Europe, Asia and the East Coast of the U.S. that are likely to be hardest hit. (Investments may be under water, Pensions & Investments, 9/17/07) No, the exact impacts of climate change aren't all known but sticking our heads in the sand isn't the answer. Shareowners need to know what steps their companies are taking, so they can factor these risks into their portfolio analysis. If their companies aren't taking reasonable steps to address substantial risks, investors should either convince management to adopt best or at least better practices or they should try to shift to other investments. Trustees need information to meet their fiduciary obligations and many are already struggling. What follows is a letter to the editor from Mindy S. Lubber, President, of Ceres and Director of the Investor Network on Climate Risk, a US-based network of more than 60 institutional investors with collective assets totaling $4 trillion. The Investment News editorial, which dismissed efforts to get the Securities and Exchange Commission to require corporate disclosure of the risks posed by climate change, shows a poor understanding of how companies and investors are already responding to climate change and how the SEC, in failing to consider climate-related information to be "material," is failing to protect investors. (Investment News, Nov. 26) Curiously, the editorial fails to note that among those filing the climate disclosure petition with the SEC were 16 institutional investors collectively managing $1.5 trillion in assets, who have a legal duty to make prudent investment decisions on behalf of the millions of retirees they serve. To suggest that the regulatory and physical impacts from climate change are impossible for companies to assess strikes me as naive. Insurance companies, oil producers and financial firms are already calculating climate risks in their business models. Power companies will soon be impacted by state and federal carbon limits. Automakers face inevitable challenges from regulations on tailpipe emissions and increased mileage standards. Investors are justified in asking for complete, systematic disclosure on how companies will be affected by these trends. The SEC has so far been remiss in failing to require it. At noon on Friday, November 30th, the Georgetown Environmental Law & Policy Institute, together with the Georgetown Environmental Law Society, will host a panel discussion the petition that major institutional investors, asset management firms, the New York Attorney General, Ceres and Environmental Defense filed with the SEC. The petition requests that the SEC issue guidance on the obligations of public companies to disclose financial risks they face from climate change and greenhouse gas regulations. Hotung Building - Room 2000, 550 First Street, NW. Listen to the podcast if you can't be there. Canadian Rankings The Globe and Mail released its sixth annual report on corporate governance best practices in Canadian companies, which reviewed factors such as board independence, compensation practices, shareholder rights issues, and disclosure. Top marks went to Manulife Financial, Gildan Activewear, Canadian National Railway and Toronto Dominion Bank. At the bottom were Duvernay Oil, Galleon Energy and Reitmans. Praised was Nexen's disclosure on directors. The company includes a chart listing which directors attended various education-related events during the year. Among the damned were Baytex directors, who met three times last year. With a base retainer of $30,000, $267,360 in trust units, and $1,500 for each board meeting attended, that works out to over $100,000 per board meeting. Too much. Tenke was singled out for granting options to executives which all vested immediately. "Perhaps Tenke hasn't noticed that most other companies have three-year holding periods, and many now add extra performance hurdles for vesting. Tenke says its options align executives ‘with the longer-term interests of shareholders." So why doesn't the board require a holding period? Here’s one guess: directors got 50,000 options each themselves last year. (Board Games 2007: The New Realities of Corporate Governance, 11/26/07) Little Carrot, Big Stick Financial Week reports that SEC Chairman Cox may propose a trade-off, end broker voting for directors in return for putting a stop to proxy access, at least for 2008. However, the article goes on to note that "SEC spokesman John Nester said the agency had not announced when it will address the NYSE proposal to change Rule 452. He also said the SEC informed NYSE Euronext in August that broker voting and proxy access are 'not linked' in the agency's agenda, despite the claims made in the exchange's letter to its member companies." In the past broker votes in uncontested director elections had little tangible effect since companies used plurality voting, where nominees could be elected with one vote if no other nominees ran, since the winner was simply the candidate with the highest number of votes. However, that has now changed, since majority voting has been adopted by more than two-thirds of S&P 500 companies, according to Claudia Allen, chair of the corporate governance practice at Neal Gerber & Eisenberg. As a side note, J. Robert Brown has an intersting post Shareholder Communications and the Problem of Street Name Ownership (Part 1), 11/26/07 at TheRacetotheBottom.org. Financial Times Could Set Chamber and Cox Straight, If They'd Listen The US Chamber of Commerce argues the SEC must act this week to quash proxy access or face proxies clogged with union, hedge funds and environmental "special interest" director candidates. Companies might have to move abroad to avoid them. However, the FT points out that all 40 of the largest markets outside the US already give investors in public companies a mechanism for nominating and removing directors. The UK's rules date back to the 19th century but are rarely invoked. Since 2001, only three UK companies have elected shareholder nominees to their board. The mere risk seems to do the trick. Business groups staved off William Donaldson access proposal several years ago. (According to Robert Monks, Corpocracy FT concludes that since international investors can go anywhere, "why would they choose a country where they have fewer rights?" (SEC/proxy voting, Financial Times, 11/25/07) Political Contributions May Help CEOs But Not Shareowners Study finds corporate campaign contributions usually don't add value for shareholders. The most active corporate givers are often among the most poorly run. The greater the level of contributions, the more likely that management and the board of directors are not in sync about corporate goals. "Who benefits from political contributions? Shareholders or management? It's management," said Felix Meschke, one of the study's three authors. The authors found that more than eight out of 10 companies make no political contributions. The study concluded that firms that donate to campaigns experience smaller financial returns than those that don't, engage in less research and development initiatives and have more debt. Nell Minow, editor of the Corporate Library, a Maine organization that analyzes corporate compensation and governance issues, said that in a world in which political giving is part of doing business, full disclosure is a must. (Companies and politics: Do they mix? Study says no, Minneapolis Star Tribune, 11/24/07) As a side note, nice little interview of Nell Minow in the Corporate Crime Reporter. (Minow on Vast Wastelands, Corporate Boards, Rating Movies, and Liquid Hissing, 11/25/07)
Starbucks Adopts Majority Voting Starbucks (SBUX) amended its bylaws, at the request of Harrington Investments (HII), to require a majority vote to elect the board of directors . Together with John Chevedden, I made a similar proposal at Whole Foods Markets (WFMI) and believe there is a good chance they will also voluntarily adopt the measure and avoid resisting the proxy resolution. Since more than 2/3 of the Fortune 500 has already done so, there seems little point in bucking the trend toward truer democracy. (Disclosure: James McRitchie, Publisher of CorpGov.net, is a shareowner of both SBUX and WFMI.) Black Humor For a little black humor from British bankers on the subprime mess, take a look at the 11/21 YouTube post on TheCorporateCounsel.net Blog. Warning: it contains racial stereotyping. A crow was sitting on a tree, doing nothing all day. A small rabbit saw the crow and asked him: "Can I sit and do nothing all day long like you?" "Sure, why not," said the crow. The rabbit sat on the ground below the crow, and rested. All of a sudden, a fox appeared, jumped on the rabbit and ate it. What can we learn from this? To be sitting and doing nothing, you must be sitting very high up. A turkey was chatting with a bull. "I'd love to be able to get to the top of that tree," sighed the turkey, "but I haven't got the energy. "Well, why don't you nibble on some of my droppings?" replied the bull. "They're packed with nutrients." The turkey pecked at a lump of dung and found that it actually gave him enough strength to reach the first branch of the tree. The next day, after eating some more dung, he reached the second branch. Finally after a fortnight, there he was proudly perched at the top of the tree. He was promptly spotted by a farmer, who shot the turkey out. What can we learn from this? Bullshit might get you to the top, but it won't keep you there. (Real-life lessons for MBA students) Jungle Rot In Shareholder Access and the "Law of the Jungle," J. Robert Brown addresses the specter that SEC Chairman Cox raised at the recent Senate hearing that the Second Circuit's seemingly clear decision was rendered doubtful by a subsequent Supreme Court decision in Long Island Care v. Coke, 127 S.Ct. 2339 (2007). There is nothing in Long Island Care that suggests a position adopted by an agency by changing its interpretation over time, not through notice and comment, but inconsistently through no action letters and without "reasoned analysis" is entitled to Chevron style deference. Chairman Cox is stretching to create the impression that a "law of the jungle" exists with respect to access proposals. He needs to do this in order to justify an interim policy that would prohibit access. But his position is belied by practice. In the first proxy season, access reigned and the experience was not a law of the jungle. His efforts to find uncertainty in the law (since it doesn't exist in the practice) as a source of the "law of the jungle" has resulted in a series of interpretations that, to say the least, are questionable if not wrong. In short, there is no serious threat of a "law of the jungle" that would justify an interim rule prohibiting access. The Speculation Economy: How Finance Triumphed Over Industry Lawrence Mitchell chronicles the formative era of what he calls The Speculation Economy between 1897 and 1919 when the American corporate landscape shifted from independent factories controlled by entrepreneurs to one driven by financiers, promoters, and business managers focused on the stock price - “stock market capitalism” - where more is made from legal and financial manipulation than from practical improvements such as technology, management, distribution or marketing. This turn was “neither the necessary nor inevitable form of the American economy.” As I read it, the resulting speculative economy pushed our collective life to more atomistic forms of competitive individualism that may eventually be our undoing. “It is within our power either to change it, to modify its rough edges or to accept it as it is,” argues Mitchell. It should be easier to move forward purposely if we understand how we got to where we are now. Mitchell does an excellent job chronicling the journey. (Continue reading review and commentary in Book Bites)
SEC Schedules Meeting for Proxy Access on November 28 As expected, the SEC scheduled an open meeting on Wednesday, November 28, 2007 at 10:00 a.m., in Room L-002 to discuss the following:
Final Attempt to Stop SEC A coalition of major US and international institutional investors launched a last-ditch effort to scuttle proposed SEC rules on corporate board elections that would overturn the AFSCME v. AIG decision, which effectively grants shareowners the right to submit proposals to provide proxy access to shareowner director nominees. They called on the SEC to delay a vote and "not act on these flawed proposals" until Democratic seats on the Commission are filled. SEC Chairman Christopher Cox "stands poised to move ahead with a proposal. To do so would create a legacy of destroying shareholder rights," said Fred Buenrostro, chief executive of CalPERS. “The SEC’s major customers – pension funds that invest billions and billions of dollars in U.S. capital markets – are dead serious in opposing this action. We see it in direct conflict with the duties of the SEC to ‘do no harm’ to investors in promulgating regulations.” "These proposals offer no meaningful shareholder access and should be rejected by the commission," said CalSTRS chief executive Jack Ehnes, who also heads the $3 trillion Council of Institutional Investors. "Naturally, we stand ready to work with the SEC and provide input on any proposals, but we must not run backwards out of a fear of an illusory uncertainty. We are at a critical point in the history of shareholder rights. Demonstrating leadership and protecting the rights of shareowners is paramount, and we are highly concerned about the direction that we see this heading. We’re asking the commission to stop and listen to the world’s shareholders.” “The sky has not fallen and the markets are working. And while the vast majority of corporate boards are doing a good job, there are some boards that are failing their shareholders. In those cases, it would be useful and good for shareholder value for shareholders to have an effective tool to at least nominate a few new directors on those boards. Access to the proxy is that tool" said Meredith Miller, Assistant Treasurer for Policy, Connecticut Retirement Plans and Trust Funds. Dr. Daniel Summerfield, Co-head of Responsibility Investment from Great Britain’s Universities Superannuation Scheme, agreed, saying: “It’s critical that U.S. policy-makers understand that this (SEC action) has ramifications for how overseas investors view the integrity of U.S. markets.” He said experience in countries that allow proxy access has shown that the rarely-used tool has played a key role in aligning corporate boards with shareowners' interests while, rather than destabilizing companies, has led to more constructive dialogue between companies and investors." Since the summer, the SEC has received more than 34,000 public comment letters; almost all opposed the SEC's proposed action. "We're prepared to litigate," Richard Ferlauto, AFSCME's director of pension and benefits policy, said in a telephone interview Monday. "I'm assuming that we'd have other major investors that would come in, in one form or another," on any litigation, he added. A study by The Wharton School, the business school of the University of Pennsylvania, earlier this year found that companies with activist shareholders outperform the stock market by more than 7% in the short term, with improvement on performance and return on equity in those companies lasting up to two years. (Institutional investors oppose SEC proposals, Financial News, 11/20/07; Funds push for board votes, SacBee, 11/20/07; CalPERS Press Release, 11/19/07; Union, 12 Pension Funds Want SEC to Wait, Houston Chronicle, 11/19/07) For letters and additional background information, see Institutional Investor Press Conference to Proxy Access on the CalPERS site. I encourage all readers to join by . Private Equity Ownership Can Bring Governance Benefits Private equity owners have a high tolerance for leverage/risk and minimal public transparency. This heightens credit risk and highlights that private equity owners pay less regard to bondholders (at least, holders of bonds prior to the buy-out). The owner's relatively short-term investment horizon creates event risk, according to a recent report, "Credit Implications of Corporate Governance in Private Equity Owned Companies," from Moody's. "Current market conditions may mean private equity firms have to work harder to generate returns from the improved governance and oversight they bring to companies they own. After all, the credit market squeeze means the companies have to operate with less leverage, at least when compared to earlier in the year. And volatile equity markets limit the owner's IPO options." Private equity owners demonstrate a commitment to robust controls and financial reporting, and, importantly, an extremely involved board of directors. "Ultimately, bondholders benefit when engaged, knowledgeable board of directors oversees management," says Moody's Team Managing Director Mark Watson, author of the report. "Boards of private equity owned companies, which are comprised mainly of representatives of the owner, are arguably the most engaged boards." "Current market conditions may mean private equity firms have to work harder to generate returns from the improved governance and oversight they bring to companies they own." Boards of private equity-owned companies are also much more willing and able to fire managers that under perform, a quick trigger usually in the interests of bondholders. "On the one hand, pay-for-performance promotes a high performance culture among management and focuses management on value-adding activities," says Watson. "On the other hand, it can encourage management to share the owner's pre-disposition towards higher leverage and risk and to focus on actions that have short-term, not long-term, benefits." RiskMetrics Updates Policy for 2008 ISS Governance Services at the RiskMetrics Group published an update of its US corporate governance policy. According to their blog post, "This year's policy updates reflect an increasing desire among investors for better disclosure on critical corporate governance issues. Our policy updates on shareholder resolutions calling for an independent chair, say on pay, stock option overhang cost, pay practices, accounting practices and product safety each derive from this trend towards improved transparency." Broc Romanek summarized the changes on TheCorporateCounsel.net Blog, RiskMetrics Publishes '08 Policy Updates, 11/20/07. Big Thinkers, Here's Your Chance...But Act Quickly The Department of the Treasury released a request for public input as it prepares a blueprint for an improved U.S. financial regulatory structure. The blueprint, set for release early next year, will seek a "more effective regulatory structure that can improve efficiency, reduce overlap, strengthen consumer and investor protection and ensure that financial institutions have the ability to keep pace with evolving markets." According to the release, "the Department's review of the financial regulatory structure will focus on all types of financial institutions: commercial banks and other insured depository institutions; insurance companies; securities firms; futures firms; and other types of financial intermediaries. Treasury asks for public comments on topics including overlapping state and federal regulation, ways to improve market discipline and consumer protection, the strengths and weaknesses of having multiple regulators and multiple federal charters for financial institutions, as well as other issues." (press release, 10/11/07) The release is particularly interested in comments on the specific questions, (What should be the key objectives of financial institution regulation?), but also seeks specific ideas or recommendations "as to how we can improve our current regulatory structure" generally. This looks like a great opportunity for those who think broadly. Should we have national corporate charters? Does the Gramm-Leach-Bliley Financial Services Modernization Act, which repealed the Glass-Steagall Act, need amended? How should we address the need to regulate hedge funds? Should companies with ADRs listed on US exchanges have to meet US listing and disclosure standards? How can we address the problems that stem from stock churning and short-term investment practices? What financial incentives, if any, should the government offer to encourage investments that address global climate change or other social issues? Should we move away from a "rules-base" approach to regulation towards a more "principles-based" approach? Should the federal government take more of a role in deciding where people can and can't live and still be expected to be covered by some form of disaster relief? The questions that could be addressed are endless but the time to consider them is not. Comments are due on November 21, 2007. Access Denied WSJ's take on Senate Banking hearing is that "the SEC will allow companies to reject shareholder proposals related to director elections, as it has in the past, and that any concerted effort to revamp the process will have to wait until the year after next." The article also notes, "Cox prides himself on being the investors' advocate, and has said multiple times in speeches that federal proxy rules should not stand in the way of shareholders choosing the boards they want." (SEC Chairman's Proxy Pitch Loses Steam, 15/07) How can Cox expect to go down in history as anything but the shareowners pariah if he goes through with a vote to ban proxy access? Say on Pay A "say on pay" nonbinding proxy resolution at Cisco by Christian Brothers Investment Services garnered 48% support. Julie Tanner, corporate advocacy coordinator at CBIS, said: “Investors are increasingly concerned about mushrooming executive compensation which sometimes appears to be insufficiently aligned with the creation of shareholder value. Our resolution urges Cisco’s board to allow shareholders to express their opinion about senior executive compensation at the company by establishing an annual referendum process. The results of such a vote would, we think, provide the board and management with useful information about whether shareholders view the company’s senior executive compensation as being in the best interests of shareholders. The compensation practices at Cisco Systems should encourage executives to build a successful, sustainable company and share this prosperity within the company.” Aflac and Verizon have already agreed to adopt the “say on pay” policy and a number of companies are working with investors to study the ways in which this practice could be practically implemented in the U.S. market. Resolutions regarding “say on pay” are regularly receiving support of 40-50% , remarkable for a new issue. A Towers Perrin study of top executive pay in 26 major countries found that American executives make an average of twice as much as their French, German and British counterparts. (press release, 11/15/07) Board Committee Members on Hot Seat Majority vote requirements are in place at two-thirds of the S&P 500. In coming years, shareowners are expected to step up "withhold" or "vote no" campaigns against committee members who appear to fail oversight duties. The NYT reports, "The particular responsibility for risk oversight and control at Merrill lay with its finance committee — a four-member group headed by Charles O. Rossotti, former chairman and chief executive of American Management Systems, and a senior adviser to the Carlyle Group, the private investment firm. Other members of the committee include Ann N. Reese, a former chief financial officer at the ITT Corporation; John D. Finnegan, chief executive of the Chubb Corporation; and Alberto Cribiore, an executive at a private equity firm." Meredith Whitney, a financial analyst at CIBC World Markets, said, “You would think you would want some experts on subprime because that was the risks they were taking on.” "Ms. Reese and Mr. Rossotti serve on the audit committee, along with Joseph W. Prueher, a former United States ambassador to China, and Judith Mayhew Jonas, a New Zealand academic who has experience running London’s financial district. Mr. Finnegan and Mr. Cribiore both serve on the compensation committee, which approved Mr. O’Neal’s pay." Expect possible fallout among members of both finance and audit committees. Nell Minow, is quoted saying the Corporate Library had expressed strong concern about the Merrill board for several years, citing, among other things, high turnover and the possibility that newcomers were not asking tough questions. There was very low share ownership among directors, and “that’s a big red flag about motivation.” Will booting out directors add to a board that may already have too many newcomers? (Where Did the Buck Stop at Merrill?, 11/4/07) Studies, such as that performed earlier this year by the National Association of Corporate Directors and Mercer Delta Consulting, which found that roughly half the directors surveyed from public, private and non-profit boards said their boards were “less than effective” at the task don't help the case for incumbents who should probably avail themselves of more continuing education opportunities. CEOs recruited from the outside earned median pay of $13 million in 2005, compared with $5 million for those promoted from within. 'The focus is shifting to the nominating committee...This is the committee that will have to reach out and engage with shareholders on some really tough issues in the coming year...Boards will have a tough time justifying the continued service of a director who has been successfully targeted by such a campaign,” says Richard Koppes. Koppes says committees should be proactive in gathering director nominee suggestions when meeting with key shareholders. A good dialogue between shareholders and the boards, he said, “goes a long way in making investors feel included and avoids confrontation. It's all about engagement...Nominating committees will have to take the lead in reaching out to shareholders,” says Koppes. “Sure, you have to be careful about an individual director carrying out his or her own agenda, but this notion that only management represents the company no longer holds water. Shareholders' representatives are the board.” (Boards on the hot seat, Financial Week, 11/12/07) I urge shareholders to consider proposing replacement directors to nominating committees under the SEC rules that took effect on January 1, 2004. Disclosure Regarding Nominating Committee Functions and Communications Between Security Holders and Boards of Directors, requires corporations to disclose if their nominating committees have received a recommended nominee from a 5% shareholder or group and the disposition of that request. ICCR Position Open The Interfaith Center on Corporate Responsibility seeks a Support Coordinator to aid program directors and the office of the executive director of ICCR, assisting in a wide variety of coordinating and support assignments. It looks like a nice part time (25 hours) per week union position for the right person in New York. AARP AARP certainly has clout among retirees. To date, the organization has been largely absent from shareowner advocacy and activism. The Power of You, published in their 11/15/07 Bulletin may be a sign of change. "Retiree groups are among today's most active shareholders, confronting directors they consider overpaid and fighting for more generous health and pension benefits," it says. The article also mentions that AARP filed a brief in the U.S. Supreme Court case of Stoneridge Investment Partners v. Scientific-Atlanta urging the court to allow investors to sue. Currently, it is clear that if the signatures of third parties, like accountants and banks, are included in an issuer’s SEC filings they can be held liable as “primary violators” if they make false statements. It is also clear they can be sued under “scheme liability” for committing acts with the “purpose and effect” of furthering the issuer’s allegedly fraudulent scheme. But what it they are just complacent? That's what Stoneridge seeks to answer. The AARP article goes on to site examples of several campaigns by individual retirees and retiree groups and even cites corpgov.net as an online resource. This may be progress. However, I still have to wonder: Why didn't AARP submit comments on the SEC's proxy access rule? With "broker votes" for directors proposed to end and 60-70% of retail shareowners not bothering to vote in corporate elections, why doesn't AARP offer to accept proxies from members so that all those unvoted shares can be voted in a block, instead of thrown in the trash? Real activism from AARP on the day-to-day corporate governance issues would be welcome. If it ever happens, all shareowners will benefit. Beverage Governance One significant trend among beverage companies has been an exceptional level of CEO turnover. Of the 19 Moody's-rated issuers examined in a study entitled Governance Trends With Potential Credit Implications For Food And Beverage Companies, 12, or 63%, have CEOs with tenure of three years or less, and nine, or just under half, have tenures of less than a year. CEO changes enhance governance risk and increase the probability that an event such as large transactions will affect credit quality, says Moody's "The higher rate of CEO turnover in the food and beverage sectors may reflect the intrinsically low growth rate of U.S. companies in this sector and the challenge of increasing sales by more than the rate of population growth." Several companies have moved from a plurality to a majority voting standard, making it easier for shareholders to reject directors nominated by management, with eight of the 19 making such changes. However, dual-class share structures--a powerful takeover defense typically opposed by shareholders--remain prevalent in the sector, says Moody's, with 38% of the companies examined retaining such structures, as compared to 9% across S&P 500 companies. "The board's role is perhaps especially challenging in the food and beverage sector because leading companies have a relatively high propensity to look outside for new CEOs." "Stock options remain a key component of long-term incentives, with 11 of the 19 Moody's-rated food and beverage sector companies surveyed relying on equity options as a portion of their executives' pay. A heavy reliance on stock options in pay for senior executives can create a strong short-term focus, particularly when reinforced by annual bonus performance metrics that are similarly shareholder-focused. However, the majority of companies surveyed have pared back the use of stock options, and have awarded restricted shares or created restricted share unit plans in lieu of reduced options." "Most of the companies analyzed for this comment (14 or 74%) have change-in-control or severance policies that provide for no more than three times total compensation for the CEO-the preferred threshold for many institutional investors focused on this issue." Since 2003, Moody's nine-member Corporate Governance Specialist Group has worked alongside Moody's credit analysts to incorporate governance more systematically into the credit rating process. As I have indicated before, these reports by Moody's allow investors to compare companies across industry and to get into more depth than with other analyses. While they may be sounding unnecessary alarms with regard to increased shareowner power, their reports are always informative and welcome.
Gaining the Whip Hand in Silicon Valley On 11/13/07 I attended a very interesting early morning program sponsored by the NACD Silicon Valley Chapter provocatively called "How Institutional Shareholders Are Gaining the Whip Hand …and What It Means for You as a Public Company Director." The panel discussion was led by Eric Finseth, a partner at Mayer Brown who oversaw and administered the SEC's shareholder proposal program during the 2006 proxy season. Panelists included Cornish Hitchcock, who represents Amalgamated Bank's LongView Funds and others; Rachelle Silverberg, a partner with Wachtell, Lipton, Rosen & Katz, well known for inventing the poison pill and other defense mechanisms; and Godfrey Sullivan, CEO of Hyperion Solutions. Finseth led off with a brief updated summary of his co-authored Storming the Ramparts: The Ongoing Shift In the Balance of Power Between Shareholders and Incumbent Boards of Directors. He sees core drivers of the shift in power from incumbent boards to institutional shareholders:
Also important are the proxy access movement and the rise in the use of mandatory bylaw amendments. "The overall effect of these recent and anticipated changes to the proxy and voting landscape will be a sharp rise in the power and influence of shareholders to shape corporate policy and remove any director perceived as being unresponsive or standing in the way." Panelists came out about as might be expected. Hitchcock noted continuing impediments, such as supermajority requirements and the SEC providing a "no action" letter to CA on LongView's proposal to remove two directors. (Longview asked that CA shareholders be allowed to remove directors by a majority vote of the shares outstanding -- something they are entitled to do under the laws of Delaware, where the company is incorporated.) Longview had much greater success with proposals asking companies to fix grant dates before the fiscal year begins and to price options at an average of the stock’s opening and closing price on the grant date. Most of their proposals were withdrawn following constructive talks with the companies but they won 47% at Apple, which held out. During discussion, Hitchcock offered that proxy access can add positive value by adding board members with fresh perspectives. Silverberg argued that directors balance competing needs, not simply the short-term interests of a transitory shareholder base. She raised the canard of "special interest directors" put up by hedge funds seeking short-term profits. (see her firm's comments on the SEC's proxy access proposals) She said corporations are "representative democracies" where directors are ultimately accountable. She also raised the likelihood that hedge funds will increasingly "supersize" their votes and will attempt to profit by voting against shareholder interests in complex derivative actions. Godfrey noted that tech firms paid little attention to governance issues until the recent restatement brought problems to light. CEOs now need to spend more time explaining to shareholders why and how to vote. He fears that increased shareholder power will lead to the need for self-defense mechanisms, such as expanding boards and more staggered elections. More importantly, growing democracy might force CEOs and boards to take their eyes off growing their companies, in order to focus on elections. During the discussion, Finseth put forward the idea that pensions should have to get permission from fund holders on how to vote on their behalf. Beneficiaries shouldn't have to allow the pension to vote in ways they disagree with. Afterwards, I discussed with him how this might be accomplished by branding, as proposed by Mark Latham. The program was informative and led to a lively discussion. I was pleased to see the NACD Silicon Valley Chapter was able to gather a panel of such luminaries. Unfortunately, the program was held the day after a holiday, instead of their normal Thursday; attendance was about half of normal. If you're in the area, be advised to attend future events. Aguilar and Walter Named for SEC Postions According to the Washington Post, Senate Majority Leader Harry M. Reid has forwarded the names of Luis A. Aguilar and Elisse B. Walter to the White House to fill their party's two vacancies at the Securities and Exchange Commission. After extensive background checks, President Bush and the full Senate may act on their nominations. The paper reports that labor groups had pushed Damon Silvers, a lawyer at the AFL-CIO, for one of the slots, instead of Aguilar, who some see as weak on the 2002 Sarbanes-Oxley law. (Democrats Nominate 2 for SEC Vacancies, 11/14/07) AP reports, "Of the Democrats' two choices for SEC nominees, Aguilar, the former investment firm executive, is widely perceived to be more pro-business than Walter, who would be expected to lean more toward regulation." (SEC Headed for Vote on Shareholder Moves, Forbes, 11/14/07) Senate Hearing on Proxy Access The US Senate Committee on Banking, Housing, and Urban Affairs held a hearing on “Shareholder Rights and Proxy Access.” In prepared remarks, Christopher Cox, Chairman, Securities and Exchange Commission, said: "As you know, the current rules do not permit shareholders to offer these bylaw proposals." That may be Cox's interpretation but before 1990 and since the recent AFSCME v AIG decision, shareowners have had the right to put forward such proposals as binding or nonbinding resolutions. Cox's written testimony goes on to say that choosing the company's directors is a most important legal right and "the federal proxy system should protect and enforce" that right, "not stand in its way. After all, we cannot have capitalism without capital." Cox believes the AFSCME v AIG decision has been called into question by a Supreme Court ruling this year in another case that held that an agency's interpretation of its own regulations cannot be questioned unless it is "plainly erroneous." This "leaves a degree of legal uncertainty, which "does involve a great deal of real world risk and litigation." "Officially, the staff has no view on what the rule says or how it applies in any specific case. There can be absolutely no excuse for our continuing to fail to answer that basic question. That is why I have said all year that we are committed to having a clear rule in place for the coming proxy season." "We are still in the process of evaluating over 34,000 comments from the public on this issue." Cox went on to note the Commission is not limited to choosing one of the two noticed proposals. "So long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention." He insists that because of the legal uncertainty, the SEC must move forward or "all of the protections of the proxy contest rules are out the window -- including requirements for disclosure of conflicts of interest, and possibly even the antifraud rules that prevent deliberate lying to investors." Cox said he agrees with the many commentators on the two proposals who have said that we should go back to the drawing board and take a fresh look at this issue. "We will do that. None of the 22 SEC Chairmen since the agency first looked at this issue in 1942 has successfully taken this step. I nonetheless am committed to serious work on it, and I am intent on bringing it to a successful resolution." In other testimony, John Castellani, President of the Business Roundtable, said proxy access would lead to a distraction. Our "biggest concern is that board members would be forced into a political system, and then concentrate on annual election campaigns to the detriment of their most important responsibility – protecting and enhancing the investment of all shareholders." "Individual shareholders would be confused by conflicting choices." BRT members have already made substantial reforms. "84% of our Boards have voluntarily adopted Majority Voting for Directors in just two years." "The mean tenure of a CEO of a Business Roundtable company is now down to four years," said Castellani. "Boards are more dominate than ever." (But are boards accountable to shareowners? Boards that are independent from CEOs aren't necessarily dependent on shareowners.) "With Majority Voting, shareholders now have a true "yes" or "no" vote on board candidates, and have a meaningful voice in the director election process." (Yet, if only one nominee's name appears on the ballot, voters have little real choice.) "The challenge we now face is guarding against further erosion of our competitiveness. Increasingly we see public companies going private, and new companies listing in foreign exchanges." Jeff Mahoney, General Counsel, of the Council of Institutional Investors, testified that "shareowners should continue to have the ability to file proxy access resolutions and the marketplace at large should have the opportunity to vote on whether those resolutions are in the best interests of the targeted companies and their owners." "We have already gone through one proxy season with the AIG decision in place and the great legal uncertainty that Chairman Cox apparently fears never materialized...There were only three access resolutions during the 2007 proxy season. And I would add that all of those resolutions received significant shareowner support; in one case a majority. We expect that the 2008 proxy season will yield similar results." Mahoney said all three of last year's access proposals "fully complied with existing SEC disclosure requirements." "In addition, Council members, and we believe most other investors, would oppose proxy access resolutions that fail to provide adequate disclosures about the proposing shareowners." Anne Simpson, Executive Director, International Corporate Governance Network, responded to the concerns raised by John Castellani about businesses increasingly going abroad or going private. She said that when companies do go abroad, as an alternative to US capital markets, they find that in most jurisdictions shareholders enjoy the right to nominate and remove directors. She also noted that one of the main reasons companies go private is so that shareholders can have a greater say over who sits on the board and more opportunities for shareholder input. "In the UK, Australia and other Common Law countries outside North America, shareholders may propose a director by ordinary resolution, and this requires that 100 shareholders or those representing 5% of the share capital put the resolution forward. A similar provision exists in major Civil Law countries, such as Japan or in Germany where a single shareholder may propose a director for election to the supervisory board, although to call a special meeting for this to take place requires 5% of shares." Those essential rights have been in place in the UK for 150 years. She noted that because of market size in the US, a 5% threshold is too high to allow for meaningful access." "The corporate governance paradigm is simple: shareholders provide capital to companies; boards are given the task of overseeing the deployment of that capital; shareholders ensure that their interests are protected through being able to hold the board to account. To ensure this, shareholders need the ability to appoint, remove and propose directors to the board." In a poll of ICGN members, "82% stated that shareholders should have the right to propose directors for the board of the company. 76% thought the rules and requirements for proposing directors should be no different to that for introducing other resolutions to the agenda." "There has also been concern that allowing shareholders to put forward candidates to the board in the US via the proxy process would leave companies vulnerable to special interests. If nomination were the same as election, perhaps this would be a consideration. However, all resolutions must be passed by a majority of shareholders and all elected directors would still have fiduciary duties to the company, not to any particular group." "We urge that the SEC proposals be put to one side, whilst a further round of consultation takes place to find solutions which are simple and practical. We do not see a disadvantage in postponing the decision. The current climate in our view is suitably stable to allow for this reflection. Shareholders may well make proposals, but only if they command majority support can they have real influence. That in itself is the inbuilt check and balance to the system." Dennis A. Johnson, Senior Portfolio Manager for Corporate Governance of CalPERS testified there is no need to rush into a rulemaking. "There is no uncertainty about the existing rule, which clearly allows shareowners to file proxy access proposals on corporate ballots." "No company challenged any proxy access proposal in court this year. The odds are low that another circuit court would question the sound reasoning of the AIG case." "Requiring background information about the proponents of proxy access proposals never came up until the SEC raised it this year. Neither companies nor shareowners have previously requested such information -- even in the most hotly contested proxy campaigns." "It is important that the Commission be fully staffed before it takes action." He concluded by saying that "we prefer self-government to regulation and legislation," implying that with proxy access shareowners would be better able to monitor their own corporations with less need for government intervention. Senator Reed. concluded by summarizing the SEC's two proposal. One denies access outright. The other sets such a high threshold that it won't work. All the shareowner representatives agreed. Castellani insisted there are five percent holders...just not among pension funds. Reed said he would hold the hearing open for five days and may seek additional input from those providing testimony. investors prefer self-governance and self regulation to to regulation. SEC should do no harm. We should stand for more democracy, not less. We are the world's only market that keeps shareholder candidates from the proxy statement. Has not been any concern expressed by the companies last year that anything is missing, with regard to disclosures. The pressure is clearly on Cox. Will he move forward this year with only one Democratic commissioner? I hope not. Financial Week concludes, "It is likely the Securities and Exchange Commission will vote to temporarily curtail proxy access for shareholders later this month, despite an increasing outcry from institutional investors, unions and Democrats in Congress." Cox did say, “The ‘do nothing’ alternative is doubly dangerous…. It will create a law of the jungle for any actual shareholder proposals that are advanced in the meantime.” His vote for the no-access proposal is merely an attempt to head off the legal confusion until a better rule can be written and approved. Rumors continue that the SEC will hold an open meeting on Nov. 28 to vote for "no access" or some variant. Financial Week also reports, "The Senate has now submitted two names to replace Mr. Campos and Ms. Nazareth. If they are accepted by the White House, they would still need to be approved by the banking committee and a full Senate vote." (Proxy access muddle won't be cleared up for at least another six months, 11/14/07) Downward Mobility A report by the Pew Charitable Trusts show that one-third of Americans born in the late 1960s have moved down the economic ladder and make less than their parents. Forty-five percent of African Americans born into solidly middle-class families have fallen into the bottom 20% of income distribution. Who has gained the most in the past 30 years? The families who were already at the top of the income charts. The haves now have more. (Downwardly Mobile in America, AFL-CIO, 11/13/ | ||||
, the Business Roundtable made up of 160 CEOs