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In a similar 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."

The SEC received 34,000 letters and emails on their proxy access proposals by the close of public comment on October 2. Short "no access" release S7-17-07 (comments). Among the most thoughtful were those by J. Robert Brown, Jr., TheRacetotheBottom.org. Long limited proxy access proposal, S7-16-07 Shareholder Proposals (comments). I have posted my own here (in Word). See also those by TIAA-CREF and J. Robert Brown Jr. Also worthy of note were comments by CII and SIF. Some discussions were posted to theRacetotheBottom.org, Yale's Millstein Center for Corporate Governance and Performance, Save Shareholder Rights!, and AccountabilityCentral.com. The following organizations have active campaigns allowing readers to quickly send a message to the SEC and/or Congress: AFL-CIO, AFSCME, Christian Brothers Investment Services, Co-op America, CorpGov.net, Domini Social Investments, Oxfam America, PETA, SSR (a joint initiative of the Social Investment Forum and the Interfaith Center on Corporate Responsibility), and Walden Asset Management. Please e-mail me as you identify others. Although comments were due on October 2, traditionally the SEC has continued to post and consider comments for a month or two or until a decision is made. Therefore, I would encourage readers to continue to send comments.

October 2007

Trust Declares Victory

AVI BioPharma announced that it has entered into an agreement with the AVI Shareholder Advocacy Trust (the “Trust”) under which the company’s board of directors has appointed Dr. Gil Price and William Goolsbee as directors of the company. These new directors will fill the unexpired terms of Alan P. Timmins and Dr. James Hicks, who have resigned as directors of the company effective Oct. 29, 2007. Timmins will continue to serve as the company’s president and chief operating officer and Hicks will continue to serve the company as a consultant.

Under this agreement the Trust, the Trust’s managing trustee, the Shareholder Advocate LLC, and Richard Macary have agreed to terminate the Trust and, subject to certain conditions, not to take certain actions until at least the close of the company’s annual meeting of shareholders in 2010. These actions include any activities that relate to or would result in extraordinary transactions, including mergers, liquidation and transfer of a material amount of the company’s assets, changes in the board of directors or management of the company, changes in the company’s business or corporate structure or material assets, or changes in the company’s charter or bylaws.

“We look forward to drawing on the experience and insights of our two new directors as we work collaboratively to maximize AVI’s scientific and clinical foundation and our considerable commercial prospects,” said Jack L. Bowman, chairman of AVI.

Macary said, “The Trust strongly believes in the significant value and untapped potential of AVI’s RNA-based therapeutic platform. The Trust is pleased with the changes the company has made recently and, with these changes, believes that the Trust’s goals of increasing the company’s market capitalization and enhancing shareholder value are well on their way to being achieved.”

According to the Trust site, ""We continue to believe strongly in the potential of AVI’s antisense technology and 2008 should finally be the year that AVI realizes its potential and gets back on the radar screens of Wall Street firms as well as big pharma. The current changes along with the selection of a new CEO should position the company to take advantage of the bullish outlook on RNA therapeutics, which has resulted in stellar market performance over the past 18 months for Sirna, Alnylam Pharmaceuticals and Isis. AVI currently trades at a small fraction of these market caps."

In an email, Macary indicated his satisfaction. "The Advocacy Trust achieved a goal usually only achieved by major hedge funds or major investor groups...success here was a direct result of shareholders coming together, using their collective resources, their holdings and their contacts."

I'm delighted with Macary's success and with the fact that he is now writing up lessons learned. I've been something of a sceptic but a track record of success may bode well for similar efforts at other micro or small cap companies. An advocacy trust, another tool in the growing shareowner's toolbox

See also AVI BioPharma unseats 2 on board, OregonLive.com, 10/31/07. 

Nazareth Says SEC Should Delay Vote

Annette Nazareth, the remaining Democrat SEC commissioner, told a meeting of the International Corporate Governance Network, "under the circumstances, this seems a particularly inopportune time for the commission to be considering issues of this magnitude and divisiveness." Any rulemaking on proxy access should be postponed. (Call to postpone SEC 'proxy access vote,' MSNBC, 10/30/07)

Reforms Needed at Public Pension Funds

Former SEC chair, Arthur Levitt Jr., warned of problems in our currently "shaky pension system." According to a report in the NYTimes, "he blamed a rule-making framework that allows softer accounting standards for governments than for corporations, and called for the repeal of the Tower Amendment, a 30-year-old law that limits the S.E.C.’s authority to police governmental accounting."

He also questioned the way the Governmental Accounting Standards Board is financed, recommended that Board members be named by the SEC, and that public pension funds have formal education requirements for their trustees (less than half currently have such requirements). "He expressed great concern over the practice of some pension officials of soliciting campaign contributions from Wall Street firms."

Levitt said we need to bar money managers who recently made political contributions to any fund officials from working for public pension funds. (Ex-Chief of S.E.C. Says Pension Funds in Danger, 10/31/07) I think we also need to guard against the flip-side...board members hired by investment managers after these firms contract with the retirement board

With regard to reducing "pay to play," CalSTRS is in the final stage of adopting model regulations. When the Mississippi Public Employee Retirement System conducted a survey of other state systems on behalf of the National Association of State Retirement Administrators, it found that, among the 25 or so systems that responded, only nine plans had any formal education policy for board members, only six had mandatory educational requirements and only one had a mandatory certification program. That needs to change.

For more about recent reforms, see The $3 Trillion Challenge, Governing.com, October, 20007 and Pension Fund Professionals and Trustees Need Continuing Education to Properly Fulfill Their Fiduciary Responsibilities, by Bill Blythe and Tony Gelderman.

How Institutional Shareholders Are Gaining the Whip Hand

The Silicon Valley Chapter of the NACD will hold a panel discussion on significant changes to the proxy and voting regime that are causing fundamental shift in the balance of power between incumbent directors and institutional shareholders, to the benefit of the shareholders:

• Majority Voting
• Proposed Elimination of Broker Discretionary Voting in Director Elections
• Proposed Shareholder Access to Company Proxy Statements
• Rising Use of Mandatory Bylaw Amendments

Their announcement says, "Once broker discretionary voting in director elections has been eliminated, the retail street vote will as a practical matter disappear. This means that the effective corporate electorate will consist almost exclusively of institutional shareholders such as labor union pension funds and hedge funds, with their distinct political and business agendas. For a company which has adopted the new majority voting standard, any director wishing to stay on the board will have to affirmatively convince a majority of those institutional shares to vote in favor of reelection. When shareholders call to say jump, the question will be how high…The panel discussion will be led by Eric Finseth, now a partner at Mayer Brown, who oversaw and administered the SEC's shareholder proposal program during the 2006 proxy season, the battleground for many of these changes to the proxy and voting regime."

November 13, 2007 in Palo Alto, California. Registration - Networking - Continental Breakfast: 7:30am to 8am. Program: 8am - 9:30am.

Overpaid Execs

Stanley O'Neal may not be getting a severance in the technical sense, but he's still getting his $169 million pension plan after Merrill Lynch suffered the biggest quarterly loss in its 93-year history. Forbes discusses ten such outrages. (Super-Size That Severance!, 10/31/07) See also, "We are Overpaid," Say US Executives at TheCorporateCounsel.net Blog.

Singapore Drops Lead to Hong Kong

Hong Kong edged out in Singapore for the first time in corporate governance rankings due to slippage by Singapore, according to Jamie Allen, secretary-general of the Asian Corporate Governance Association. India, Taiwan and Japan have come in third to fifth in ranking, while Indonesia, the Philippines, and China are at the bottom three.

“There has been a palpable lessening of the pressure for reform around the region, as one would expect during such a time, and many governments, regulators and market participants have taken their eye off the governance ball,” says Allen. (Hong Kong ahead in corporate governance, Asian Investor, 10/30/07)

Vacation Bites

I'm still on vacation in Honolulu (anyone want to meet, please email me) but noted the following items:

WSJ notes that "as public pensions increasingly venture into more-complex investments such as hedge funds, private equity and infrastructure projects, paychecks at many funds are fattening up." Russell Read may earn $971,880 at CalPERS, while Britt Harris could earn $904,500 at Teacher Retirement System of Texas. "The impact on returns of the recent pay increases remains to be seen," says the article. "New York executive search firm PrinceGoldsmith says that among its clients, the average pay package for investment chiefs hired by endowments and foundations is up about 50% in 2006 and 2007 from the previous two years." (Scaling Up the Pay for Public Service, 10/29/07)

This year, more than 80 environmental proposals were filed with public companies, 43 of them specific to climate change compared with 31 in 2006. Expect more next year, according to an article in Financial Week. (Green proxies to be red hot this season, 10/29/07) The average vote in 2007 for environmental and social issues was 15%, an all-time high for such proposals; climate change proposals won 20% support, on average, in 2007. The SEC issued more than 63 no-action letters, allowing companies to exclude social and environmental proposals under the "ordinary business" exclusion. "A petition last month signed by regulators in 11 states, as well as institutional investors and environmental advocacy groups, called for the SEC to allow financial-risk proxy proposals under Regulation S-K, which requires companies to spell out material losses from unquantifiable risks, such as from climate change."

Charles Elson's Seminar in Corporate Governance continues at the University of Delaware. The next installment, open to the public on November 29th, will consider the topic Delaware Corporate Regulation and the North Dakota Publicly Traded Corporations Act. Elson has lined up a very distinguished panel for the discussion. 9:30 am ~ 11:30 am in 125 Alfred Lerner Hall. To attend, contact Alba Bates at the Weinberg Center for Corporate Governance.

RiskMetrics summarizes corporate governance developments in a handful of international capital markets in a report entitled Tracking Progress: A Look at Global Governance Developments. (A Look at Global Governance Developments, 10/29/07)

TBLI 2007 in Paris offers a full agenda for their meeting November15 and 16.

US companies that hire compensation experts tend to pay their top executives more but that doesn't translate into higher shareholder returns, according to a report by The Corporate Library. According to the report, companies that hired Pearl Meyer & Partners paid their CEOs 18.6 percent above the median salary of peers. (US companies with consultants pay CEOs more-report, Reuters, 10/25/07)

A recent study by Towers Perrin shows employee engagement and financial performance are intertwined and outlines how companies can help employees become engaged. Only one fifth (21%) of workers in the study are engaged in their work while 38% of polled workers are partly to fully disengaged. "Companies with the highest percentage of engaged workers had a 19% increase in operating incomes and a 28% increase in earnings per share. On the other hand, over the same year period, companies with the lowest employee engagement rates showed a 33% decline in operating incomes and an 11% decline in earnings per share." (Engaged Employees Equal Increased Earnings, SocialFunds.com, 10/25/07)

CorpGov Bites

Dave Lynn posted a summary of a brief, Shareholder Proposals: Some Helpful Tips for the Upcoming Season, from O’Melveny & Myers on TheCorporateCounsel.net/blog. Although aimed at management, the tips may be helpful to shareowners as well.

I've been meaning to write something on Supreme Court's Stoneridge case but have been spending too much time on vacation. I'm in Hawaii for another week, so won't get to it. However, Broc Romanek provides links to several discussions. I've been most impressed with those at The Race to the Bottom.

According to reports, the board of Merrill Lynch is discussing CEO Stanley O’Neal’s future. Liz Moyer questions, Merrill: Where Was The Board?, at Forbes.com for not catching "mushrooming exposure to potentially risky derivatives--amounting to $32 billion at the end of June just before the market started to crater. Should the same people who fumbled be selecting O'Neal's possible replacement?

Those meeting with SEC's Chairman Cox recently have reported back that when asked directly if the SEC will act on proxy access this year, there has been no definitive response. I'm still betting it won't happen in time for the next season. To ensure that outcome, please click on the "Save Shareholder Rights" button above or one of the other links to keep sending emails in opposition to both proposals. I understand, he SEC is, however, more likely to act on the electronic forum/chat room/communication piece, which they stated would absolutely not replace the shareholder process in any way, shape or form. That may be one of Cox's major legacies.

IPO activity in Brazil has been good for corporate governance. In order to attract interest, the recent IPOs have had to sign up to so-called novo mercado guidelines, which do away with the dual share classes, over-friendly board members and non-existent protection for minority shareholders that made life hazardous for outside investors. (The view from cloud nine, The Economist, 10/25/07)

Frank Letter Posted

I've posted a copy of the letter from Barney Frank and several other ranking members of Congress, asking the SEC not to adopt either of their proxy access proposals. Instead, the group cautions, the SEC should take this opportunity to learn about proposals already submitted or that are in the works as a result of AFSCME v. AIG.

It is clear that the ability of shareholders to propose changes in director election procedures did not lead to a torrent of such proposals. Moreover, the limited number of proposals that were made appears to have resulted in valuable discussions of the appropriate means for accommodating shareholder input to the director nomination process, in some cases leading to voluntary adoption of new procedures by the companies involved...

We ultimately would like to see improvements in the proxy process. At the present time, however, the broad opposition to both proposals, coupled with the lack of consensus at the Commission and the reduced number of commissioners, argues in favor of maintaining the status quo for the coming season.

Morgan Stanley Update

We recently reported that a sponsor of a resolution to Morgan Stanley was refused a "proof of ownership letter," as required by the SEC for a resolution involving Morgan Stanley. That left their client, who pays full-service brokerage commissions, with the strange need to transfer their entire account to another broker in order to continue to submit rule 14a-8 proposals to any company.

At least one other Morgan Stanley client was also reportedly denied a "proof of ownership letter" for a resolution involving another company. Several of us wrote to Morgan Stanley and received a favorable outcome. Their "Director of Company Law" wrote back to inform us that "it appears that there was some confusion regarding the request for the proof of ownership letters. This has been or will be rectified shortly and the letters are forthcoming if they have not been received already."

He went on further to note: "Morgan Stanley has no policy to refuse to provide proof of ownership letters in the context of shareholder proposal submissions and in fact provided such a letter last year to the Morgan Stanley client you noted in connection with his shareholder proposal. As you can imagine, we receive many requests for all sorts of letters in our branch system. To avoid any confusion in the future, we have sent a compliance notice to remind our staff of the importance of promptly providing proof of ownership letters in this context."

Although we are happy with that resolution, we are still disappointed to be at the mercy of other entities to comply with SEC provisions. SEC rules require shareowners to obtain proof of ownership letters but there is no requirement that brokers cooperate in providing such letters. SEC rules require shareowner resolution proponents to present their proposals at the annual meeting but do not require companies to allow such presentations to be made. Why does the SEC, which is tasked with protecting shareowners, promulgate rules that place requirements on shareowners but not on the hired help? The SEC should place reciprocal requirements on management so that shareowners have the tools to ensure management is working in their best interests.

OMERS Wants Gloves Off

The Ontario Teachers Pension Plan has been in the news for their recent acquisition, proxy advisor Glass Lewis. Now the Ontario Municipal Employees Retirement System (OMERS) has told the Ontario government that it needs to do away with its current pension plan restrictions on investments. One of the prohibitions OMERS would like to see pulled is a bar against a pension plan owning more than 30% of the voting shares of a corporation. OMERS also opposes a rule restricting pension plans from holding more than 5% of the book value of the fund's total assets in any single parcel of real estate or Canadian resource property, or more than 15% of assets in Canadian resource properties, or more than 25% of total assets in real estate and resource properties. (OMERS wants restrictions lifted, Toronto Globe and Mail, 10/20/2007)

With the surge in the Canadian dollar, relative to the US dollar, expect to see more acquisitions and more governance activism from these giants of the north.

Family-owned Indian Companies

Family-owned companies dominate India's corporate landscape. According to a new joint survey of 32 Indian companies in 16 prominent family groups covering a broad cross-section of Indian industry, by Moody's Investors Service and ICRA Ltd., positive characteristics of family control can include a long-term perspective and an ability to act quickly. Indian family companies have responded well to the opportunities available in the fast-growing and liberalizing economy.

However, family control can also raise specific corporate governance concerns - with potentially negative credit implications - that include adaptability, leadership transition, checks and balances, and transparency, says the report.

"Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding 'checks and balances' such as composition of the board of directors and the operations of audit committees," says Chetan Modi, Moody's India Representative Director and a co-author of the report.

"There are material residual issues regarding checks and balances, but these are generic to corporate India and not isolated to family companies -- for example, the lack of activist shareholders and a business and cultural environment that does not permit hostile mergers and acquisitions. Furthermore, important governance issues persist in areas not covered by regulation," adds Modi.

"The lack of board nomination sub-committees in many companies suggests that succession planning is not fully deliberated with independent directors. There is often insufficient transparency on ownership/control, related-party transactions and the group's overall financial position. Also, the prospect remains of higher leverage as families try to maintain control while implementing their often aggressive growth plans," adds Anjan Ghosh, ICRA's General Manager and a co--author of the report.

The report also noted that despite regulations regarding independent board directors, families retain significant control over listed companies. As such, the difficulty in ascertaining the true independence of directors is a big corporate governance challenge.

The above drawn from a press release. The report is priced at $550.00 and I'm assuming it might make interesting reading. Asia Times writer, Gary LaMoshi, once wrote that an independent board of directors that does its job properly might threaten the family's prerogatives. It might insist that all those nephews holding corporate-vice-president portfolios hit the road in the name of shareholder value. That move would not only subvert the rationale for family control but sow discontent that might endanger it. Let's hope Indian companies are able to bring the best of both world's to their family owned firms.

Owned by Investors for Investors

According to an article in Global Proxy Watch (10/12/07), "Owned by Investors for Investors" is a marketing slogan being floated by the Ontario Teachers Pension Plan for their recent acquisition, proxy advisor Glass Lewis. I like it.  Stephen Davis, editorial director of Global Proxy Watch, expects Teachers to name a new board for GL, with the retiring CEO of Teachers as one of the possible members.

But their "'number one priority' is to design air-tight conflict of interest standards. These could include disclosure whenever GL is advising on companies where Teachers has stakes and engagement. Such measures could introduce competitive pressure on other services to improve their own governance habits... Teachers’s reputation as a governance pacesetter lends GL new sex appeal among activist pension plans who now subscribe to RiskMetrics. Equally, though, the acquisition could unnerve asset managers and mutual and corporate fund clients anxious that GL might turn tougher on corporations," writes Davis. (see also, press release)

I'm hoping GL will now be open to new options, such as providing voting services for organizations of individual investors, such as AARP, AAII, Responsible Wealth, and others. That would allow retail shareowners to assign their proxies to such organizations, creating a competition by brand for retail votes. Another option I hope they will explore is to cooperate with those, such as Mark Latham, who submit resolutions to have corporations purchase independent proxy services based on shareowner vote. That would eliminate the "free rider" problem in obtaining proxy advice and services.

Proxy Activism 101

See a presentation that Lance E. Lindblom, President and CEO of the Nathan Cummings Foundation, gave recently at Harvard Law School on shareholder activism. He explains the Foundation's commitment to democratic values, social justice, and building a socially and economically just society. With an endowment of over $500 million, the Foundation uses its shareholder status to vote proxies and file shareholder resolutions in a manner consistent with achieving its mission and with long-term capital accumulation.

Since January 2007, the Foundation cast 536 votes on 155 proxies, including 417 on company resolutions and 119 on shareholder proposals. The Foundation casts its votes in accordance with its own proxy voting guidelines, using information supplied by Institutional Shareholder Services. Since 2003, the Foundation has filed over 30 shareholder resolutions with 22 corporations. Lindblom discusses negotiations with both the companies and with ISS. Questions from Lucian Bebchuk, Beth Young and Harvard Law School students led to a more wide ranging discussion on theory, practice and possible reforms. (link at The Power of Proxies and Shareholder Resolutions, The Harvard Law School Corporate Governance Blog, 10/19/07)

Dysfunctional Board Members

Jack & Suzy Welch offer five stereotypical types of dysfunctional board members: Do-Nothings, White Flags, Cabalists, Meddlers and Pontificators. "Imagine how much better it would be if nominating committees, usually just focused on vetting potential members, dealt with the hard cases right in front of them," they say. "After all, nothing can keep a board on its best behavior but itself." (Directors Who Don't Deliver, BusinessWeek, 10/18/07) Nothing, perhaps, but empowered investors. Unfortunately, that possibility doesn't appear to enter their minds.

Morgan Stanley Invents a New Outrage

In 2006 Whole Foods Markets refused to allow shareowner resolution proponents an opportunity to speak during the normal business portion of the annual meeting, even though SEC Rule 14a-8(h)(3) requires that a proponent or representative of a resolution contained in the company proxy must not only attend the annual meeting, but must actually present the proposal.  If they do not, that proposal is barred from being presented again for a period of three years. This year, it looks like the award for finding loopholes to block shareowners from exercising their legal rights may go to Morgan Stanley.

Word from shareowner activist John Chevedden is that a sponsor of a resolution to Morgan Stanley, which won a 59%-vote at the 2007 Morgan Stanley annual meeting, is now being refused a "proof of ownership letter," as required by the SEC when an investor sponsors a resolution. Who is refusing to issue the letter? None other than Morgan Stanley, which apparently has a new policy to refuse to provide proof of ownership for any shareowner resolutions.

This leaves the Morgan Stanley client, who pays full-service brokerage commissions and still owns the same stock as reflected in last year’s Morgan Stanley broker letter, with the strange need to transfer their entire account to another broker in order to continue to submit rule 14a-8 proposals to any company, including Morgan Stanley. Additionally, I understand this is not the only Morgan Stanley client who has recently been refused a broker letter. I'm told a foundation based in New York City has also been the victim of this new policy as well.

Home Depot didn't gain favor when its board members didn't bother to show up for the 2006 annual meeting. Whole Foods didn't gain favor when they refused to let legally authorized resolutions to be presented during the business portion of their 2006 annual meeting. Morgan Stanley won't gain the favor of either its own shareowners or its customers with this latest stunt. Morgan Stanley should immediately rescind its reported policy, which blocks shareowners from complying with SEC rules and which requires only a very minimal expense.

The Art and Ethics of the Internal Investigation

Recent data suggest that in 2006, more than 60% of large publicly traded corporations hired outside law firms to conduct internal investigations. Supervising these inquiries is becoming a core competence for boards of directors, general counsel, and outside counsel alike. A panel at the Arthur and Toni Rembe Rock Center for Corporate Governance will explore a series of difficult legal, ethical and strategic issues that commonly arise in connection with the conduct of such inquiries, including questions of privilege, independence, cooperation with governmental authorities, and warnings to employees subject to interview. The panel will also address pragmatic considerations such as techniques for identifying circumstances in which it may be unnecessary to retain outside counsel, responsible strategies for controlling the cost of these investigations, and methods for addressing differences of opinion concerning the interpretation or implications of an inquiry’s findings. 5-7 p.m. Tuesday, October 30, Room 280A, Stanford Law School. Register.

CorpGov Bites

Night at the Museum discusses corporate governance reforms initiated by Peter Erichsen at the J. Paul Getty Trust. Nonprofit advisors and board members should take note. (Law.com, 10/18/07)

'Whose Company Is It?' New Insights into the Debate over Shareholders vs. Stakeholders published: in Knowledge@Wharton (10/17/07) reviews a study, which uses a mathematical model to explore the advantages and disadvantages of stakeholder-oriented firms. Stakeholder-oriented companies were found to have lower output and higher prices, and can have greater firm value than shareholder-oriented firms.

How does ISS fit within RiskMetrics? Has policy development changed? Cheryl Gustitus, Head of Global Communications at RiskMetrics, explains all on this podcast over Windows Media Player or RealPlayer. Thanks to TheCorporateCounsel.net.

Monsanto, Marathon Oil, Bank of America, Walt Disney and Entergy headed their sectors in CRO's 100 Best Corporate Citizens 2007. The list is drawn from approximately 1,100 publicly held U.S. companies in the Russell 1000, S&P 500 and Domini 400 indices, as measured by performance in the eight stakeholder categories: Environment, Climate Change, Human Rights, Employee Relations, Corporate Governance, Lobbying, Philanthropy and Financial.

Although a few big lawsuits will not rattle the market for directors and officers insurance, the effects of the credit squeeze just might. According to Bear Stearns, the D&O insurance industry could potentially lose $3 billion this year as a result of the credit squeeze that followed the subprime crisis. (A D&O Dilemma, CFO.com, 10/18/07)

Thirty-nine percent of surveyed young adults between 25 and 34 expect to be able to retire before the age of 60, yet 31% admit that saving for retirement is difficult, with 24% saying that low salaries are the reason. (Nearly 40% of Those Under Age 34 Expect to Retire Before Age 60, MMExecutive, 10/18/07)

Private equity funds are an increasing force among global investors but their short-term approach risks destabilising some developing countries, according to the United Nations trade and development agency. (Private equity funds risk destabilising poor countries: UNCTAD)

A new report from Ceres authored by Evan Mills, of the Lawrence Berkeley National Laboratory, finds that insurers worldwide are now offering hundreds of initiatives to tackle climate change and rising weather losses. The number of initiatives identified, which include pay-as-you-drive auto insurance, green buildings insurance, and weather derivatives for renewable energy projects, has more than doubled since a similar report was released last year. However, the report also highlights the fact that two-thirds of insurers are not yet experimenting with these approaches, and that most of this activity is happening outside the US. (Hundreds of New Insurance Initiatives Emerging to Tackle Climate Change and Rising Weather Losses, 10/18/07)

Giuliani Blasts SarBox

“We sure as heck have to go back and moderate Sarbanes-Oxley,” presidential candidate Rudy Giuliani told the conservative, anti-tax Club for Growth in Washington. In particular, he criticized the various certification requirements, which he said “serve no purpose.” “We have to make our financial industry competitive.” (Presidential hopeful Giuliani supported SarbOx but would push for change now, Financial Week, 10/17/07)

AAII, Failing its Members

The American Association of Individual Investors (AAII) announced its 25th AAII Investor Conference this November in Orlando, Florida, 11/8-10/2007. Three days of investment advice on stock picking, asset allocation, bonds, financial planning, ADRs, ETFs, REITs, even industry specific analysis but not one word, as far as I can tell, about how to vote your shares or what other steps shareowners can take to enhance the value of the corporations they already own. Voting is a legal requirement for institutional investors because, as an asset, it can add or detract value. Shouldn't this also be a concern for individual investors?

The last significant article I've seen from AAII on corporate governance was The Proxy Edge: Exercising Your Shareholder Rights by John Deysher in April 2005. Although it was very well done, it wasn't advice that lasts a lifetime. Issues evolve; so should AAII.

Online Education Coffee Break

What measures do you use to analyze a corporation's operational health? Earnings, cash flow, operational metrics, bookings, backlog, same store sales, etc. have become validating metrics, according to Marc Siegel, Head of Global Accounting Research at the RiskMetrics Group at the first installment in their 2007 Fall Leadership Interview Series. Siegel's discussion, Trends in Egregious Accounting Practices, offers insights on debt rollover risk, executive compensation and other issues in the current credit crunch. He's noticing aggressive accounting techniques in cyclical companies that attempt to hide the fact that business is as bad as it is. Of course, that leads to bad investment decisions and later restatements.

Presidential Candidates

I'd love to see a comparison of the corporate governance positions of presidential candidates similar to that released by the Kaiser Family Foundation to compare the health care proposals. Admittedly, the issues aren't as pivotal for most voters, but the long-term impacts could certainly be significant. Please let me know if you see any such analysis.

Boards Aligned With Management

A survey of more than 200 high-net-worth investors and professional financial advisors for FTI Consulting by independent research firm Affluent Dynamics found that 64% of high-net-worth individuals and 61% of financial advisors say that boards operate in the interests of management, rather than shareholders. Other findings:

• 87% of advisors and 88% of investors see a close connection between effective corporate governance and a company's reputation.
• 82% and 71% of financial advisors and high-net-worth investors respectively believe reputation accounts for more than 20% of a company's market value.
• 56% of financial advisors and 41% of high-net-worth investors said a board accounts for more than 10% of a company's share value.
• 3% of financial advisors and 12% of high-net-worth investors believe corporate governance practices have improved "a great deal" since the passage of Sarbox, while 45% of financial advisors and 43% of high-net worth individuals think that post-Sarbox governance practices have improved only "a moderate amount."
• Expertise (88% of financial advisors; 78% of high-net-worth investors) and independence (64% of financial advisors; 69% of high-net-worth investors) were identified as the two characteristics they look for most when measuring the qualifications of a board member.
• 67% of financial advisors and 58% of high-net-worth investors believe that companies do not provide adequate communications about their corporate governance practices. (Corporate Boards Seen As Aligned with Management Rather than Shareholders, According to a New Survey By FTI Consulting and FD,10/16/07)

Frank Warning to Cox

House Financial Services Committee Chairman Barney Frank, D-Mass., said it would be "a great mistake" for the SEC to act on proxy access matters without a full complement of Democrats on the five-member commission. He added that it's possible Congress could move this year to suspend any SEC action on proxy access.

This came in response to SEC Chairman Christopher Cox's affirmation last week that commission still plans to vote this year to clarify whether shareholders should be able to propose proxy-access measures, allowing them to place the names of their own candidates for corporate boards on company proxy ballots. (Rep. Frank: SEC Proxy-Access Vote Unwise, Forbes.com, 10/16/07)

The Social Investment Forum reports that SEC staff said that approximately 22,500 investor comments were made during the comment period. Only a small number of public comments supported the proposals. A survey by nine large institutional investors mirrored the huge opposition to the SEC proposals. The survey found that less than a third of investors supported any of the five potential SEC proposals. (Record 22,500 Investors Speak Out Against Potential SEC Curbs On Shareholder Resolutions, Role in Board Nominations, 10/10/07)

Exec Compensation

RiskMetrics Group's ISS Governance Services unit has released a new white paper - "Proposed Best Practices in Executive Compensation Disclosure" - which attempts to evaluate the clarity and effectiveness of the new disclosures.

A survey released by the National Association of Corporate Directors (NACD) finds that even most corporate leaders feel chief executives fail to earn their keep. The NACD polled 791 people who have served on the board of a public company, and nearly 70 CEOs or presidents. Two-thirds of respondents said the level of CEO compensation relative to their performance was "somewhat high" or "too high." Just 2.2 percent thought compensation was "too low," while nearly a third said CEOs are paid "just right."

58.8 percent of respondents said the reason for overcompensated CEOs is a lack of real performance objectives and evaluation. Further, 47.8 percent said rewards bore little connection to future corporate performance. And 39.6 percent faulted "undue CEO domination of the process" as the reason for exorbitant pay.

Last week the Securities and Exchange Commission summarized its take on the first year of its compensation disclosure rules. The SEC said it wants more analysis of how and why companies pay their top executives what they do, and more concise presentation of the compensation data. (CEOs Don't Earn Their Pay, Execs Agree, CFO.com, 10/16/07)

TBLI Conference Europe - Paris in November

Thursday, November 15, 2007 9:00 am - Friday, November 16, 2007 6:00 pm. Triple Bottom Line Investing Conference is the world's largest international learning and networking event dealing with sustainable investment. During this two-day event, the latest developments on screening, auditing, reporting, SRI analysis, corporate citizenship, indexes and research will be covered. Includes a segment on Shareholder Engagement.

California Women Execs Still Dreaming

The Study of California Women Business Leaders by Katrina Ellis, an associate professor of management at UC Davis Graduate School of Management, finds that from Apple Computer Inc. to Callaway Golf Co., TiVo to Williams-Sonoma, half of the 400 largest public companies in the world's eighth-largest economy have no women directors, and roughly a third have no female executive officers.

• Women hold only 10.4% of the board seats and highest-paid executive officer positions. That’s one woman for every nine men in the top leadership roles at these 400 high-profile public companies.
• 122 (more than 30%) of California’s 400 largest public companies have no women in a top executive position or on the board of directors.
• Half of the 400 companies have no woman among their executive officers.
• 47% percent have no woman in the boardroom.
• And only 13 of these 400 companies have a woman CEO.

Results are virtually unchanged from the university's initial report on the California's 200 largest public companies in 2005. This, despite a Catalyst report, The Bottom Line: Corporate Performance and Women's Representation on Boards, which showed that companies with the highest percentage of women on their boards outperformed those with the smallest by as much as two-thirds in three key categories: return on equity; return on sales; and return on invested capital. (UC Davis study still finds few women in California boardrooms, Sacramento Bee, 10/16/07)

No Pay for Managers Who Don't Beat Indexes

CalPERS officials said the overall performance of the 40 outside firms managing about $38 billion in U.S. and international stock investments are "not performing up to expectations," making it difficult to justify paying hefty fees. WSJ reports they are looking at imposing a pay-for-performance plan. Under the proposal, "global stock managers would receive a fee only if they outperformed certain benchmark indexes. Managers whose returns failed to beat the index would be paid nothing for that period."

CalPERS and CalSTRS, already use a structure that rewards money managers with additional fees for outperforming their benchmark indexes. But these plans also include at least a small fee that is paid regardless of performance. (Calpers Weighs a Fee Overhaul, WSJ, 10/15/07) Of course, the danger is that managers will dramatically increase risk in order to make the gambol pay, and they'll be gamboling with other people's money.

RiskMetrics Survey

ISS Governance Services wants feedback on potential proxy voting policies for the 2008 season. We encourage readers to express their views through their convenient gateway.

Execs in UK Want to Continue DB Pensions

Executives at UK companies are committed to providing employee retirement benefits, even though pension costs eat into profits and competitiveness, according to a survey released by the Confederation of British Industry and Watson Wyatt Worldwide. 84% agreed that pension plans help attract and keep staff members.

Yet UK employers are continue to shift toward defined contribution plans from defined benefit plans; 67% reported offering DC plans this year vs. 50% in 1994, when the survey was first conducted. Defined benefit plans are an option for less than a fifth of newly hired employees in the U.K., based on their employers’ responses. (Survey: British execs pledge to offer pensions despite rising costs, P&I, 10/15/07)

Now Reading

Next week, I'm heading over to Hawaii for a couple of weeks. One book I'm sure to pack is Lawrence E. Mitchell's The Speculation Economy: How Finance Triumphed Over Industry. In it, Michell argues the growing preeminence of finance over operations causes stock market considerations to increasingly trump those that improve the actual workings of a business. The quicker the stock payoff can be engineered, the more complete the triumph. Until that changes, don't expect CEOs to stop gaming the system, says Michell.

In the late 19th century US business was transformed from making money by controlling costs and increasing productive efficiency, the way Rockefeller and Carnegie did, to reaping instant riches from stock sales--such as the $1.5 billion stock fee (in 2006 dollars) that J.P Morgan's syndicate earned in 1901 by putting together US Steel.

Stock turnover increased almost 30% between 2000 and 2006 to 118% per year on the NYSE. Mitchell worries that an economy grounded in the short-term will self-destruct over the long haul. He argues that though a year feel like long-term for stock trading, it's not long-term industrial production. Rethinking capital-gains taxation is key and he calls on different terms for different market segments.

I'm not sure if that is the right direction to go, but he certainly is examining fundamental issues. I'm looking forward to a thorough read ...and to learning a lot more about finance at the end of the 19th century. If you're reading the book too, please share your thoughts.

End of Month ICGN Conference

The 2007 Mid-Year Meeting on the International Corporate Governance Network will be held in New York City on October 29th and will include corporate governance luminaries from around the world. Annette L. Nazareth, SEC Commissioner will deliver the opening address. Next up will be a moderated discussion on what's happening with shareholder rights in America, led by Peter Montagnon ICGN Chairman and Director of Investment Affairs at the Association of British Insurers. Later sessions focus on the question of whether the USA is losing its historic position as the premier listing choice for  publicly traded companies; cross border harmonization of regulation and worldwide IPO migration; and the right balance between appropriate regulation, litigation and shareholder rights.

Morgenson's Dire Prediction

Gretchen Morgenson predicts the SEC will vote to curtail investor rights, by enacting the no-access option for shareowner nominees. "This, by the way, comes, from the agency that calls itself the investor’s advocate."

If Mr. Cox votes to roll back A.I.G., he may argue that it is a temporary move until the S.E.C. can bring out a new, improved rule for the 2009 proxy season. But by voting against the rollback, Mr. Cox would prove that he’s on the side of investors.

In the past, Mr. Cox has said publicly that he thinks investors should have the opportunity to decide who their directors are. He can certainly talk the investor talk. In fact, there’s probably nobody smoother in that department.

But walk the walk? We’ll just have to wait and see. (The Owners Who Can’t Hire or Fire, NYTimes, 10/14/07)

I certainly hope Morgenson is wrong. The other two Republican Commissioners may want choice-free elections, but I'm not so sure Mr. Cox wants to go down in history as akin to Hu Jintao, whose new campaign against democracy activists and other critics of the government has now made discussion of leadership issues inside China more sensitive than ever. Choice-free elections may work for the Communist Party in China but is that really the best option for American corporate governance?

Earlier this year, the SEC prepared to weigh in on the side of shareholders in the case argued last week before the US Supreme Court involving Charter Communications Inc., a cable TV company that investors had accused of inflating its earnings. At issue was whether shareholders have the right to sue third parties, such as investment bankers, who were involved in improper transactions. The Los Angeles Times reports that "in a key, behind-the-scenes vote, Cox and the SEC's two Democrats prevailed over two of the commission's Republicans." Yet, the Justice Department ultimately rejected the SEC's brief. (SEC's policy path wavers, 10/25/07)

Cox took the right course on Charter; he will come to his senses and delay the vote on proxy access until next season. At least that's my sense of it, ...if he hears from enough investors who cry foul.

Election Runoff at CalPERS

CalPERS announced a runoff election will be held for the Retired Member representative to the 13-member Board of Administration, since none of the three candidates won 50% plus one vote. More than 125,000 (32% of the 392,120 retirees) throughout the state cast votes. Henry Jones, retired Chief Financial Officer for the Los Angeles Unified School District, received approximately 45% of the overall vote.

Perry Kenny, a retired tax consultant formerly with the California State Board of Equalization, received 33.5% percent of the vote; and Susan Bergeron-Vance, a retired director of finance and administrative services from the City of Santa Fe Springs, received 21.9%.  

Within minutes of the announced election results, Jones reportedly received the endorsement of Susan Bergeron-Vance. “I would like to thank the many retirees throughout the state of California who initially voted for me," said Bergeron-Vance. “As the remaining candidates enter a run-off, I now ask that my supporters consider casting their run-off vote for Henry Jones. I have a tremendous amount of respect for Henry's experience and he is the more qualified of the two remaining candidates."
  
 “I am honored to have received such strong support from retirees, associations and labor unions throughout California,” said Jones. “The unprecedented number of votes cast in this election reflects the desire of retirees to have a strong voice on the CalPERS Board of Administration. My team, supporters, and I are fully prepared to continue with our campaign to represent the needs and interests of California’s public employee retirees.” 
  
“I have been  tremendously impressed with Henry’s knowledge and expertise relating to pension fund management and equally impressed by his strong work ethic,” said CalPERS Board President Rob Feckner.  “I am confident that, going forward, many more retirees will join with those of us who support Henry and elect him to the Board of CalPERS.”  

"Jones may well be the most highly qualified candidate in history to ever run for the CalPERS Board," said James McRitchie, who publishes CorpGov.net and PERSWatch.net. "I fully expect CalPERS retirees will make the right choice to ensure the strongest Board possible to represent their interests."

PERSWatch.net has been working to avoid the need for a runoff in future elections by instituting "Instant Runoff Voting," which would allow voters to rank candidates in order of preference. This could save CalPERS up to $1 million dollars by avoiding the costs of runoff elections. The Board has directed staff to review IRV and other options. This may be the last runoff.

A random drawing for the order of candidate names for the runoff ballot was conducted October 12th; Jones' name will appear first. Ballots will be mailed to eligible retired members November 9; voted ballots must be postmarked no later than December 7.  Returned ballots will be opened beginning December 10 and the results will be announced soon thereafter. Upon certification of the election results by the Secretary of State, the newly elected Board member will be seated on January 16, 2008. The successful candidate will replace incumbent Bob Carlson, who has been on the Board since 1971 and did not run for re-election. (Press Release, 10/11/07)

Vanishing Middle Class

A new IRS report found that in 2005, the top 1% of earners took home 21.2% of the adjusted gross income share in the nation, up from 19% from 2004, and it also beats the previous high of 20.8% in 2000. The bottom 50% brought in 12.83% of the adjusted gross income share in 2005, a new low, and down slightly from 13.42% in 2004. If the trend continues, the top 1% will soon earn twice as much as a group than the bottom 50%. (Richest get richer, says IRS report, InvestmentNews, 10/12/07)

Access May Continue for Another Year

If the SEC fails to adopt a new rule on proxy access this year, investors are likely to be able to file such proposals for the 2008 season, concludes RiskMetrics group. John White, director of the SEC's Corporation Finance Division, indicated in an Oct. 1 letter to CII that SEC staff would take a similar position to last season if no final rule is adopted. However, White noted that “our intent is to have final rules in place this fall in time for the coming proxy season, because until that happens, there will continue to be great uncertainty across the nation--a situation that is highly undesirable.” With one vacant and one pending vacancy, both Democrats, on the five-member commission, movement this year appears unlikely. Another year of the 1 year, $2,000 threshold should help to demonstrate that this option is far from unreasonable. (Non-Binding Proposals Defeated, Risk & Governance Blog, 10/12/07)

ESG Handbook for Endowments

Last week I announced that Amnesty International USA and the Responsible Endowments Coalition have created what they claim is the first-ever step-by-step guide to encourage colleges and universities to adopt responsible investment practices in pursuit of environmental, social and governance (ESG) changes. Now the link to their guide works! Integrating Environmental, Social and Governance Issues is aimed at higher education trustees and administrators and student activists who want to push for responsible investing.

Amy O'Meara, a business and human rights campaigner for Amnesty International USA, said that while the trend toward responsible investing has been gaining over the last decade most academic institutions continue to invest in at least some companies whose policies and practices offer no protections for the environment or human rights and may, in fact, hurt either or both. "Colleges and universities could use their power as investors to press companies to improve how they respond to social and environmental challenges. But often they do not," O'Meara said.

"The truth is, academic institutions in the United States lag behind public and private pension funds, foundations, and even mutual funds in adopting strategies and policies for responsible investing," said O'Meara. "The value of college and university endowments now exceeds $340 billion in the United States. If higher education devoted a larger share of these endowments to responsible investments, the impact on the common good and on social and environmental change could be enormous."

Morgan Simon, executive director of the Responsible Endowments Coalition, said: "Our handbook explains in depth how college trustees, investment managers and students can align investment strategies with their institutions' values and missions. Long term, colleges with responsible practices can have a significant impact on how companies define their response to social and environmental challenges in addition to supporting their own communities. The guide provides many compelling examples of best practices from colleges and universities who have taken some leadership in this area."

Sixteen of the top 20-ranked colleges and universities (2008 U.S. News and World Report rankings) have adopted some practices that incorporate social, environmental and governance concerns in investment decisions.

The practices range from committees on investor responsibility to formal processes that allow students to petition for shareholder advocacy on issues that are of concern

Overall, more than $2.29 trillion in assets in the United States are currently managed using one or more strategies that consider ESG issues. This means that one out of ten dollars under professional management in the United States today is involved in some form of ESG investing.

The handbook offers information on legal issues, investment strategies, including positive investment screening and community investment, sample investment policies, and outlines various methods of shareholder advocacy and direct engagement with companies whose practices may be of concern.

"College students today have a low tolerance for hypocrisy, and many are getting an education so that they can better fight the massive injustices they see in the world, including human rights abuses by companies. These students are ready to undertake sophisticated efforts to reform their college endowments with the guidance this handbook offers," said Lisa Sachs, a co-author of the handbook.

Chapters topics include Closing the Credibility Gap, Strategies for Incorporating ESG Issues into Investment Practices, Proxy Resolution Process, Efficacy of Shareholder Advocacy in Promoting Corporate Social Responsibility, Legal Concerns - Fiduciary Duty, as well as Policy Frameworks and Implementation. Sample policies, letters, resolutions and an extensive list of resources are also included.

Network Expands

We have just added Veracorp LLC to our Corporate Governance Network. Veracorp inculcates the principles of decency throughout the entire organization with programs that engage boards, management, employees, suppliers and clients.  Once engaged, these stakeholders become loyal advocates of the organization, provide it with longevity, and actively participate in its mission to succeed. 
 
Through his programs, Frank Settineri has influenced  businesses ranging from the largest pharmaceutical companies, to small testing companies, to retailers and small businesses.  He recently started Veracorp LLC after a 30 year career in the pharmaceutical industry in which he built and grew organizations by selecting and retaining great talent and key stakeholders. 

Green Companies Attract Employees

New research shows that employees want to work at green companies and are happiest at companies with solid corporate social responsibility programs in place. A survey by MonsterTRAK found that 80% of those surveyed said they are interested in a job that has a positive impact on the environment and a whopping 92% would chose working for an environmentally friendly company. (Working for the Earth: Green Companies and Green Jobs Attract Employees, SocialFunds.com, 10/9/07)

How Professional?

Interesting that The Society of Corporate Secretaries & Governance Professionals' comment letter on the SEC's proxy access proposals is reportedly dated October 5, 2007...three days after the end of the comment period. How professional is that?

Still, I hope the SEC continues to accept and consider comments until they make a decision of this important issue...and I hope they make no decision until the seats of both Democrat Commissioners are filled.

The Society has over 4,000 members representing approximately 3,000 companies, so its letter should reflect something of a consensus among that membership. Sadly, the Society believes "the Commission should adopt the Director Exclusion Proposal, or at the very least issue no-action letters permitting the exclusion of access proposals consistent with the adoption of its interpretation."

A few highlights from the letter, which should be posted to the SEC comment site in a few days, follow:

It would be inappropriate for individual shareholders or groups of shareholders, who do not owe a fiduciary duty to the company or other shareholders, to be allowed to use company assets and resources to propose changes in the company's governing documents or elect a competing slate of directors.

We do not believe the Commission should adopt the Access Proposal. If the Commission nevertheless proceeds, the threshold for shareholder access should be not less than 5% beneficial ownership, and a minimum one-year holding period should be required. Any access bylaw proposal should also include the following additional safeguards:

Expressly limit the number of directors that shareholders could nominate, so that these procedures cannot be used as a mechanism for effecting a change of control of a company. We note, in this regard, that the Commission's access proposals in 2003 contained limits on who could nominate director candidates and on how many candidates could be nominated and included in the company's proxy statement.

Require the shareholder proponent to disclose the proponent's total position in the company's stock, rather than just long positions. Disclosure should also be required of any arrangement that affects such proponent's voting or economic rights; given the possibility of the de-coupling of economic interests from voting rights, other shareholders need to know this information regarding the proponent in order to obtain a clear and accurate understanding of the proponent's interest in the company.

The Society goes on to ask for a "significantly" higher threshold to submit nonbinding resolutions and that "resubmission thresholds of Rule 14a-8(i)(12)(i), (ii) and (iii) should be raised to 10 percent, 15 percent and 20 percent, respectively." They seek to limit the “significant social policy” exception, which "serves to undercut significantly the 'relevance' and 'ordinary business operations' exclusions."

We urge the staff to re-evaluate the standard it is applying to determine if a proposal may be excluded from a company's proxy statement as “substantially implemented.” We believe that under our corporate governance system, a company's board of directors should be given deference to determine, with respect to the issue that is the subject of the proposal, the most appropriate way to address it.

The Society calls on the SEC to require additional disclosures for proxy advisory services and their potential conflicts of interest and should consider proportional voting (based on the retail, rather than institutional, vote) and client-directed voting to "protect the voting power of individual investors." They think electronic forums should be addressed in a separate rulemaking on shareholder communications.

Glass Lewis

Xinhua Finance reportedly sold Glass Lewis to the Ontario Teachers' Pension Plan for $46 million cash. WSJ says "ownership of the firm by an activist institutional investor may stir questions about its advice." Brian Gibson, senior vice president for public equities at the Ontario fund, responded that "we have no intention of being involved in day-to-day decisions" at Glass Lewis. (Glass Lewis: New Owner, Conflict?, 10/6/07)

An article in Financial Week says "the world’s second-largest corporate governance advisory firm would continue to operate independently, although the pension fund would be involved in strategy development at the board level." One official from the pension fund will sit on Glass Lewis’ board.

Glen Hellman, president and chief operating officer of Proxy Governance, the No. 3 player in the proxy advisory field is quoted: “Can they rebuild the management team and be ready for proxy season in a few months?” “It will take a significant investment and time to train new researchers. Right now they’re starting from scratch.” (Canadian pension fund scoops up proxy adviser Glass Lewis for $46 million, 10/5/07) (OTPP press release)

That does seem like the more important question at this point. Frankly, I don't see the conflict of interest. If OTPP gets too involved, other subscribers to Glass Lewis services may need to determine how closely their corporate governance policies align with those of OTPP but I suspect that Glass Lewis will continue to tailor services to their customers needs.

Countering Investor Activism

The Brunswick Group says shareholder activists use the power of digital communication tools in "a wolfpack mentality" to put corporate leaders in the crosshairs. To help executives understand the latest challenges, Brunswick offers 10 tips for countering investor activism:

1. Articulate operational and financial milestones that Wall Street can use to monitor progress.
2. Provide simple, straightforward disclosure about executive compensation, showing its alignment with operational objectives, financial goals and, ultimately, shareholder interests.
3. Be aware of the impact a company’s corporate governance and labor practices has on reputation.
4. Thoroughly assess your own shareholder base, and study past campaigns of any activist shareholders to learn their allies and their track records.
5. Rethink how you plan to use the Internet to communicate with different segments of your shareholder base in the age of the e-proxy, especially in terms of annual meetings and proxy campaigns.
6. Don't underestimate the importance of regular investor audits to uncover any communications issues or signs of investor uneasiness with management and the company.
7. Don't rely on the "sell-side" to tell your story or provide intelligence on your shareholder base. While they can be helpful, it's investors who own your stock.
8. Don't brush off irate shareholders or automatically turn down any shareholder’s request to meet with board members.
9. Don't fear engaging in dialogue with hedge funds; they have their ear to the ground on Wall Street sentiment and sometimes are long-term holders themselves.
10. Don't underestimate the importance of communicating and engaging such stakeholders as third-party supporters, customers, and employees; their impact on the outcome of a contested proxy vote — and on corporate reputation — are vital. (Ten Ways to Defuse Shareholder Activists, CFO.com, 10/4/07)

Of course, activists can also use the same tips to help "wolf pack" leaders to hone their focus.

2007 Proxy Roundup

The RiskMetrics Group posted its 2007 Postseason Report. Below are a few of what I consider highlights. I advise you to take your own read of this important report.

Shareholders gave strong support for proposals that seek greater board accountability, such as those requesting annual investor votes on executive pay, majority voting in director elections, board declassification, and the right to call special meetings.

At the same time, investors withdrew more than half of their proposals on majority voting, stock option reforms, and sustainability reports after negotiations with companies, according to data collected by RiskMetrics Group’s Governance Research Service (GRS). These withdrawals suggest that companies are becoming more willing to engage with shareholders on certain issues.

As of Sept. 15, 656 investor proposals had appeared on 2007 corporate ballots, up from 581 at the same time last year, according to GRS data, which covers about 4,500 U.S. companies. So far this year, 107 shareholder proposals have earned a majority of votes cast. Last year, 116 proposals did so. Two years ago, just 85 proposals received majority backing.

One significant U.S. trend has been the growing influence of federal lawmakers since Democrats took control of both chambers of Congress after the 2006 elections. The most active Democrat on governance issues has been Rep. Barney Frank, who successfully won passage of House legislation in April to provide shareholders an annual advisory vote on executive pay. Companion Senate legislation has been introduced by Senator Barack Obama.

Individual shareholders received greater backing for their proposals. According to Los Angeles-based activist John Chevedden, more than 40 proposals by individual investors won majority support this year. In addition, shareholders at 20 firms approved management proposals this year to implement governance changes sought by individual investors, he said.

As of Sept. 15, the SEC had granted corporate “no action” requests to exclude 155 shareholder proposals, up from 129 during the same period last year, according to GRS data.

Withdrawals were as high as 55 percent on the issue of majority voting this proxy season, which compares with just 24 percent in 2006 and 23 percent in 2005, the first year the issue gained wide support.

If the SEC does adopt a 5 percent requirement for proposing an access bylaw, the change presumably would prompt investors to target small and medium companies, rather than their larger peers.

That would be in keeping with another trend likely to extend into 2008: the targeting of smaller companies for governance reforms.

Since the corporate scandals of 2001 and 2002, traditional activist investors have primarily targeted large corporations, according to RiskMetrics Group data on shareholder proposals, with many smaller companies slipping under the radar. But that trend maybe changing, analysts say, noting how many hedge funds have successfully targeted S&P MidCap and SmallCap firms.

LongView, for example, plans to push “further down in its portfolio,” to smaller companies, Hitchcock said, a sentiment echoed by other investors.

Responses on Proxy Access and Push for Democracy

Those meeting recently with SEC staff learned that the SEC believes the opt out question and others in the limited access proposal were not concept releases but were sufficient, in terms of notice, to allow the SEC to go ahead with implementation without additional public notice, even if the Commission votes to enact the no access proposal. Hopefully, cooler heads will prevail.

Thirty-nine law professors, including Harvard's Lucian Bebchuk, affiliated with twenty-four universities around the country, filed a comment letter with the SEC urging the Commission not to adopt either one of the two proposals it is now considering to allow companies to exclude some or all shareholder-proposed bylaw amendments concerning shareholder nomination of directors. The SEC, it argues, should avoid producing impediments to shareholders' exercise of their right under state law to initiate bylaw amendments concerning shareholder nomination of directors.

There is substantial disagreement among the professors regarding the substantive merits of proxy access bylaws and whether shareholders would benefit from adopting such bylaws. All members of the group are unanimous, however, in their belief that shareholders should be allowed to make the decision on this subject for themselves, and that companies should not be allowed to make the decision for them by excluding proposed bylaw amendments from the corporate ballot.

The proposed rules "reveal an agency that has thrown overboard its mission to serve investors and has adopted instead a policy of promoting the interests of corporate management at the expense of shareholders," said Jack Ehnes, CalSTRS Chief Executive, in a letter to the SEC. (CalSTRS criticizes SEC's director election rules, Reuters, 10/2/07)

“The harsh reality is that US corporate governance practices are on a relative decline,” said a group which included the Australian Council of Super-Investors and UK’s National Association of Pension Funds in a letter to the SEC. “Political winds in the US have recently swung toward rolling back investor protections. This does not give us confidence about future rights of shareholders in the US.”

“Rights to provide real director accountability to shareholders are sorely needed in the US,” said Daniel Summerfield, co-head of responsible investment at the Universities Superannuation Scheme, the UK’s second-largest pension scheme and a signatory to the letter to the SEC. (SEC warned over investor rights, Financial Times, 10/2/07)

Paul Munn, director of Hermes Equity Ownership Services, says: "The upshot was, almost universally: nobody likes either proposal. It is a real mess." (Bitter pill for investors on proxy rules, Financial Times, 10/3/07)

We urge you to abandon any plans to alter Rule 14a-8, or to delegate the important authority to govern the proxy process to individual issuers, or to state courts. We will continue to watch these developments closely, and appreciate the opportunity to comment on this critically important corporate governance matter. (PRI, an investor initiative with US$1.4 trillion in invested capital)

“'Corporations shouldn’t be democracies,' argues Lynn Stout, a professor of corporate law at UCLA, in a recent op-ed in the Wall Street Journal. Ms Stout writes at a critical time: shortly before the October 2nd end of a consultation period during which America’s Securities and Exchange Commission (SEC) is considering whether to amend its rules and require companies to pay the expenses of dissident shareholders seeking to replace the board or individual directors." Thus begins an editorial in The Economist. (In praise of corporate democracy, 10/2/07)

The editorial goes on to point out that Stout argument hangs on the fact that "America has more big companies than any other country," citing figures from The Economist for evidence, "so it must be true." Most of the powers she cites that UK shareowners have are due to recent reforms that have helped London to attract listings to the point that many on Wall Street feel threatened. Bigness probably has more to do with the size of domestic markets or the ambitions of founders, than shareowner rights of lack of them.

Short-termist pressures "probably owe far more to the obsession of mutual-fund managers with quarterly earnings than the focus of activist shareholders on strategy," says the editorial, dispelling another contention by Stout. Finally, The Economist points to Stout's questionable reasoning when she argues that by “giving activists even greater leverage over boards, the SEC's proposed proxy access rule will undermine American corporations' ability to do exactly what investors, and the larger society, want them to do.” Why would shareholders get less of what they want if they have more power to decide who runs their firm? The editorial then continues to turn Stout's argument on its head.

Ms Stout seems to fear the tyranny of the minority, in which activists (whether from hedge funds or union pension-funds) force management to act against majority interest. But the usual problem in democracy is the tyranny of the majority, and it is hard to imagine that this would not be the case with more corporate democracy. And if it is, the oppression of minority views, such as those of activists, would surely be exactly what Ms Stout wants.

For a more ominous view, see the Business Roundtable's comment letter. Not surprisingly, the organization of 160 CEOs thinks the current CEO dominated system of corporate governance is just fine and they hypocritically seek to take credit for many of the reforms the BRT and their members fought. Of course, they'd like to get rid of those pesky nonbinding resolutions where shareowners request boards to take action. Great material for Saturday Night Live or John Stewart's The Daily Show.

Bleak Assessment from Expert on Fund Votes

Mutual fund's continue to exhibit abysmal voting records on proxies supported by shareholders, Reuters reports, citing a report from FundVotes.com analyzing proxy voting records at 54 fund groups. Most continue to overwhelmingly side with management. The fund companies supported 90.7% of management proposals in the latest voting period and only 35.2% of shareholder proposals. Support for management proposals remained steady from 91.3% in the voting period ended June 30, 2006, but support for shareholder proposals dropped from 38.2%. And in 4.8% of the shareholder proposals, the fund companies abstained, up from 3.4% in the period before.

“The data doesn’t leave us very encouraged,” said FundVotes.com founder Jackie Cook. “I don’t think funds are becoming more activist.” Excluding socially responsible funds from the mix, funds support only 30.9% of shareholder resolutions but 92.7% of management proposals. (Funds Continue to Side With Management on Proxies, Among SRI funds, MMExecutive, 10/3/07)

Of SRI funds, Parnassus supported 65 or 81% of shareowner resolutions and 996 or 94% of management resolutions. MMA Praxis supported 243 or 79% of shareowner resolutions and 3909 or 90% of management resolutions. Calvert and Citizens both supported 75% of shareowner resolutions; 60% and 42% of management resolutions respectively. In contrast, figures for Fidelity and Vanguard were 21%/87% and 16%/84% respectively. Still, despite the rather bleak portrait, I think progress is being made. RiskMetrics reports that 306 proposals (out of the 1,145 tracked by GRS) were withdrawn by shareholders as of September 15, as compared with the 189 withdrawn (out of the 947 resolutions tracked) during the same period last year. Funds didn't get to vote on these.

CalSTRS to Remain Above Water

Christopher Ailman, CIO of CalSTRS, reportedly included a map in his report to the board from the World Resource Institute showing that 19% of all coastal land may be significantly impacted by global climate change. Areas in Great Britan, southern Europe, Asia and the East Coast of the US will be among the hardest hit. Much of Florida may be under water in the not too distant future. However, Ailman reassured the board that "it does not predict beach front property for Sacramento, and West Sacramento appears to stay dry." The giant pension fund is planning a new headquarters building in West Sacramento and is reviewing its real estate portfolio to assess how it may be affected by rising ocean levels due to global climate change. (Investments May be Under Water, P&I, 9/17/07)

Investor Advocate for SEC

The same issue of P&I carries an editorial, An SEC Nominee, suggesting "the next nominee to be a thoughtful advocate for investors, one who supports strong enforcement of securities laws and the preservation and potentially enhancement of shareholder and other investor rights."

"Of the five current commissioners, four of them, including Mr. Campos, have typical SEC commissioner backgrounds — working for corporate and securities sides, whether at law firms or investment banks. One was a congressional aide."

With two Democrats leaving, President Bush gets to appoint the Commission's entire contingent of Democrats with the advice and consent of the Senate. Wouldn't it be novel to appoint commissioners whose primary concern is protecting investors? I can think of several excellent candidates. You?

Let's Bring a Little Democracy to Corporate Elections

Currently, corporate “elections” for directors generally involve either voting for a list approved by the CEO, or “withholding” your vote. If candidates get one vote, they are elected using the typical plurality system because no opponents are listed on the proxy. Five years ago Les Greenberg (representing the Committee of Concerned Shareholders) and I petitioned the SEC to allow sharowners to place their nominees on the corporate proxy.  The SEC now has two proposed rulemaking packages out for comment. The deadline for comments was October 2, 2007. However, the SEC is expected to continue to post and count comments until their November meeting. I understand that as of October 2nd, they had received more than 30,000 letters and emails. That's more than on any other issue in the SEC's history. Please consider clipping the suggested comment below (after the background section) and emailing it to rule-comments@sec.gov.  In the subject line write: File Number S7-16-07 and File Number S7-17-07.

Background

Several months after my 2002 petition, the SEC came out with a very complex “proxy access” proposal that would have allowed shareowners to place nominees on the corporate ballot of a few companies if several conditions were met.   Although the proposal received more letters and emails in support than any previous SEC proposal, it was rejected because of opposition from the Business Roundtable, composed of 160 CEOs from leading American firms, and the U.S. Chamber of Commerce. Not surprisingly, CEOs did not want to lose control of the boards that evaluate their performance and set their pay packages. Of course, the SEC is mandated to protect shareowners, not CEOs.

Prior to 1990, the SEC had allowed shareowner resolutions seeking proxy access but they never got a majority vote. When it looked like shareowners would soon be winning resolutions (about 50 years after the right was affirmed in the early 1940s), the SEC reinterpreted its own rules. Without a new rulemaking or even a press release, the SEC began allowing corporations to deny resolutions seeking proxy access. The American Federation of State, County and Municipal Employees (AFSCME) went to court on the issue and won.  The court (in AFSCME v. AIG) basically said the SEC can’t simply change its rules without public debate or explanation.

As of last year, shareowners who continuously held at least $2,000 of stock in a company for a year can once again submit resolutions proposing proxy access in future elections. Three proposals were voted on this year. One got a majority vote and is being implemented. Two got about 45% of the vote.

Earlier this year, the SEC took the unusual step of coming out with two conflicting rulemakings. One was a short "no access" release [S7-17-07 (comments)], supported by the Republican commissioners, that would prohibit proxy access resolutions. The SEC also proposed a long and complex limited proxy access proposal [S7-16-07 Shareholder Proposals (comments and my own here), initially supported by the Democrat commissioners and Chairman Cox (who also voted in favor of the no access proposal), which would allow shareowners and groups with 5% of a company’s shares to propose access resolutions. [Excellent comments were submitted on no access proposal by J. Robert Brown, Jr. and on the limited access proposal by TIAA-CREF and J. Robert Brown Jr.]

Aside from the high 5% threshold (the largest funds, such as CalPERS, typically own less than 0.5% of a company's stock), the “limited access proposal” also requires burdensome disclosures and floats several questions aimed at determining what shareowners are willing to trade-off for the right of access. For example, should companies be able to “opt out” of allowing nonbinding resolutions? Nonbinding resolutions can deal with anything from asking that the roles of board chair and CEO be split, to addressing global warming, “say on pay” for CEOs, or gay rights.

Roel Campos, one of two Democrats, left the commission at the end of September. The other Democrat, Annette Nazareth, is expected to depart by year's end. That would leave only the three Republicans. Since the court decision has already given investors back “proxy access” and the remaining commissioners are likely to take away rights, not give them, the best outcome may be for the Commission to take no action on the proposals.

I submitted a 16 page comment letter, which you can download at http://www.corpgov.net/news/word/McRitchieSECproxyAccess.doc   

Below is a much briefer comment note I suggest you clip and send to the SEC at rule-comments@sec.gov.  In the subject line write: File Number S7-16-07 and File Number S7-17-07.

October Link to this article: http://www.corpgov.net/news/news.html#LetsBringaLittleDemocracytoCorporateElections

-------  Suggested Comment email ------

I fully support the stated intent of the Commission to facilitate the corporate proxy process so that it enables shareowners ''to control the corporation as effectively as they might have by attending a shareholder meeting.'' Unfortunately, proposal S7-17-07 runs entirely contrary to this intent and should be dropped.

With regard to proposal S7-16-07, the SEC's approach assumes that every proponent of an access proposal intends to also nominate candidates, when that is not the case. Why is the SEC proposing shareowners must own 5% of the company…an outrageously high amount? What's next? Will the SEC soon propose a different threshold for environmental or social resolutions?

Proxy access is similar to many other mechanisms that may eventually lead to changing directors, such as majority vote, cumulative voting, repeal classified board, redeem or vote on poison pill, or the reimbursement for proxy expenses. All raise the risk of an increase in the number of election contests.

The SEC should allow market-driven innovation to continue, either by postponing any action on Rule 14a-8(i)(8) or by affirming its 1976 interpretation, which allowed such resolutions.

With regard to increased disclosures, they are not appropriate for simply sponsoring a resolution. Proponents of such resolutions should continue to be exempt from additional disclosures if they are not nominating a candidate for the board.

With regard to shareowner forums, I support establishing a safe harbor from liability for such forums to encourage dialogue. However, I strongly oppose the substitution of such forums for binding or nonbinding proposals under the existing process.

With regard to the SEC's “opt-out” question, I oppose allowing companies to bar nonbinding resolutions from the proxy. An opt-out option would further the distance between management and owners, especially at companies where such relations are already strained, since these would be the most likely to opt-out. Confrontation would increase, as would lawsuits and binding bylaw resolutions.

Finally, the submission thresholds for resolutions should continue at $2,000 (although that could be adjust slightly for inflation). Resubmission levels should continue at their current thresholds.

Comments on SEC Proxy Access Rulemakings Due

Please keep in mind, the deadline to submit comments on this most important issue is October 2, 2007. To facilitate your ability to borrow, I have posted my comments here in Word. Yours should be emailed to rule-comments@sec.gov, with File Number S7-16-07 and File Number S7-17-07 in the subject line. If you attach a document, indicate the format or software used (e.g., PDF, Word Perfect, MS Word, ASCII text, etc.) to create the attachment. Do NOT submit attachments as HTML, GIF, TIFF, PIF, ZIP, or EXE. Additionally, I have summarized my comments below.

I fully support the stated intent of the Commission outlined in S7-16-07 to facilitate the corporate proxy process so that it functions, as nearly as possible, as a replacement for an actual, in-person gathering of security holders, thus enabling security holders ''to control the corporation as effectively as they might have by attending a shareholder meeting.'' Unfortunately, S7-17-07 runs entirely contrary to this intent. I am unreservedly opposed to this proposal, which would deny shareowners rights they now enjoy under state law. Reference J. Robert Brown, Jr. comments.

With regard to S7-16-07, the SEC's approach “puts the cart before the horse,” assuming that every proponent of an access proposal intends to also nominate candidates. Why is the SEC proposing a different share ownership threshold for proxy access? What's next? Will the SEC soon propose a different threshold for environmental or social resolutions?

Proxy access is similar to many other mechanisms that may eventually lead to changing directors, such as majority vote, cumulative voting, repeal classified board, redeem or vote on poison pill, or the reimbursement for proxy expenses. All raise the risk of an increase in the number of election contests. The SEC should allow market-driven innovation to continue, either by postponing any action on Rule 14a-8(i)(8) or by affirming its 1976 interpretation, applying the election exclusion only to “…shareholder proposals that relate to a particular election and not to proposals that…would establish the procedural rules governing elections generally.” Additionally, I seek to have the election exclusion narrowed to allow an exception for collectively hiring proxy advisors whose advice would include an assessment of board candidates.

With regard to increased disclosures, they are not appropriate for simply sponsoring a resolution. Proponents