 |
||||
 |
||||
|
January, February, March, April, May, June, July, August. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest as of 8/9/07. Book bites.
Still Seeking Pay for Performance “My way of characterizing the major thing that’s wrong with large public corporations in the United States: the CEO has no boss,” says Michael C. Jensen, an early inventor of bigger-than-life compensation packages for corporate chief executives. “Private equity fixes that very well. The CEO has a boss.” The professor emeritus at Harvard’s Graduate School of Business is about to publish a book with co-author Kevin J. Murphy, an economist and business school professor at the University of Southern California, entitled CEO Pay and What to Do About It Jensen and Murphy abhor large payoffs to fired execs like Henry A. McKinnell at Pfizer and Robert L. Nardelli at Home Depot. Jensen found that in 44% of all contracts for CEOs, even those convicted of fraud or embezzlement cannot be fired without a severance payment. In 94% they cannot be fired for unsatisfactory work without a big severance package. “How in the world can compensation committees sign these contracts?” Mr. Jensen asked. “They are breaching their fiduciary responsibility. It is a scandal of major proportions, and it is hidden.” Too many CEOs are well-paid without creating value, according to Jensen, who raises no objection to pay in the tens of millions as long as it is, by his standard, justly earned. But most contracts fail to take into account the cost of capital. Jensen would require chief executives to pay for their options, forcing them to focus on creating value or risk losing their own money. “Skin in the game is important," he says. (read more at Advocate of Paying Chiefs Well Revises Thinking, NYTimes, 9/28/07)
Want a Job as a Shareower Advocate? The Unitarian Universalist Association is seeking an Assistant to the Treasurer. The UUA is a member of both SIF and ICCR, and is an active shareholder. The Assistant to the Treasurer will provide support to the Treasurer covering a wide variety of responsibilities, including shareholder advocacy, internal budgeting, and communication with member congregations. Candidates should have excellent organizational skills, strong analytical ability, and an interest in socially responsible investing and social justice. Candidates do not have to be Unitarian Universalists. The full job description is posted on the UUA website. The Corporate Library also has several interesting jobs available, including Network Manager, Director of Ratings, and Application Developer. Another great place to work. Free Advice for Pension Trustees Strong fiduciary oversight and protecting workers’ benefits is one of the highest priorities of the U.S. Department of Labor. The best way to protect workers’ benefits is by preventing problems before Say-on-Pay Vote, Not so Bizarre A shareholder proposal calling for a “say-on-pay” vote by shareowners on executive compensation at Activision Inc. (ATVI) filed by As You Sow received 69% of the vote at the company’s annual meeting held in Beverly Hills, California. This may be the highest vote result so far of about 50 say-on-pay proposals voted on by shareowners this year. Activision is a publisher of video games including Quake, Doom and Guitar Hero, and is currently all the news for its purchase of Bizarre Creations Ltd., the UK studio behind the popular Project Gotham Racing title. (Activision to Purchase U.K.'s Bizarre Creations, WSJ, 9/27/07) In remarks delivered to shareholders at the meeting, Conrad MacKerron, Director, Corporate Social Responsibility Program at the As You Sow Foundation, criticized the company for providing outrageous perks like paying the mortgages, Medicare taxes, and even pet-sitting for executives. The SEC is reportedly investigating the company’s stock options practices. An internal company review completed in June cleared the CEO of intentional wrong doing but said four people were responsible for “measurement date inaccuracies.” The "say on pay" vote result may reflect widely reported concerns about improper stock options grants. Will management act on the strong vote results?
Frankly, SEC Proposals Need Rewritten The House Committee on Financial Services, chaired by Barney Frank, heard testimony from the Business Roundtable, CII, Social Investment Forum and the Investment Company Institute, among others on the SEC's proxy access proposals. CII said it opposes both SEC proposals because they bar access without providing investors any meaningful alternative approach. Anne Yerger, the council's executive director, said the status quo was better than either of the SEC proposals. Timothy Smith, Walden Asset Management's director of socially responsive investing and head of the Social Investment Forum, agreed and warned against the SEC's trial balloon, contained in one of the proposals that could do away with nonbinding resolutions.Donald Kirshbaum, representing the State of Connecticut, whose retirement fund holds about $26 billion in assets, said the 5% threshold was "too high a barrier." The Investment Company Institute, a mutual fund group whose members manage about $11.14 trillion in assets, urged the SEC to raise the minimum threshold above 5% and the holding period to two years. The ICI also backed the proposed liability protections to protect electronic shareowner forums. As expected, the Business Roundtable, an association comprised of chief executives of U.S. companies with $4.5 trillion in annual revenues, said the "access" proposal “would result in special interest nominees and politicize the director election process” and would discourage qualified independent directors from serving and result in board candidates who advance special interests. “Proxy access is a bad idea whose time has passed,” he told lawmakers. The last thing shareholders need are fractured boards representing divergent constituencies," he added. "The notion that you would have a problem with a dissenting vote on a corporate board is troubling to me," said Frank. "Boards work best when they are cohesive," Castellani said. Rep. Emanuel Cleaver, a Missouri Democrat, and Rep. Frank challenged Castellani about his concerns about split votes and special interests. "I am troubled by your dislike of split votes," Frank said. "That is an invitation to groupthink." Frank said that if a group of investors decided to put up a board candidate for a vote who advocated disinvestment in Iran or Darfur, would that be considered a "special interest?" Castellani suggested that that hypothetical candidate might not have the interests of all shareholders at heart, and Frank accused him of dodging the question. Castellani then said a company might not want to do business in Boston, Frank's hometown, because of dislike of the Red Sox baseball team. Frank became outraged, saying: "Equating dislike of the Red Sox with genocide is silly." I don't think the BRT won anyone over with that exchange. I thought Tim Smith had a good rebuttal with: “The business community too often falls into the mentality of ‘we don’t like what you’re doing, therefore you’re a special interest." Rep. Carolyn McCarthy, D-N.Y., questioned whether boards of mortgage companies might have helped their firms fend off today's credit problems if a dissident member had questioned their subprime lending practices. "Did those boards know what CEOs were doing at mortgage companies?" she asked. "Obviously it affected the whole stock market; it had to have a trickle-down effect." But Rep. Randy Neugebauer, R-Texas, voiced concern that proxy access would hurt the ability of U.S. corporations to create jobs. "We should be cautious," he said. He added that institutions could instead increase their stakes in corporations and gain influence that way. "I look at other countries that have proxy voting, and I don't see as much robust growth as in America," Neugebauer said. Investor advocates also voiced opposition to additional disclosure requirements proposed by the SEC on filers of access bylaw resolutions. Kirshbaum told lawmakers that such requirements would impose unnecessary costs on both companies and investors. “As with the ownership threshold, it is not clear that any additional disclosure is warranted simply because a proposal concerns proxy access,” Kirshbaum said in a prepared statement. Kirshbaum pointed to three access proposals, all of which received high votes this year, as evidence that mainstream investors--not just “special interests”--support proxy access. Senator Christopher Dodd, the Democratic chairman of the Senate Banking Committee, has said he may introduce legislation if the SEC fails to have a rule in place before next year's annual meeting season. (U.S. SEC proxy proposals need reworking--investors, Reuters, 9/27/07) RiskMetrics Group coverage indicates "a final decision on this issue before 2008 appears unlikely after the Sept. 18 departure of Commissioner Roel Campos, a long-time supporter of access." "Speaking at a CII conference just before he left the SEC, Campos said he doubted that Senate Democrats would be able to approve his replacement in time for that new commissioner to participate in deliberations on proxy access before the filing deadlines for the 2008 proxy season." (Investors, Business Spar on Access, Risk & Governance Weekly, 9/28/07 - reprinted on their blog) The US Chamber of Commerce also indicated they would submit a letter to the Committee opposing proxy access. "I think we're going to be suggesting that they need to start over again," House Financial Services Committee Chairman Barney Frank, D-Mass., told reporters after a hearing. (Dow Jones Newswires, 9/27/07) See the Committee's website for posted comments and a transcript (when it becomes available). On a separate note, Senator Carl Levin, who chairs the Permanent Subcommittee on Investigations, wrote a letter to Christopher Cox on September 27 expressing his support for the proxy access proposal as "an important step forward in addressing...inattentive and compliant boards of directors that fail to protect shareholder interests and too often place the interests of corporate management ahead of the interests of the corporation's owners." He went on to note that the 5% threshold is too high and recommended it be reduced to 3%. He also said the 1 year required holding period was too long, since those proposing a bylaw must certify they did not acquire or hold the stock for the purpose of effecting change or influencing control of the company. Levin supports the electronic forums, but not as a substitute for the resolution process, which serve a useful function by focusing management's attention on an array of issues posing risks to corporate interests, on matters ranging from corporate governance to economic risks involving social and environmental issues." However, he doesn't think they should be allowed to be used to facilitate the formation of shareowner groups to put forth access proposals. It seems to me that it would be very difficult to restrict such use if the purpose of the forums is to raise issues and to see how many shareowners think various problems are significant. I suppose that since the forums would not be required, companies could simply take them down if they appeared to facilitate shareowner rebellion, just as the government in Myanmar (Burma) recently took down access to the internet. permalink at http://corpgov.net/news/archives2007/September.html#FranklySECProposalsNeedRewritten Panel to Discuss Director Term Limits The Weinberg Center for Corporate Governance at the University of Delaware will host a panel discussion, Director Term Limits: Necessity or Performance Hindrance?, moderated by Charles M. Elson on Thursday October 11, 2007, from 9:30 am to 11:30 am at 125 Alfred Lerner Hall. Panelists will include:
Please email Alba at the Center, if you plan to attend. If I lived on the East Coast, I'd be there. I wish Stanford's Rock Center were doing more programs like this.
Warren Hellman to Rock Stanford Warren Hellman, Chairman and Co-Founder of the leading private equity firm Hellman & Friedman, has a rare long term perspective on the private equity market. Since its founding in 1984, Hellman & Friedman has raised and managed approximately $16 billion of committed capital. Its strategy is to be a partner with management and to focus on select industries such as media, financial services and information services. In addition to being an investor and director of a number of public and private companies, Mr. Hellman is also an active philanthropist in the Bay Area. In a special presentation at Stanford Law School, join Mr. Hellman as we explore corporate governance and best practices in private equity. Wednesday, October 10, 2007. Reception: 5:30 pm. Presentation at 6:00. Seating is limited, so please register online. Profits of Wrong Doing Wired (9/25/07) carries the following interesting article: A Reporter Exposes Fishy Stocks. His Boss, Mark Cuban, Trades on the Findings. An investigative reporter, Chris Carey, is financed by Mark Cuban, "the infamous Broadcast.com founder and Dallas Mavericks owner," to reveiw corporate filings and regulatory documents to come up with companies that are essentially pumping their stock without the fundamentals. Cuban then shorts the stocks and Carey posts his findings to Sharesleuth.com. Posts are infrequent, since the investigations take most of his time, but they appear effective in driving down share price by exposing scams. "They are planning to hire four new researchers to supplement the one freelancer they currently use, as well as a part-time videographer. Eventually, Carey says, they hope to develop multimedia content, including podcasts and hi-def video." They might also want to hire an attorney. While I'd rather see shareowners taking a positive role in policing their companies and putting them in order through improved corporate governance, I think Carey and Cuban are doing us all a service...supplementing the enforcement activities of the SEC and attorneys general. I hope they won't be able to find enough scandals to keep them in business, but the realist in me says they are more likely to get rich...well, richer in the case of Cuban.
House Hearing on SEC Proposals On Thursday, September 27, 2007, at 10:00 a.m., in the 2128 Rayburn House Office Building, the House Committee on Financial Services will hold a hearing entitled, "SEC Proxy Access Proposals: Implications for Investors." Representatives from diverse groups will be heard, including the Business Roundtable, CII, Social Investment Forum and the Investment Company Institute, among others. Listen to the live webcast and read prepared testimony. A transcript will also be posted. Investors Don't Support SEC Proposals A survey conducted for nine leading investment companies and religious institutional organizations by the Opinion Research Corporation (ORC) found that a third or less of US investors support any of the five potential approaches outlined by the Securities and Exchange Commission (SEC) to curb the rights of shareholders to file shareholder resolutions and participate in the process of selecting members of corporate boards. The study of 1,133 U.S. investors was released one week before the October 2nd deadline for comments on the controversial proposals.
Lisa Woll, CEO, Social Investment Forum, said: “This is a resounding ‘thumbs down’ from U.S. investors to the possible approaches outlined by the SEC that would undercut shareholder advocacy and limit the involvement of investors in corporate boards. A clear majority of American investors understand that shareholder advocacy is vital to promoting wider corporate social responsibility, which, in turn, strengthens the bottom lines of companies and results in more long-term wealth for shareholders. What we are seeing here is common sense prevailing: Most U.S. investors agree that what the SEC should be further opening up corporate boardrooms, rather than shielding them from the scrutiny and feedback that is legitimately being offered by the American investors.” Wayne Russum, vice president, ORC, said: “It might be expected in a case like this where five different possible proposals are being weighed that a majority of investors would come down in favor of at least one of them. However, that was not the case here, with supporting ranging from a low of 10 percent to a high of 39 percent. That across-the-board rejection of the potential SEC proposals is really quite remarkable. And it should be assumed that these are ‘high water marks’ in terms of potential support for what the SEC is contemplating. If any degree of argument had been provided in the survey against the SEC proposals, it is likely that the support level would have dropped to even more anemic levels.” Russum makes an important point. My experience with shareowners is that very few are actually familiar with the election process. Most assume that corporate elections are similar to those for civic representatives. When they learn of the process, they are shocked that even though the language used is the same, such elections are more similar to those of North Korea than North Dakota. If high school students were taught corporate governance in high school, opposition to the SEC proposals would be expected to be even higher. This point is also reflected by the fact that those who can be expected to be most familiar with the corporate election process (higher educated, higher income respondents) were also those most opposed to the SEC proposals. I encourage readers to take a look at the full report, Preserving a Voice for Investors. The graphics make the results stand out even more and you'll notice that the results even more conclusive when "don't know" responses are factored out. Listen to the 9/25/07 news conference on the press release page. Broker Votes Continue in 2008 Broc Romanek reports that Rule 452 won't be revised to eliminate broker discretionary voting in director elections for next proxy season. The NYSE intended to have the rule change in place and effective by January 1, 2008 but approval is apparently be held up by the SEC as part of the broader range of issues relating to the SEC's own shareholder communications and proxy access proposals. (Loss of Broker Non-Votes: Ain't Happening for the '08 Proxy Season, TheCorporateCounsel.net Blog, 9/25/07) Moody's Looks at Paper & Forest Products Industry Moody's examined the governance attributes of the 12 largest Moody's-rated publicly-traded paper and forest product companies in North America and reported its findings in a paper entitled Governance at North American Paper and Forest Products Companies May Inhibit Change. Most maintain a “classified” or staggered board and the provisions difficult to remove since they are codified in companies’ bylaws and typically require a supermajority of votes–75 or 80%—to repeal. "By insulating management from equity markets and other external constituencies, strong takeover defenses can reduce management’s accountability and slow the company’s response to emerging business challenges." They've also been slower in this industry to adopt majority vote requirements for directors. The report also addresses such other factors as CEO and director tenure, director independence, and compensation practices. As I have indicated before, these reports by Moody's allow investors to compare companies across industry and to get into more depth than are often found in other analyses. Broken Glass FinancialWeek carried a lengthily article on rumors that "Xinhua Finance, fresh from a credit downgrade by Standard & Poor’s, is shopping Glass Lewis, the embattled proxy adviser it bought just nine months ago for $45 million." RiskMetrics, parent of ISS, is the reported suitor. "Ironically, Standard & Poor’s Ratings Services recently dropped its long-term corporate credit rating on Glass parent Xinhua Finance to B from B+, in large part over concerns about its corporate governance practices." "ISS already has 1,700 clients representing $25.5 trillion in investment assets, more than the next four advisory shops combined (Glass Lewis, Proxy Governance, Egan-Jones and Marco Consulting). Add Glass Lewis’ 300 clients, representing $15 trillion in assets, and ISS would pretty much own the $150 million market (some predict a $500 million market within a few years)." (Advise this: Glass Lewis on the block?, 9/24/07) NYSE Listing No Guarantee "Chinese companies trading on the New York Stock Exchange have poor quality of earnings, shoddy governance and serious accounting irregularities, a new study has found, reports FinancialWeek. RateFinancials studied the top 10 Chinese companies by market cap with ADRs trading on the NYSE, and concluded all 10 are “government-controlled enterprises masquerading as independent public companies,” with poor disclosure. None of the 10 companies scored higher than one star (out of five) in the area of corporate governance; half got no stars. "In comparison, the average corporate governance rating for a U.S. public company is roughly three stars, and nearly every U.S. company receives at least one star." NYSE allows “foreign private issuers” to follow their home countries’ corporate governance practices. The study also found that none of the ten Chinese companies filed annual proxy statements, "leaving investors in the dark on issues of compensation, governance and related-party transactions. Public filings that are required, such as the 20-F, are translated from Chinese and are often 'so poorly written that they cannot be fully understood,' according to the study." (Red giant bad for investors, 9/24/07) Roe to Talk in Wilmington Mark Roe will deliver a talk, Does Delaware Compete?, in Wilmington, Delaware, as part of the Francis G. Pileggi Distinguished Lecture in Law series. Roe apparently believes firms either stay incorporated in their home state or reincorporate in Delaware, leaving Delaware alone in the interstate market. However, Delaware's monopoly could be challenged by another state or by "federalization of core elements of its corporate law even if no other state actively competes for charters." (Announcement)
Debate Intensifies on Proxy Access The SEC should scrap both of its recently proposed rules on proxy access and come up with something more balanced and acceptable to shareholders, Roel C. Campos, SEC commissioner, told a Council of Institutional Investors (CII) conference in Coronado, California. (CII maintains background papers and letters concerning the proxy access issue on its site.) Campos called the proposals “horrible” and “very bad,” adding that “investors dislike these proposals.” Campos, who is resigning effective September 30, thinks the believes Christopher Cox, SEC chairman, out of concern for his legacy and relationship with the investment community, would not advance a vote that quickly. (Campos: Scrap proxy access proposals, InvestmentNews, 9/17/07) I'm not sure what that last statement means. Perhaps Cox will wait until Campos' seat is filled. The issue also took center stage during a panel discussion on “Shareholder Access and Other Voting Issues” at the 9/17/07 meeting of the Mid-Atlantic Chapter of the Society of Corporate Secretaries & Governance Professionals in Washington, according to a 9/21/07 report by Risk & Governance Weekly by ISS Governance Services of the RiskMetrics Group. Meanwhile, several large public pension funds met with SEC Chairman Christopher Cox recently, and the AFL-CIO is planning a massive letter-writing campaign by rank-and-file workers to oppose the proposals. Key 2007 Votes USA Today, known for its easy to read charts and graphs, published a nice table summarizing key shareowner proposals voted on to date in 2007. A record 1,169 shareowner resolutions were proposed this year and a record 23% were withdrawn after companies agreed to adopt new policies, or to sit down and discuss the issues. Companies are willing to talk because shareowners are winning. "Proposals on CEO pay and other hot-button issues are receiving record high "support" votes of 30% to 60% from investors. In earlier years, votes of 2% or 3% were common." One of the year's biggest victories was the result of Ed Durkin's campaign at the United Brotherhood of Carpenters and Joiners of America pension fund. That fund and others filed 140 resolutions urging shareowners to approve majority vote requirements for directors. More than half of the companies agreed to voluntarily adopt majority voting, so sharehowners withdrew their resolutions. A record 43 global-climate resolutions were filed. Again, Shareowners withdrew one-third of the resolutions after the companies agreed to reduce their greenhouse gas emissions or report on their energy-efficiency plans. (Boardrooms open up to investors' input, 9/6/07) CalPERS News A federal appeals has court reinstated a lawsuit accusing the New York Stock Exchange of violating securities laws by allowing improper trading by its seven specialist trading firms. Plaintiffs, led by CalPERS, said that fraud and lax monitoring at the NYSE cost investors who bought or sold NYSE-listed stocks millions of dollars. (Court revives suit against NYSE, Investment News, 9/19/07) Six leading experts addressed new and emerging challenges, opportunities, and strategies for investing in California at the California Pension Fund Investment Conference in Los Angeles at the Millennium Biltmore Hotel. The conference was designed to enhance institutional investing in California. (press release) Investments by CalPERS generated $15.1 billion in California economic activity in 2006 – adding new jobs and state and local tax revenue, according to a California State University, Sacramento, report, “The Economic Impacts of CalPERS Investments on the California Economy." CalPERS economic impact in 2006 created 124,377 jobs, returned state and local tax revenues of nearly $832 million, and generated employee compensation of $4.9 billion. CalPERS commissioned the university's economic impact study, the fund's first, partially to counter criticism that its defined-benefit pensions, with fixed payments, are becoming a burden on deficit-plagued state and local governments, which participate in the CalPERS system. Critics fear that taxpayers could be forced to pay pension obligations if CalPERS doesn't earn enough on its investments. CalPERS, however, counters that it has a strong investment history with a portfolio that has grown an average of 9.1% annually in the last decade. (Study touts CalPERS' benefit to economy, LATimes, 9/19/07; see also Fund's impact in state gauged, Sacbee, 9/19/07) The payout for the amount of money paid by taxpayers is far greater than public employees would get if the same amount was passed on to them for their own investements. Job Announcement Friends of the Earth US is looking for a Director of the International Program, for their Washington, DC office. FoE is a national advocacy organization and a member of the Friends of the Earth International network, with affiliates in 70 countries across five continents. FoE works internationally on issues at the intersection of the environment and social and economic justice. The Director would establish and maintain the strategic direction of the International team programs, including overseeing the preparation of International program strategic plans and work plans. Work with other Friends of the Earth teams and colleagues to develop coordinated organization-wide strategies. At least five years experience in policy advocacy, planning and implementing issue-oriented campaigns, and influencing public and private decision makers is required. I don't see the position listed on their jobs page yet. However, you can email jobs@foe.org. for more information. RiskMetrics RiskMetrics Group, which bought ISS for $542.6 million last January, filed for an initial public offering of its common stock, according to a report at Forbes.com. (RiskMetrics Group Plans IPO, 9/19/07) ISS provides corporate governance and financial research and analysis services to more than 2,500 institutional investors and corporations. Credit Suisse, Goldman Sachs, and Banc of America are reportedly the underwriters. As part of their rebranding, the ISS Corporate Governance Blog has expanded to reflect their combined entities and is now the RiskMetrics Group Risk and Governance Blog. Listen to Preparing for the 2007 Australian AGM Season Webcast Replay, first broadcast on 9/18/07. Changes at ASX Corporate Governance Council, executive pay, assessing renumeration reports were three issues highlighted. Designing the Future of the Corporation Allen White, founder of the Global Reporting Initiatives and Marjorie Kelly, founder of Business Ethics magazine and author of The Diving Right of Capital This conversation, co-hosted by Bill Baue and Francesca Rheannon, follows up on CWR's two-part interview with Allen and Marjorie in June 2006, and also touches on the question of whether legal regulation is the best means of promoting corporate change first addressed on CWR when we spoke with Terry Mollner, a Ben & Jerry's boardmember and a founding boardmember of Calvert Social Investment Funds. Listen or download at Corporate Watchdog Radio and subscribe to the podcast or listserve. The upcoming Summit will include a plethora of speakers from civil society, business and academia, many of whom believe that corporations should server a higher cause than maximizing quarterly returns to shareholders. Should corporate charters and laws be rewritten to build in social responsibility? Goals of the Summit include creating a space to exchange views; building a vanguard for change; and formulating an action agenda for change. Shareowners Turn Up the Heat SaveShareholderRights.org, the joint Social Investment Forum / Interfaith Center on Corporate Responsibility site launched on 8/29/07 to oppose controversial proposals from the Securities and Exchange Commission to seriously undermine the rights of investors has helped generate 3,000 emails to the SEC and the U.S. Congress in the first three weeks of operation. In addition, the site nearly 200 institutions and financial professionals have signed a joint statement opposing the expected SEC proposals. On 7/25/07, the SEC put out for public comment two proposals that would substantially weaken shareholder access to the proxy in the nomination and selection of board members. The SEC comment period expires on October 2, 2007. In launching SaveShareholderRights.org, SIF Board Chair and Senior Vice-President of Walden Asset Management Tim Smith said: “We are investors and representatives of investors who take seriously our rights and our responsibility to be engaged and informed as shareowners of companies. We strongly oppose proposals at the SEC to either eliminate the shareholder resolution process or make it more difficult to sponsor resolutions. We also oppose any step to make it more difficult for investors to help nominate directors. Shareholder advocacy is vitally important in communicating with corporate boards, management and other investors on key issues such as climate change, governance reforms, employee diversity, executive compensation, and human rights in overseas factories.”
The sign-on statement continues: “We also support the right of investors to nominate board members using the proxy process and urge the SEC to have a reasonable level of shares required for the nomination process. Under one approach raised by the SEC, such shareholder involvement would be barred outright, whereas another approach outlined by the Commission is so onerous as to make such involvement all but impossible.” Readers of CorpGov.net are also encouraged to submit comments directly to the SEC. File No. S7-17-07: "Shareholder Proposals Relating to the Election of Directors" can be described as the "no access proposal," since it would deny the right of shareowners to submit resolutions seeking proxy access for the purpose of listing director candidates nominated by shareowners. (Submit comments here.) In reviewing the comments submitted so far, it appears many are understandably confused as to which of the two SEC proposals is which. One who has clearly read the "no access" proposal thoroughly is J. Robert Brown, a Professor of Law at the University of Denver who blogs at theRacetotheBottom.org. Brown points out the SEC's poorly worded proposal would also ban proposals to impose minimum qualifications for nominees and proposals that seek the adoption of election procedures such as cumulative or majority voting. See his comments here. His central arguments are as follows:
The other proposal, File No. S7-16-07: "Shareholder Proposals," is one I have been calling the "limited access proposal," since at least on the surface it appears to provide a framework allowing shareowners to put forth resolutions at companies for shareholder access. Since the decision in AFSCME v. AIG, the right of shareowners to such access was reaffirmed. The thresholds are the same as for any other resolution: $2,000 of stock held for one year. An amnesiac Commission believes access would be a new right (because they reinterpreted their own rules without explanation or public notice, as determined in AFSCME v. AIG). For years the SEC held that companies could not exclude shareholder resolutions pertaining to the director nomination process. Then in 1990, just when it seemed shareholders would begin winning majority votes on such resolutions, Commission staff began issuing “no action” letters on any proposals advancing shareholder influence over elections for directors. Had such resolutions not been excluded, we might have avoided the recent crisis in corporate governance typified by Enron, WorldCom, Global Crossing and so many others. In return for that right, but requiring onerous disclosures and thresholds, based on a series of questions contained in the release, they appear to be on the verge of proposing to eliminate the nonbinding resolution process. It took shareowners 50 years to win the first majority vote on a nonbinding shareowner resolutions. Now, just as shareowners are beginning to get frequent majority votes on such fundamental issues as electing directors by a majority vote, the SEC wants to take away this important shareowner right, which is simply a formal right to petition management. The SEC has been considering proxy access since they were formed. They first proposed a regulation in 1942 but the language was poorly drafted and confusing. Additionally, the country was going to war. The SEC said they dropped the proposal because "unqualified persons might be nominated, that too many candidates might be nominated, and that the shareholders would become confused and improperly mark their proxies." In 1977, the issue came around again after a series of corporate scandals. Even the Business Roundtable recommended "amendments to Rule 14a-8 that would permit shareholder to propose amendments to corporate bylaws, which would provide for shareholder nominations of candidates for election to boards of directors." Such amendments, they said, "would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law." However, the election of Ronald Reagan, with his campaign theme of "It's morning in America," highlighted the sunny optimism of his personality rather than issues. Like addressing the ballooning federal deficit, the idea of proxy access was dropped. When Les Greenberg and I filed a petition in the summer of 2002 to allow shareholder proposals to elect directors, we got e-mail from people whose eyes were opened as to the contradictions between the language of corporate elections and the rules. One investor wrote, "This is exactly how voting in communist countries worked. Everyone could vote, but there was no choice of candidates." However, as bad as the current SEC proposals are, they do provide an opportunity for shareowners to voice our desire for greater democracy in corporate elections. Download my own initial comments on the limited access proposal, let me know what you think, and submit your own to the SEC here. You can even include up to three attachments. Let the SEC know that Soviet style corporate elections are no longer acceptable and taking no action would be better than either of the current proposals. Climate Change Risk Disclosure Petition and Analysis A coalition of environmental activists and investors managing $1.5 trillion in assets are asking the SEC to require companies to disclose the risks that climate change may pose to their bottom lines. (Effort to Get Companies to Disclose Climate Risk, NYTimes, 9/18/07) We are reminded the move by Robert Monks and then Domini Social Investments to require disclosure of proxy voting guidelines and proxy votes, which led to the SEC's final rule in 2003. This new petition is off to a bigger start and has implications that one can rightly term "global." Two blogs provide interesting coverage. Dave Lynn writes that such efforts don’t usually "focus on what information is material to investors, and they rarely recognize that a 'one size fits all' approach doesn't work when it comes to assessing materiality and the applicability of existing disclosure requirements. Climate change may very well stand apart from these other issues when it comes to materiality judgments, given the significant impact that climate change may ultimately have on many companies." (Climate Change Risk Disclosure: Coming Soon to Your 10-K?, TheCorporateCounsel.net Blog9/19/07) J. Robert Brown focuses on the petition process itself. He points to Massachusetts v. EPA, 127 S. Ct. 1438, 1459 (2007)("Refusals to promulgate rules are thus susceptible to judicial review, though such review is 'extremely limited' and 'highly deferential.'") as a groundbreaking decision. He concludes:
Limited Access Proposal: Summary and Comments To facilitate analysis, review, and comment on the SEC's limited proxy access proposal, S7-16-07 Shareholder Proposals (comments), I have posted a much abbreviated 3-page version (in Word) focusing (I hope) on the major issues and my own initial comments (also in Word) in the context of that summary. Please note that issues important to you may have been left out entirely; other inaccuracies may have resulted from misinterpretation. Use at your own risk. I made no attempt to summarize issues raised in the Paperwork Reduction Act, Cost-Benefit Analysis, Burden on Competition, or Flexibility Analysis sections. Anyone submitting comments to the SEC should carefully review these sections and their assumptions as well as the entire SEC document. During the 2007 proxy season, three proxy access shareowner resolutions were presented for a vote and all received significant support. One resolution was approved by the shareowners (Cryo-Cell International, Inc.). According to Institutional Shareholder Services, the other two resolutions received 45.3% (UnitedHealth Group) and 43.0% (Hewlett-Packard Company) of the vote respectively. The process resulting from the AFSCME v. AIG decision allows shareholders to tailor thresholds for nominations to the circumstances of each company. These initial votes demonstrate that shareholders support proxy access. Instead of this market driven process, the SEC now proposes a cookie-cutter one size fits all approach with unrealistically high thresholds that would substantially reduce the rights of shareholders. Additional questions posed by the SEC with regard to nonbinding resolutions, such an opt-out option, an electronic petition substitute, and raising submission/resubmission thresholds all point to a draconian final rule. No action would be far preferable to the current SEC proposals. I encourage readers to post comments to several forums for feedback prior to sending them to the SEC. Discussions may be active at theRacetotheBottom.org, the Millstein Center for Corporate Governance and Performance (MCCGP) at the Yale School of Management, Save Shareholder Rights!, and AccountabilityCentral.com. Please e-mail me as you identify others. Acquisition Leads to Higher Share Price Robin Greenword and Michael Schor's paper, Hedge Fund Investor Activism and Takeovers (July 27, 2007), examined long-horizon stock returns around hedge fund activism in a comprehensive sample of 13D filings by portfolio investors between 1993 and 2006. They found that abnormal returns surrounding investor activism are high for the subset of targets that are acquired ex-post, but not detectably different from zero for targets that remain independent a year after the initial activist request. Announcement returns show a similar pattern. Firms that are targeted by activists are more likely to get acquired than those in a control sample. They argue that the combination of hedge funds' short investment horizons and their large positions in target firms makes M&A the only attractive exit option. They also suggest that hedge funds may be better suited to identifying undervalued targets and prompting a takeover, than at engaging in long-term corporate governance or operating issues. For a discussion, see When Investor Activism Doesn't Pay, WSJ, 9/12/07. Of course, what we are all looking for is an analysis of each fund activist over time. Some are more likely than others to be able to wring out value. Non-Access Proposal: Parts 1-8 Those reviewing the SEC's proposal to close proxy access [S7-17-07 Shareholder Proposals Relating to the Election of Directors (comments)] would do well to read J. Robert Brown's series of posts at theRacetotheBottom.org. With the scheduled departure of Campos, the non-access proposal appears more likely than the proposal that purports to grant access, while severely restricting it from what has been allowed since the AFSCME v AIG decision. Brown notes that "few incumbent directors ever confront a challenge and few ever lose their seats." Therefore, if directors who want to remain directors "would be rational to take positions designed to support the other directors (including the CEO) rather than to support shareholders." In the one year following the effective judicial repeal of subsection (i)(8) of Rule 14a-8, only three proposals found their way into proxy statements and one passed. This "suggests that allowing shareholders to make these proposals does not by any stretch guarantee that they will be adopted." In other words, shareowners haven't stormed the barricades. In part 4 of the post, Brown argues that "under state law, shareholders generally have the right to propose bylaws at the meeting." Such rights are now effectively empty, since most shares are voted through the proxy process. Rule 14a-8 mitigates this impact by allowing the proxy process to operate as a substitute for the shareholder meeting. "Denying shareholders access to the company’s proxy statement would render the proposals all but impossible to make. It would amount to federal preemption of a state law right. Thus, the Commission would be inserting itself into the corporate governance process but in a manner that would reduce rather than increase the governance rights of shareholders." In part 5, Brown notes something even more alarming. "In addition to retaining the phrase 'relates' to an election of directors, the language adds to the exclusion proposals that relate to a nomination or to 'procedures' for any nomination or election. On its face, therefore, the language would extend to proposals that would impose minimum qualifications for nominees or proposals that seek the adoption of election procedures such as cumulative or majority voting." In contrast to this vague language, the "access" proposal "used very narrow, very precise language designed to make sure that the exclusion applied only to one type of proposal." Proposals excluded under the non-access provision "will amount to an effective denial of a shareholder’s rights under state law." Its vague language "will add cost to the shareholder proposal process," and "will reopen areas already deemed resolved by the staff of the Commission." In part 6, Brown argues that denying shareowners their state law rights to proxy access will drive them to other proposals, such as reimbursement of expenses in contested elections, which the SEC has found cannot be excluded. "This type of proposal is a far more intrusive and, if adopted, likely to result in far more contests than the current access proposal," writes Brown. The contests would be far more expensive as well and who would pay for them? Shareowners, of course. In part 7, Brown rebuts the qualified directors won't serve argument, noting it was also used to oppose the requirement to disclose board attendance. "Most importantly, however, the right of access for these bylaws is unlikely to result in a substantial increase in the number of proxy contests. He cites several reasons:
In part 8, Brown writes that the only argument offered for the non-access proposal is that it would "prevent the circumvention of other proxy rules that are carefully crafted to ensure that investors receive adequate disclosure and an opportunity to make informed voting decisions in election contests." [Exchange Act Release No. 56161 (July 27, 2007)] However, fixing inadequate disclosure would make more sense. Even if the non-access proposal is adopted, companies could voluntarily adopt access bylaw proposals and they could do so without adequate disclosure safeguards. "Thus, out of a desire to deny access, the Commission’s solution would be to leave in place gaps in the proxy rules that result in inadequate disclosure."
California Pension Fund Investments: A Golden Opportunity This investment conference will explore opportunities and strategies for investing in California. A second day, for trustees only, offers an interactive, case-study approach. Sponsors include CalPERS, CalSTRS, LACERA (Los Angeles County Employees' Retirement Association) LAFPP (City of Los Angeles Fire and Police Pensions) and LACERS (Los Angeles City Employees' Retirement System). September 18-20, 2007 in Los Angeles. For more information, see an announcement on the CalPERS site. Measuring Performance: The Board's Challenge The Forum for Corporate Directors will host a panel discussion by experts in Irvine, California on October 2, 2007. This low-cost event will cover the board’s role in setting financial and non-financial goals for the company and its CEO; how to correlate rewards under annual and long-term incentive plans to corporate goals; how to manage high-performing and under-performing CEOs; how to assess the performance of the board and its members; and the best lessons they have learned, and best practices they have seen, in measuring performance. London Calling “How can boards drive social, environment and ethical agenda and how the markets can create a more equitable world?” are some of the topics being discussed at the 8th International conference on Corporate Governance organized by the World Council for Corporate Governance and being held in London on 20 Sept 2007. Corporate governance experts from 35 countries are participating.
The findings of each group will be presented and distilled into a volume of conference proceedings to be distributed among relevant institutions and marketed as the definitive text - with recommendations and guidelines - at the leading edge of global corporate governance thinking. All contributions will receive due acknowledgements in the supplement volume which goes alongside the proceedings. CalPERS Sees the Light When I testified before a committee of the CalPERS Board this morning (9/11/07) on proposed regulations that would have allowed directors to set eligibility standards for candidates and information required to validate member petitions without going through the rulemaking process, I half expected arguments. After all, what politician wouldn't want to be able to survey the potential opposition before writing the election rules before each round. In the past I had to obtain a determination that CalPERS is not exempt from California's rulemaking laws (1999 OAL Determination No. 18) to convince them they aren't above the law. Still, my petition to put several election procedures in regulations was summarily rejected. After I obtained a decision that CalPERS election rules were not legally adopted (2007 OAL Determination No. 1), the Board proposed rules to allow them to set the rules at a duly notified board meeting before each election, without going through the legally required rulemaking process. See written comments and proposed amendments. This time staff recommended they work with my suggested changes and put the rulemaking out for an additional 15-day comment period. Perhaps the Board has grown tired of trying to place themselves above the law. Maybe they finally recognize democracy has a place in government agencies as well as corporations. Maybe the old guard is fading. Whatever, the reason, it is a welcome development. Still no word on following CalSTRS' lead with regard to severely limiting potential pay to play. When the Sacramento Bee carried the news (CalSTRS votes to limit political gifts, 9/7/07), it appeared on the front page as the top article of the day, although in archives it appears in the business section. I thought severely limiting campaign contributions by money managers to the governor and other elected officials would have gotten more press outside California's capital. One step at a time for our local public pension funds. Eventually, their own governance standards may be the best they can be. Meanwhile, most others are far behind. In other CalPERS news, trustees signaled a further push into infrastructure by tagging $1.5 - $2.5 billion for investment into building bridges, power generating plants and other government rebuilding projects. (CalPERS paves way for $1.5 billion investment in infrastructure, SacBee, 9/10/07) “We hope to generate stable, attractive investment returns with low to moderate risk as we deploy capital to meet a reported need of $1.6 trillion for U.S. infrastructure projects over the next five years,” said Rob Feckner, CalPERS Board President. “These pilot programs are our first step toward recognizing that opportunity and a step toward further diversifying our portfolio.” (CalPERS press release, 09/10/07) Increasing Share Price, Is that Important? Australian study, Compny Directors' Views Regarding Stakeholders, finds that less than half (45%) of the directors surveyed feel that increasing the share price is important to them, although the proportion among directors of listed companies holding this view is considerably higher (60.4%). “US studies, for example, show that around 8 out of 10 directors rank shareholders ahead of all other stakeholders, including employees. The Melbourne University study shows that only 4 out of 10 Australian directors rank shareholders first. In contrast, in Japan studies have shown employees to be ranked highly over other stakeholder groups”, said Meredith Jones, the primary researcher on the survey led by Professor Ian Ramsay, from the Centre for Corporate Law and Securities Regulation, and Professor Richard Mitchell, from the Centre for Employment and Labour Relations Law. When asked to rank company stakeholders in order of priority, 44 percent of directors ranked shareholders as their number one priority. Customers were ranked as the number one stakeholder by 8.2 percent of directors. Employees were the number one priority for 6.7 percent of directors. In a sure sign baby boomers are taking steps toward retirement, individual annuity sales increased 6% in the second quarter to a record of $66.5 billion over the same period in 2006, according to LIMRA International Inc. (Individual annuity sales hit record highs, Investment News, 09/11/07) T. Rowe Price Group amended its bylaws to require majority votes by shareowers for the election of directors in "uncontested" elections. Any nominee who does not receive a majority vote is to offer his or her resignation to the board promptly following the election. (T. Rowe gives shareholders the vote, Investment News, 09/11/07) Webb News David Webb reports on the Hong Kong government's surprise disclosure of 5.9% of HKEx, where it might go next, and how the government quietly scrapped a 5% benchmark on the Exchange Fund weighting in HK stocks, leaving it as the 2nd-biggest investor after the mainland government. Webb calls on the government to return its surplus capital to the people with a 10-year program of deliberate budgeted deficits. According to the WSJ, "The government also claims that its motives here are "strategic" -- making it easier to forge closer ties between HKEx and mainland Chinese exchanges -- and not for profit. So does that mean the Fund's purchases, which are ultimately accountable to the people of Hong Kong, aren't invested for profit?...Hong Kong is retreating into further government interference in an attempt to cozy up to China's tightly controlled domestic exchanges. This after then-Financial Secretary and now-Chief Executive Donald Tsang promised that the government's interventions in the equity market would end after the financial crisis a decade ago. (Delisting Hong Kong, 09/11/07) Shareowers of MTR Corporation Ltd (MTRC, 0066) will want to read Webb's dicussion on the proposed "Rail Merger," which he reports is not really a merger but a mixture of property purchases and leasing of railway assets on onerous terms from the Kowloon-Canton Railway Corporation (KCRC), wholly-owned by the government. Bundled in with the deal is a proposal to strip the company of its commercial autonomy, locking its real fares at the current low levels, for no payment in return. Proxy forms must be received by the registrar 48 hours before the meeting, which takes place at 11:00 on Tuesday 9-Oct-07. Advice Monopoly According to a post by Brock Romanek (ISS and Glass Lewis to Merge?, TheCorporateCounsel.net Blog, 9/10) who got the word from Stephen Davis' Global Proxy Watch, RiskMetrics if the front running contender to buy Glass Lewis. With RiskMetrics (the parent company of ISS) in talks with the SEC in advance of filing formal IPO documents, this latest news is sure to raise concerns about the dominant position of ISS in advising how institutional shareowners vote in worldwide corporate elections. "Expect an IPO to rekindle debate about whether public ownership—or another buyer—might affect the quality or content of RM advice," says Davis. Last month I wrote the following:
Only auditors who know little of the corporate governance industry could have concluded that ISS is not all that influential. Davis notes the findings "fortify defenders of any RM takeover of GL," even as an IPO "rekindle(s) debate about whether public ownership—or another buyer—might affect the quality or content of RM advice." "GL-ISS nuptials could boost proxy firms that remain—such as Proxy Governance and Egan-Jones in the US, and ECGS in Europe. Equally, a takeover could spur market interest in specialist stewardship firms such as F&C, Governance for Owners and Hermes EOS," write Davis. I hope it also leads to consideration of proposals where companies purchase firm-specific services based on the vote of shareowners, as in Latham's VoterMedia projects. CalSTRS Takes Bold Action to Prevent "Pay to Play" The California State Teachers' Retirement System passed ground-breaking limits on campaign contributions that the governor and other public officials with influence over the fund can receive from Wall Street money managers. CalSTRS has set a new gold standard that will increase pressure on other public pension funds to come into line. (see agenda item) The adopted regulations go far beyond the minimum disclosure and recusal recommendations included in Best Practice Principles recommended by the Clapman Committee on Fund Governance. As reported in the lead story on the front page of the Sacramento Bee, "the CalSTRS rules are aimed at investment managers and their firms -- Goldman Sachs, Lehman Bros. and other monied financiers -- that do at least $100,000 a year in business with CalSTRS, and those vying for a contract. Among the provisions:
The plan passed 8-3 with dissenting votes by Trustee Carolyn Widener and representatives for state Treasurer Bill Lockyer and Superintendent of Public Instruction Jack O'Connell." The article by Gilbert Chan notes that "former Treasurer Phil Angelides picked up more than $4 million in donations from companies doing business with CalSTRS and CalPERS." (CalSTRS votes to limit political gifts, 9/7/07) (See also CalSTRS Board Approves Restrictions to Campaign Contributions, press release, CalSTRS, 9/6/07) In 1998, CalPERS moved to restrict contributions after being criticized in a series of articles that appeared in the Los Angeles Times and Sacramento Bee. Those restrictions would have effectively impacted only Controller Kathleen Connell. Resolutions BD-98-01, BD-98-02 and BD-98-03, enacted as "policies" on 2/19/98 required disclosure of solicitations, gifts, and banned certain campaign contributions. On 2/21/98 I petitioned CalPERS pursuant to Government Code section 11340.6, requesting promulgation of the policies as regulations pursuant to the Administrative Procedure Act. CalPERS declined to do so. I then sought a determination regarding the legality of the regulations from the Office of Administrative Law (OAL) on 5/1/98. In contrast with the previous CalPERS policies, the regulations adopted by CalSTRS are moving through the legally required rulemaking process and impact not only the ex-officio members of the board but also the Governor. The California Chamber of Commerce and the California Banking Association both opposed the rulemaking. Although legal challenges are expected, I believe the CalSTRS rules have been carefully crafted and should stand. CalPERS should be the next pension fund to adopt similarly stringent standards. Ownership Myth Debunked In The Myth of Diffuse Ownership in the United States, Clifford Holderness challenges the view that diffuse ownership is the norm for US public corporations. He finds that 96% have blockholders owning in aggregate an average 39% of the common stock. (Thanks to Holger Spamann, Harvard Law School Corporate Governance Blog, Diffuse Ownership in the United States: A Myth?, 9/7/07) Compliance A wink and a nod can be costly signals when it comes to insider trading, as those involved in Cubist Pharmaceuticals recently found out. (Insider Trading on a "Wink-and-a-Nod," CFO.com, 9/7/07) John Coffee addresses how ineffective securities fraud class actions have been to deter corporations from engaging in fraudulent activities and to compensate shareholders for their losses. Coffee suggests that the current system imposes the cost of litigation and damages found against corporations upon the shareholders. Statistics show that investors have never recovered more than 7.2% of their losses through securities fraud class settlements between 1991 and 2004. The individual defendants involved are rarely held accountable for their participation in the fraud because of D&O insurance. (Securities Class Action Reporter, 8/31/07) In the Jan. 18 edition of the New York Law Journal, Professor John Coffee presents a wish list of securities litigation reforms. The proposed reforms are:
The LRN white paper "Global companies, global integrity" is available for download and "shares effective strategies to meet the requirement put forth in the U.S. Sentencing Guidelines to promote an organizational culture that encourages ethical conduct and a commitment to compliance with the law." LRN recommends following an approach that "implements global principles based corporate values, while allowing for local policies based on cultural traditions. Their recent ethics and compliance risk management practices study found that 92% of US companies said they were able to engage all or most of their employees in ethics and compliance education programs. That figure was lower for Canadian and European operations (86%) and still lower for other areas of the world (70%). Companies consistently provided more education in headquarters than in international locations. TheCorporateCounsel.net Blog published a lengthy list of SEC enforcement actions against general counsels so far this year compiled by Keith Bishop. Worth a look. (In the SEC's Enforcement Division's Crosshairs: General Counsels, 9/6/0-7) J. Robert Brown, Jr.'s post on the Harvard Law School Corporate Governance Blog reviews the recent conviction of Gregory Reyes, the former CEO of Brocade, and is concerned with the use of federal criminal law to police executive compensation matters. "The Delaware courts’ failure meaningfully to evaluate the independence of the directors who make those decisions raises serious questions about the integrity of board procedures and the ability of the board to supervise corporate conduct." Brown thinks the best way to prevent further federal intrusion into the governance process – particularly in the executive compensation area – is to" impose meaningful standards of review at the state-law level. (The Reyes Conviction and Federal Intervention in Compensation Decisions, 9/6/07) Governance among Exploration and Production Issuers Moody's issued a report on Key Governance Features of Investment Grade North American Independent Exploration and Production Issuers. Key findings include the following: "E&P companies face pressures of escalating costs and volatile commodity prices. E&P companies also face new reputational risks, most notably pressures from environmental groups. E&P boards would benefit from having more directors with large-company experience to help management deal with these external challenges. Faster turnover of directors would also provide an opportunity to broaden the geographic scope of directors and introduce new perspectives...E&P boards have retained a preference for option awards, which exposes management to the vagaries of share price movements and to the volatility of commodity markets, both of which are outside of E&P company executives control. A more appropriate method of pay for E&P executives, it would seem, is to adopt long-term incentives that use metrics similar to those used for annual bonuses, such as the recycle (leveraged full-cycle) ratio, an important measure of operating and capital efficiency." Includes interesting information, such as a chart comparing the aggregate in-the-money holdings of CEOs with CEO tenure. We need more governance reviews by industry, as well as by business phases, if we are ever to get away from box ticking generalities. Reich Turns to Friedman Robert Reich's Supercapitalism: The Transformation of Business, Democracy, and Everyday Life Our role citizens must be recovered and must take precedence over our role as consumers and investors. Supercapitalism has brought with it alienation from politics and community. He calls for an end to the legal fiction that corporations are citizens. Consistent with that thought, he says we should abolish corporate income taxes and tax shareholders instead. We must also hold individuals rather than corporations guilty of criminal conduct and should limit participation in politics to citizens not legal entities, such as corporations. (see also, Rethinking the Social Responsibility of Business: A Reason debate featuring Milton Friedman, Whole Foods' John Mackey, and Cypress Semiconductor's T.J. Rodgers, reason.com, 10/05 and listen to CorporateWatchDogMedia) Has Reich gone over to the dark side? I don't think so. He's trying to emphasize the need for political reform. He believes we won't be able to tackle global climate change and other significant issues as long as the voices of corporations are heard over those of individuals. He's probably right. ISS Issues Highlighted Jeffrey Pfeffer laments the "check box" mentality that arises from the 65 rules and guidelines of ISS . He's upset because there is "almost no evidence that ISS's prescribed practices are actually related to outcomes, such as higher rates of return for shareholders or improved company performance." However, he is "even more concerned about potential conflicts of interest. ISS requires the companies it rates to report how much 'nonaudit' work their auditors do; it wants supporting data, not just assurances, that there are no conflicts of interest. But ISS doesn't reveal who it consults for, or the fees it receives, so there's no way to know whether its ratings are affected by its own self-interest." Pfeffer concludes: "Companies are rightfully concerned about governance scores because they affect how institutional shareholders vote their shares. But whether the ratings are reliable and valid and whether the governance business itself is going to face its own 'governance' issues remain open questions." .(Beware the corporate raters, CNNMoney, 9/5/07) As Pfeffer notes, last year ISS was acquired by RiskMetrics, which is contemplating an IPO. Maybe if it goes public its own governance issues will be more transparent. Directorship 100 in Corporate Governance Directorship put out a list of "the 100 most influential players in corporate governance." The top two slots went to institutions, not people. CalPERS and the SEC ranked one and two respectively. Number three is Democratic Rep. Barney Frank of Massachusetts, the new chair of the House Financial Services Committee, for his “say on pay” bill. Warren Buffett of Berkshire Hathaway gets fourth place for “deploring the system of compensating top-level executives with stock options” and eschewing rewards to executives who generate “quick profits.” The Delaware Courts take number five followed by Ralph Whitworth of Relational Investors, Pactrick McGurn of ISS, Ira Millstein, Paul Sarbanes and Michael Oxley, Richard Breeden, Jeffry Skilling and "the CEO Inmate Club," PCAOB, the Exchanges, Richard Ferlauto of AFSCME, Martin Lipton, Ex-Chairment Pitt, Levitt and Donaldson, Charles Elson at U. of Delaware, Peggy Foran at Pfizer, Nell Minow at the Corporate Library and Damon Silvers of the AFL-CIO rounding out the top 20. Others on the list included Ira Millstein of Weil Gotshal & Manges; Martin Lipton of Wachtell Lipton Rosen & Katz; Larry Sonsini of Wilson Sonsini Goodrich & Rosati; activist investors Richard C. Breeden, Kirk Kerkorian and Ralph Whitworth; and former Home Depot CEO Robert Nardelli, who now heads Chrysler. (Crowning the Corporate Governance Elite, NYTimes, 9/3/07) See the full list posted at the Millstein Center. Missing were John Chevedden, representing "small" individual investors; J. Robert Brown, publishing theRacetotheBottom.org which is up and coming; Broc Romanek and Dave Lynn, who edit TheCorporateCounsel.net and its associated educational branches; Timothy Smith, who heads the Social Investment Forum; CalSTRS, the crosstown rival of CalPERS that will soon finalize stringent Board Conflicts/Disclosure Regulation; and Anne Simpson, ICGN Executive Director. Your nominations? Frequent Flyers A study by The Corporate Library (Up, up, and Away--Personal Use of the Corporate Jet) finds that 54% of 215 large-company CEOs have access to corporate aircraft for “non-business” use. The median costs for such usage last year were $182,929, with a median tax reimbursement (or gross-up) of $37,933. Spouses of 29 CEOs and other family members in six cases were also eligible to use corporate jets for personal use. The author, Paul Hodgson said that at the very least, executives should have to reimburse companies the equivalent costs of buying tickets for a commercial aircraft and at best, should reimburse the company for “the whole” of the incremental costs associated with personal air travel. (Despite shareholder criticism, company jet use by CEOs (and families and friends) for personal travel is heavy, as are costs, Financial Week, 9/4/07) Vice Chancellor Strine’s opinion in Mercier v. Inter-Tel makes clear that properly motivated, disinterested directors have discretion to postpone a stockholder vote on a proposed merger for a reasonable period of time where the directors believe that the transaction will benefit stockholders–even if the directors know that a majority of stockholders would vote against the transaction if the vote were held on the originally scheduled date. (The Delaware Court of Chancery Concludes Directors’ Action To Reschedule A Stockholder Vote Satisfies Blasius’ Compelling Justification Standard, Morris, Nichols, Arsht & Tunnell LLP) Footnoted.org highlights an amended employment agreement the company filed late Friday for CEO Edward Mueller at Qwest Communications. Allowing Mueller’s wife and stepdaughter to use Qwest’s jet for their personal use may cost as much as $600K, assuming normal charter rates for the Falcon 2000. (Back to school (but not on the bus), 9/4/07) End of Democracy at Dartmouth Dartmouth College is one of a few schools in the US that allow alumni to elect leaders directly. Eight of the 18 members of Dartmouth's governing Board of Trustees are chosen by the popular vote of 66,500 graduates. In 1891, Dartmouth agreed to a pact that instituted a novel scheme of democratic governance. Alumni -- the school's financial underwriters -- won the right to elect half of its non-administrative or ex officio trustees, who oversee the school and hire and fire its president. The remaining seats are filled by appointment and typically go to big donors. This arrangement has been in place since 1891. Now, some in Dartmouth's inner circle want to do away with such elections. "The endowments of the 25 wealthiest institutions of higher learning total $178 billion, and a college education is one of the largest investments a person will ever make (in tuition and donations as an alumnus). It isn't a surprise that alumni stakeholders have begun to show interest and exert influence. The only surprise is the lengths to which academic elites will go in order to keep out the light of day." (The Illiberal College, WSJ, 9/1/07) Too bad. I'll bet that alumni with a vote are much more generous in their contributions to universities than those without. Additionally, as the WSJ article notes, alumni have a great deal at stake in oversight and advising, in order to maintain or increase the value of their degree. Universities should be moving to Dartmouth's model, not away from it. CalSTRS May Adopt Gold Standard CalSTRS may vote this week to adopt regulations that will clearly limit campaign contributions to board members from those seeking an investment relationship with CalSTRS to $1,000 individually or $5,000 in the aggregate. While the California Bankers Association asserts the regulations’ contribution amounts may discourage doing business with CalSTRS, CalSTRS believes it is more likely that such an investment decision would be motivated by the fiduciary duty the members of the Association owe their shareholders and investors as opposed to tangential political concerns over how much can be contributed to a particular campaign. (See 9/6/07 agenda item Finalize Board Conflicts/Disclosure Regulation at Teachers' Retirement Board: Public Meeting Notices and Agendas) CalPERS and other public funds will certainly face pressure to adopt similar restrictions, if CalSTRS moves forward. Race to the Bottom J. Robert Brown speculates that with Commissioner Campos stepping down, Cox may have trouble delivering on his Senate testimony that there would be a rule by next season. "This suggests that Cox may side with Atkins and Casey, at least if the paramount issue is to obtain a rule. Alternatively, to bring them around, he may agree to more severe restrictions to access in the existing proposal." (Shareholder Non-Access, Corporate Governance, and the SEC (Part 1), theracetothebottom, 9/3/07) In Part 2 Brown reviews the bleak record of proxy contests (that is, a shareholder nominating one or more directors to compete with management's slate). He cites Lucian Bebchuk's findings that "only twenty-four companies, or less than three per year on average, had a market capitalization exceeding $200 million at the time of the electoral challenge." According to Brown, "The point of the data is that few incumbent directors ever confront a challenge and few ever lose their seats. The data raises a fair question about the value, if any, of the shareholder election mechanism. Moreover, it is clear that a director who wants to stay on the board could rationally adopt a strategy designed to appease the board's nominating committee. In other words, it would be rational to take positions designed to support the other directors (including the CEO) rather than to support shareholders." We Gotcha The 10b-5 Guide: A Survey of 2006 Securities Fraud Litigation from Weil, Gotshal & Manges provides summaries of recent cases concerning federal securities class action. These cases address key issues, including pleading standards, loss causation and class certification.provides summaries of recent cases concerning federal securities class action. Chapter 1 provides an overview of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), as well as summaries of recent opinions relating to pleading standards and scienter. Chapter 2 discusses pleading materiality, loss causation and the PSLRA’s Safe Harbor for forward-looking statements. Chapter 3 focuses on liability issues. Chapter 4 addresses the developments in case law concerning the PSLRA’s lead plaintiff provision, as well as developments in class certification case law. Chapter 5 covers additional procedural concerns, including statute of limitations, standing, stay of discovery and Rule 11 sanctions. Finally, Chapter 6 reviews cases addressing the Securities Litigation Uniform Standards Act of 1998 (“SLUSA”). Fund Growth Employer contributions to the $154.5 billion New York State Common Retirement Fund, will be cut by 2009 because the system is 104% funded. Contribution rates will drop to 8.5% of payroll from 9.6% in 2008. The world’s largest 300 pension funds grew 11.5% last year, with assets topping $10 trillion for the first time while keeping pace with the 2005 growth, according to an annual survey conducted by Pensions & Investments and Watson Wyatt Worldwide. The top 300 pension funds represent about 40% of the total global pensions market, with the top 30 funds controlling 20% of assets, according to separate data provided by Watson Wyatt. Australia led the way in terms of asset growth. Australian pension assets in the top 300 grew 40% in U.S. dollar terms — to US$118.4 billion — and about 30% in local currency term in 2006. (N.Y. State fund to cut employer contributions, P&I, 9/4/07 and World's Largest Pension Funds: $10 trillion strong, P&I, 9/3/07) ESOP Alternative The standard path for a technology startup is well-known: find a venture capital firm, accept its money, give up most of the stock (and all control), and, maybe (though the odds are against it), wind up with riches when your company is sold in a few short years. If it works, of course, an entrepreneur can get a big pay day. There is an alternative path – one most notably taken by Bob Beyster at SAIC and since emulated by many others. It has come to be known as the “employee ownership alternative.” It is grounded on the notion that those who contribute the resources that are essential to the firm’s growth should be the owners of the venture, in proportion to the value of their contributions. Certainly an organization needs financial capital, and those who supply it justly have a claim to ownership. But to grow and thrive, a technology startup also requires ideas, insights, expertise, customers, and products; and individuals who contribute those resources have likewise earned an ownership interest. With the employee ownership approach, overall ownership of the company is commensurate with the value-adding contributions that people have made to the venture. The employee ownership alternative, then, begins with the notion of “fairness” to those who are making essential contributions to the venture. But make no mistake: the benefits of this approach include much more than simply a sense of moral pro priety. As it turns out, distributing ownership in this manner produces major competitive advantages. Martin Staubus, Beyster Institute Staff, provides advice in The Employee Ownership Path: An Alternative Route for Technology Startups. Pakistani Corporate Governance Practices The Code of Corporate Governance adopted by Pakistan in 2002 "looked good on paper – but the companies didn’t understand why or how good governance could affect their business. So instead of making changes that could improve investment and increase profits, the companies chose to remove themselves from the stock exchange, according to Moin Fudda. "Astonishingly, about 82% respondents were unaware of the benefits of corporate governance, such as protection of shareholder’s rights, improving strategic decision making, access to external capital, and transparency. Respondents viewed the most important benefit of adopting good governance practices as compliance with legal and regulatory requirements." In early 2007, SECP, the Pakistan Institute of Corporate Governance (PICG), and the International Finance Corporation (IFC) commissioned a survey of corporate governance practices in Pakistan. The draft survey report is available at accaglobal.com/pakistan/publicinterest/CG_report (Survey of Corporate Governance Practices in Pakistan, Center for International Private Enterprise Development Blog, 9/4/07) Tomomi Yano: Defending the Interests of Average Workers Interesting profile in the New York Times of Tomomi Yano, head of investment at the $11 billion Pension Fund Association, who the article credits forcing companies to "downsize bloated boards, to raise dividends and to better inform and respond to shareholders." "Mr. Yano is inspiring a growing number of imitators, mostly smaller pension funds that are printing investment guidelines like the ones he has pioneered, and pressing companies to increase returns." “It used to be that shareholders were on the bottom of management’s list of priorities,” Mr. Yano said. “Now, we are No. 2 or No. 3, after employees and maybe business partners. But that’s progress.” (An Investor Activism Uncommon in Japan, 8/29/07) Public Bank Win Awards Public Bank Bhd won three awards for best managed company, best corporate governance and the most committed to a strong dividend policy at the annual event and the FinanceAsia’s Best Companies Poll 2007, conducted for the seventh time based on 255 survey respondents from 16 Asian countries. (Public Bank is best managed company in FinanceAsia 2007, TheEdgeDaily, 9/4/07) One Share One Vote An overwhelming 85% of investors support “one share, one vote” when asked at July’s annual meeting of the International Corporate Governance Network (ICGN). The network represents investors with combined assets of about $10 trillion. 27% of large European companies have a pyramid structure, sometimes controlled by complex chain of companies. 21% had multiple voting rights shares. (Governance: Shareholder voting rights – Equity ownership’s endemic inequality, Ethical Corporation, 9/4/07 and Report on the proportionality principle in the European Union) Conferences and Webinar Thursday, November 8, 2007, the Asian Corporate Governance Association (ACGA) will host its 7th annual conference, the “Asian Business Dialogue on Corporate Governance 2007”, at the Conrad Hotel in Tokyo, Japan. Download flyer. From the Kitchen Table to the Boardroom: Governance Solutions for Family Business, will be held on Thursday, September 27, 2007, 4:00 to 7:00 pm at The American Center for Wine Food and the Arts, 500 First Street, Napa, CA. Sponsored by the NACD. Call 707-512-6742 or register online. There is more to open book management than simply opening the books. Balance sheets and income statements, after all, seldom tell the whole story - and often tell no story at all to people who are not trained to understand them. When a company provides financial information to employees in a way that is truly understandable and actionable, however, the results can be remarkable. This is the goal of open book management and the topic of a webinar on the Beyster Institute web site on 9/19/07. Widening Gap Top hedge fund managers pocketed an average $657.5 million in 2006, or 22,255 times the $29,544 average annual pay of US workers, said a study issued by the Institute for Policy Studies (IPS) and United for a Fair Economy (UFE). That dwarfs the discrepancy between CEOs and workers. Corporate CEOs earn about 365 times the pay of US workers. (Cash of the titans: Criticism of pay for fund execs grows, USA Today, 8/29/07) The top 386 CEOs also took in perks worth an average $438,342 in 2006, so the pay estimate is low. (see the video) Barbara Ehrenreich points out that CEOs make an average of 204 times more than the 20 highest-paid generals in the US military. Tongue in check (It's Not Easy Being Ultra-Rich, 8/30/07): Suppose you are the general responsible for all the service people currently in Iraq, about 130,000 in round numbers, and suppose you manage to lose every single one of them in some ghastly miscalculation. With the death benefit for the family of a dead soldier running at $100,000, your mistake will cost a total of $13 billion. Sounds like a lot, I know, until you consider that a hedge fund manager or financial company CEO can lose that much in a single afternoon, without anyone even noticing. Q.E.D., there is simply no comparison between a general and a CEO. CEOs got a 45% increase during the past 10 years, while average workers got only a 7% increase. CEOs of S&P 500 companies retire with an average $10.1 million in their Supplemental Executive Retirement Plan. Most Americans have no pension protection whatsoever. In 2004, only 36.3% of American households headed by an individual 65 or older held any type of retirement account. The accounts that did exist averaged only $173,552 in value, or 1.7% of the dollars set aside for America’s top CEOs. Executive Excess 2007: The Staggering Social Cost of U.S. Business Leadership includes the following Proposals for Change:
Payback for CalSTRS The Third District Court of Appeal in Sacramento issued a decision requiring the State of California to pay CalSTRS $500 million plus interest (estimated at $200 million) stemming from a withheld payment for fiscal year 2003-2004. The three-member panel unanimously held that the state violated its contractual obligation to California’s retired educators when it withheld its contribution to CalSTRS’ inflation-protection program, the Supplemental Benefit Maintenance Account. CalSTRS current retirees receive only 55 percent of their replacement salary, no Social Security on their teaching earnings and frequently, no employer-provided healthcare benefits after retirement," said Jack Ehnes, CalSTRS CEO. "This ruling should permanently put to rest pension raids and allow us to refocus on strengthening retirement security for all." Out of Pocket at Feet Five former outside directors of Just for Feet Inc. in March 2007 agreed to out-of-pocket payments of $41.5 million, topping $24.8 million in 2005 by former WorldCom outside directors and $13 million by directors of Enron. According to the Wall Street Journal, "such payments are still rare. Courts in Delaware, where many big companies in the U.S. are incorporated, generally protect directors from liability for mistakes as long as they acted in good faith, under the business-judgment rule. When directors are found liable, or agree to settle, the company's directors' and officers' insurance typically covers most of the cost. In the case of Just for Feet, court filings show that only $100,000 of liability insurance remained available for the trustee's lawsuit; most of it was exhausted by the company's officers in settling a shareholders' lawsuit." (Settlement in Just for Feet Case May Fan Board Fears, 4/23/07) A 2006 Stanford Law School study found only 13 instances in the past 25 years in which outside directors paid settlements out-of-pocket. Although court documents suggest their D&O programs had coverage flaws that weakened directors' arguments for coverage, it may be that no amount of insurance would have prevented those payments. (Indeed, at least in the WorldCom case the insurance limits were not exhausted.) The Just for Feet facts are much more relevant to the average company. It appears the company simply did not have enough insurance, and it was bankrupt and unable to indemnify the directors. This is a classic scenario that a well-structured D&O program could protect against, according to analysis by Susan Miner and Lauri Floresca. They recommend a robust D&O program with the following elements:
Kaback on Say on Pay Commentator Hoffer Kaback writes about the "say on pay" controversy and concludes that the demarcation between board and management matters is, by nature, a shifting, impermanent one, varying over time and space and personnel." "Corporate governance is, fundamentally representative, not democratic. Shareholders do not govern directly; they elect directors to perform that role." Kaback doesn't think say on pay is that important. "The critical governance issue is that embodied by the warning favored by Sir Humphrey Appleby in the brilliant Brit-com 'Yes, Minister': the intrusion of 'the thin edge of the wedge.'" (The Thin Edge of the Wedge, Directors and Boards, Directors and Boards, Third Quarter 20007) I agree with Kaback... if only shareholders actually elected directors through any process that could reasonably labeled democratic. While Directors and Boards often includes informative articles such as The Role of the CEO in Board Selection in the Third Quarter 20007 edition, I'm waiting for such prestigious magazines to publish articles providing best practices on the role of shareholders in board selection. Back to the top News from August 2007, July 2007 and June 2007 There's plenty of news stored in Archives. The news may be slightly older but many of the issues covered are sitll current.
Equal access? The SEC's current rulemakings, S7-17-07 Shareholder Proposals Relating to the Election of Directors (comments) and S7-16-07 Shareholder Proposals (comments) offer conflicting solutions to a now nonexistant problem after the decision in AFSCME vs AIG. Equal access? The SEC's rulemaking, S7-19-03 (comments, Editor's: 1, 2 & 3) would have been a weak first step. Compare the petition Les Greenberg and I filed to allow shareholder proposals to elect directors: Petition File No. 4-461, which the Council of Institutional Investors said "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." See Equal Access - What Is It?, Inside Track interview, ad. Evolution at Solicitation of Public Views Regarding Possible Changes to the Proxy Rules and Sharehol Back to the top Contact: James McRitchie, Editor (916) 869-2402 All material on the Corporate Governance site is copyright © since 1995 by Corporate Governance and James McRitchie except where otherwise indicated. All rights reserved.
Back to the top |
||||
, due early next year.
, discuss the upcoming 
with the Corporate Governance NETwork!