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Current News and Commentary. 2008: March, February, January, 2007: January, February, March, April, May, June, July, August, September, October, November, December. News Archives. Corporate governance defined. Disclaimers, Copyright and publisher James McRitchie's potential Conflicts of Interest as of 8/9/07. Book bites. SVNACD: What is “ethics?” What role should it play in business decisions? How do companies develop an ethical culture? How do ethical companies compete against competitors who may not be ethical, i.e., are ethical companies at a competitive disadvantage? Conversely, do ethical practices really increase shareholder value? These are a few topics to be discussed with an expert panel. 05/15/08 7:30 AM - 9:30 AM in Palo Alto. More. Sir Higgs, Dead at 64 Sir Derek Higgs, best known for his groundbreaking report on the role of non-executive directors on company boards (The Higgs Report: Review of the role and effectiveness of non-executive directors), was taken ill suddenly on Monday, rushed to hospital and died on Tuesday. The review recommended that at least half of a company’s directors should be non-executive and set new standards for their independence. It promoted the idea of a senior independent director, and reiterated the need for a separation of the roles of chairman and chief executive, with a chief executive not stepping up to become chairman, while embedding the “comply or explain” principle of earlier corporate governance reforms. (Sir Derek Higgs dies aged 64, and Corporate crusader, FT, 4/29/08) The Future of Corporate Law: Symposium and Webcast - May 5th In the current issue of The Delaware Lawyer, a variety of practitioners and academics (including Lucian Bebchuk, Robert Thompson, Michael Dooley and Charles Elson) present brief appeals for reform of Delaware’s corporate statutes. Many of them, joined by professors Jennifer Hill, Brett McDonnell, Faith Kahn, Elizabeth Nowicki, and Ann Conaway, will discuss their proposals for reform at the Delaware General Corporation Law for the 21st Century Symposium on May 5th at the Widener University School of Law in Wilmington. Panels will focus on Takeovers; Stockholder Litigation, Stockholders in Corporate Governance; and What We Can Learn From Other Statutory Schemes. Sorry for the late notice but the webcast is free. Register
"Say on Pay," Breaking Ranks A handful of shareholder activists and governance watchdogs are breaking ranks with colleagues on a hot issue: how to curb executive pay. (More Holders Want Say on Executive Pay, WSJ) Although I support "say on pay," I'm glad to see that others I respect don't. Skeptics include Charles Elson, Edward Durkin, and Peter Clapman. The debate is healthy. Elson says the best way to curb excessive pay is to remove corporate directors responsible for those practices. Durkin says it could lead to standardized compensation packages and flexibility. He recommends engaging directors. Elson is right but shareowners don't have proxy access to replace irresponsible directors with those of their own choosing. Engagement may work for Durkin (and probably Clapman...the article didn't say what he favors but that's what he's known for), but most investors, even those representing larger funds, don't have the access that Durkin or Chapman enjoy. We need "say on pay" but it isn't an optimal solution. CalPERS (Update 3; see bottom paragraphs) Bloomberg updated Calpers Managers Leave as Board Seeks Job Protection (4/28/08) with additional speculation on the possibility that CEO Fred Buenrostro may leave by year- end. They seem to hint of a connection between executives leaving (CIO Russell Read already announced his departure) and a debate concerning the possible investment about $5 billion in infrastructure, such as toll roads and power plants. Board members and government workers want assurances the investments won't lead to job losses in California. Board members George Diehr and Louis Moret told Bloomberg they doubted the guidelines on new infrastructure investments would have prompted Buenrostro or Read to leave. Others, including the publisher of CorpGov.net, are quoted intimating that the CalPERS board takes a more active role in operations than most corporate boards, so it can be a challenging environment. Subsequently, Buenrostro issued the following statement:
CalPERS President Rob Feckner noted:
As a long-time CalPERS watchdog, the idea that Buenrostro would leave over an argument about infrastructure investments doesn't ring true. Sam Zuckerman, Chronicle Staff Writer called and asked if Buenrostro' s management style was more likely to be the cause of his leaving. I told him, based on the last several years, that rationale seemed closer to the truth. See CalPERS resignations not connected - turmoil denied (San Francisco Chronicle, 4/30/08) Although I am quoted saying that "his management style was not as participatory as it could be," I have no direct knowledge of Buenrostro's motivation. Whatever the "cause," CalPERS is not in crisis. Still, maybe dozens of reporters digging around for dirt will lead them to explore a couple of needed reforms. One would be to adopt regulations similar to those of CalSTRS prohibiting certain campaign contributions. (see Title 5, beginning with section 24010 @ page 615 of CalSTRS' compilation) Such a move would reduce both speculation and any real opportunity for "pay to play." Secondly, the press might look into the Board's latest entrenchment foray. After petitioning the Board to adopt election procedures into regulations and being summarily rejected, I sought a determination from the Office of Administrative Law (OAL). In early 2007 OAL issued a determination that the Notice of Elections contained "underground regulations," not properly noticed for public input or reviewed for compliance with the provisions of the Administrative Procedure Act (APA). (In an earlier determination by OAL, also at my request, CalPERS had argued the APA didn't apply to them. OAL and the courts determined it does.) Although their current rulemaking addresses most of the concerns raised in the 2007 determination, the Board is still attempting to set the basic requirement, how many signatures are required from members to establish candidacy, before each election, without going through the APA. I don't think Board members should be able to look over their potential competition and then write underground regulations concerning what it will take to challenge them in an election. I am reminded of an earlier dispute I had with Board members concerning ballot statements. After voting 9-4 to move ahead with regulations prohibiting "candidates' opinion or positions on issues of general concern to the system's membership," the Sacramento Bee carried a scathing editorial entitled CalPERS muzzles critics: Ballot rules protect board, keep others in the dark (May 25, 1999). That editorial concluded, "The vote by CalPERs incumbents muzzles challengers in ways that risk creation of a permanent board: unaccountable, untouchable and isolated from the people who elect it." The Board quickly retreated. Eventually, we got broadened candidate statements and a requirement that board members be elected based on a majority rather that a plurality vote. (no more board members elected with 5.5% of the vote) I'm getting a couple of calls a day from reporters on the announced departures at CalPERS. Instead, I wish they were asking why CalPERS hasn't followed CalSTRS' ethics lead and why they are now proposing rules that would allow the Board to bypass the APA when setting who can challenge or join them on the Board. See March 18, 20008 comments. CorpGov Bits Part of Broc Romanek's post at TheCorporateCounsel.net Blog deals with Apache Corporation v. NYCERS: Injunction Denied. (4/25/08) Romanek notes, "For the first time, a court has endorsed Corp Fin's view that a proposal that involves some significant policy matters can nonetheless be excluded under Rule 14a-8(i)(7) to the extent that the proposal also deals with core ordinary business matters; here for example, advertising, marketing, sales and charitable giving." TheStreet.com asks, Telecom Investors: Can You Hear Us Now? (4/28/08) The article explores the widening gap between pay and performance and what shareowners in various companies are doing to get boards to address the issue through resolutions on splitting CEO/chair, instituting "say on pay," trying to include tax "gross-ups" and other benefits in total compensation requiring shareowner approval, etc. Cites a Corporate Library study re former AT&T CEO Ed Whitacre who received $85.2 million in compensation from 2001 through 2005, as total shareholder return was negative 40.3%. Proxy Ballots: Your Chance to Make a Difference by Steve Dinnen for the Christian Science Monitor touches on recent actions with a focus on the subprime crisis and actions by CtW. Most of the article focuses on what is being done at individual companies and points to sites that might be helpful to mutual fund owners and retail investors. For example, he notes the Interfaith Center on Corporate Responsibility lists hundreds of shareholder resolutions on its website. He also cites ProxyDemocracy.org as a source of voting advice but I happen to know that site isn't currently being updated, since they are using another site for beta-testing. The article ends with a quote from CorpGov.net publisher, "Internet tools like message boards, social networking, and video-exchange sites are making it easier to galvanize support around good ideas. You can make a difference." UK shareowners, who have enjoyed "say on pay" since 2003, are starting to turn up the heat. "According to a BP release, 9 percent of shares were voted against last year’s pay packages at the April 18 annual meeting. An additional 27 percent withheld their votes, amounting to a cumulative 36 percent not cast in favor of the remuneration report, according to news reports. BP spokesman David Nicholas told Risk & Governance Weekly that the company does not count votes withheld as cast either “for” or “against.” The protest votes, which are the largest at a U.K. company so far this year, came in response to the company’s award of £1.5 million ($3 million) retention bonuses to two executives who were passed over for the CEO’s post. (U.K. Pay Plans Criticized, Risk & Governance Blog, 4/28/08) The Delaware Court of Chancery recently held in Levitt Corp. v. Office Depot, Inc., that a bylaw restricting business that could be conducted at annual meetings to (i) matters contained in the meeting notice and (ii) matters otherwise properly brought by the board or by stockholders (in accordance with advance notice provisions) did not preclude a dissident who failed to give advance notice from nominating directors at the company’s upcoming annual meeting. Vice Chancellor John W. Noble reasoned that the stockholder did not have to give advance notice of its director nominations because the annual meeting notice stated broadly that the business of director elections would be considered. (Levitt Corp. v. Office Depot, Inc., The Harvard Law School Corporate Governance Blog, 4/28/08) Whole Foods Market Inc. (WFMI) says federal securities regulators are recommending that no action be taken against the grocery chain over anonymous postings on financial-news Web sites by its chief executive. Mackey's postings, including many to CorpGov.net publisher James McRitchie, surfaced when they were included among a trove of documents that Whole Foods turned over to the Federal Trade Commission, which was examining whether the purchase of Wild Oats violated antitrust standards. (Whole Foods Not Penalized Over CEO's Web Postings, WSJ, 4/28/08) Disclosure: The publisher of CorpGov.net is a WFMI shareowner. Race to the Bottom: Director Compensation Project The Race to the Bottom has embarked on a Director Compensation Project. Over the next few weeks they will be examining the independence requirements of the stock exchanges and the compensation paid to directors and CEOs. Students will write posts that focus on the specific compensation paid to these individuals, with the information taken from the most recent proxy statements of over thirty companies in the Fortune 500. The first three will include Travelers, American Express and United Technologies. Here's one brief note from the discussion on United Technologies:
This is a very worthy project. I hope we seen many more like it. I'm delighted to see students taking a more active role at The Race to the Bottom, which is well in the top tier of legal blogs. Chevedden Reports John Chevedden and his associates have been busy and report the following votes at annual meetings:
Thumbs Down on Aflac PIRC, which properly bills itself "the UKs' leading independent research and advisory consultancy providing services to institutional investors on corporate governance and corporate social responsibility," is sending a thumbs down on Aflac. I rarely focus on individual companies in any detail but given that Aflac is the first to have a "say on pay" vote in the US and given that I obtained a copy of an analysis by PIRC, which has years of experience analyzing such votes in the UK (since 2003), I thought it would be of interest to readers...especially those on compensation committee putting together CD&As. Aflac will hold its meeting on 5/5/08, 10:00 a.m. in Columbus, GA. While PIRC commends Aflac’s decision to voluntarily submit its executive compensation policy to an advisory shareholder vote, they recommend against approval. They also recommend:
Back to the pay policy, I would abbreviate PIRC's primary objections to the following:
The above mostly summarizes what is readily available from PIRC at First US say on pay gets a no. (see also Investors get first US executive say-on-pay vote as pressure mounts, Responsible Investor, 4/24/08) PIRC's actual report goes into much greater detail. I recommend those responsible for putting together CD&As obtain a copy. RiskMetrics (ISS) is supportingAflac's proposal, so it is likely to pass. In March, shareholders of Philips, the Dutch electronics giants rejected an amended executive pay plan; the first time this has happened. Therefore, directors should be prepared. Coming and Going CalPERS CEO Fred Buenrostro is planning to leave by the end of the year amid tensions with the board, according to two people familiar with the matter, as reported by Bloomberg.com. "Buenrostro and Read are departing amid internal debate over Calpers' investments in infrastructure projects, the people said. At least four of the fund's 13 board members favor new policy provisions that would require union employees to work on the projects." (Calpers Chief Buenrostro May Leave Fund, People Say, 4/25/08) Russell Read, responsible for managing nearly $250 billion in pension assets for CalPERS, will resign as of June 30. Read's departure comes two years after he became CIO. (CalPERS pension investment manager Russell Read to resign, SacBee, 4/24/08) Michael McCauley was named portfolio manager at CalSTRS, helping to oversee its $3 billion corporate governance portfolio, and will start on June 1, reporting to Christopher Ailman. Janice Hester-Amey will now co-manage the portfolio and focus on proxy voting and activist investment management. McCauley, senior corporate governance officer and spokesman at the $184 billion Florida State Board of Administration, will serve as CalSTRS’ external liaison with domestic and international regulators regarding corporate governance issues. (Florida’s McCauley to join CalSTRS, P&I, 4/23/08) CalSTRS said McCauley, 37, will come on board at an annual salary of $175,000. "We are seeking increased diversity on corporate boards and better climate risk reporting by our portfolio companies regarding the reduction of greenhouse gas emissions," says CEO Jack Ehnes. CalSTRS Chief Investment Officer Christopher J. Ailman said McCauley has been "a national leader in improving corporate auditing standards. He will help raise CalSTRS' voice with the Securities and Exchange Commission, the New York Stock Exchange and other crucial policymakers." McCauley also co-chairs the International Corporate Governance Committee for CII. (McCauley to lead CalSTRS corporate governance program, SacBee, 4/24/08) Lee Kun-hee, the chairman of Samsung, found guilty of tax evasion and breach of trust, but cleared of bribery, announced his resignation on April 22nd from the conglomerate his father founded 70 years ago and which he led for two decades. (Lee bows out, The Economist, 4/24/08) Retail Participation in Voting Plummets: Brand Voting in the Works WSJ, using data from Broadridge Financial Solutions, reports that 80 companies that have switched to e-proxy. Only 4.6% of individual shareholders voted under e-proxy, a sharp decline from the 19.2% when the companies sent out traditional paper ballots. "The decline in the participation of individual shareholders could give larger institutions and corporate activists greater sway on company matters." "Companies may be less willing to use e-proxy when there are contested issues, including shareholder proposals that the company opposes. That's because individual investors, when they vote, usually vote on the side of management." (Shareholder Voting Declines as Companies Adopt Web Ballots, 4/23/08) Another likely result is that stockowners will feel less and less like owners and more like people simply betting at the racetrack or casino. Four approaches on the horizon all point in the direction of voting by "brand." Proxy Democracy is working to ease proxy research and is now in beta testing. What is up on the site now is simply an example of the coming database. However, those interested can ask to participate in beta testing. Eventually, clients will be able to input their portfolio and get an email whenever a fund announces their position. The site will also feature mutual fund vote analysis and other tools. Second, there is also the Investor Suffrage Movement, see Proxy Transfer Trials Underway below. At buildout, that system envisions a proxy exchange facilitating the ability of shareowners to assign proxy rights to others, whom they trust, to vote on their behalf. Similar, but simpler, would be if funds or other organizations simply step forward and indicate a willingness to accept proxy assignments of whole portfolios from retail shareowners who trust their "brand." The question at this point is, "who will go first?" Setting up such systems requires no changes in law, should be very inexpensive, and promises to substantially strengthen the clout of A fourth option, which at this point seems further down the road, would be for shareowners to collectively hire proxy monitoring firms. With "free rider" issues resolved and costs spread to all shareowners in a given company, research could be much more thorough than what critics now attribute to current vendors as a check-box approach. Votermedia.org laid important groundwork through what once was the Corporate Monitoring Project. While they are now beta-testing conceptual approaches with student elections at universities, I hope they will return to apply their valuable findings and experience to corporate elections.
Split Decision Coming at Exxon Mobil A shareholder resolution requesting an independent board chairman at Exxon Mobil could very well earn majority support at Exxon Mobil’s annual meeting on May 28, 2008, according to corporate governance expert Robert A.G. Monks, California Controller John Chiang and Maryland State Treasurer Nancy K. Kopp. (ceres, press release, 4/23/08) A streaming audio replay of this news event will be available on the Web at the Investor Newtork on Climate Risk at 7 p.m. EDT on April 23, 2008. Backdating Fallout Continues
A former chief financial officer of Mercury Interactive, the software maker bought by Hewlett-Packard two years ago, was yesterday charged by a federal grand jury with tax evasion in connection with stock options backdating. Separately, the latest settlement over stock-options backdating came yesterday from chipmaker Broadcom, which agreed to pay $12m to settle charges that it falsified reported income by backdating stock option grants over five years. The company neither admitted nor denied wrongdoing. (New backdating charge, FT, 4/23/08) Lon Allen reminds us of SVNACD's 5/15/08 program on business ethics. Among the questions to be considered: are ethical companies at a competitive disadvantage? View program. Back to the top New Rules Would Make Auditors More Independent The other proposal would prevent external auditors from providing tax services during the audit and professional engagement period to client-company finance chiefs and their family members. (For the PCAOB, It's "Independence Day," CFO, 4/22/08) Governing “For the Long Term” It is often assumed that managers and directors are required to maximize short term share price. This teaching module, What the Law Allows, complied by the Aspen Institute Business & Society Program and posted to CasePlace.org indicates that directors and managers have a great deal more flexibility than is often assumed. Workshops to Report on Legal Challenges and Transaction Alternatives To develop information that Bear Stearns shareholders may consider in their buy-sell or voting decisions, the Shareholder Forum is organizing “workshop” projects to report on the following two issues:
Meet the Candidates After a prolonged dry spell at The Millstein Center for Corporate Governance and Performance Forums, now comes two posts. One by Ira Millstein calls for boards to Uncircle the Wagons on Executive Pay. "A prudent approach would be for directors simply to communicate with major long-term shareholders (every company knows who they are and they are not radicals) in advance of setting the package. Voluntarily seek their views in advance, and even if ideas are not adopted completely, be in a position to say shareholders were consulted, not ignored." Of course, this will take courage but it might stem some of the push for politicians to act. Even more courage would be required under a proposal for "director interviews" put forth in a forthcoming column by Stephen Davis and Jon Lukomnik in Compliance Week magazine and mentioned in a second post. "When releasing its AGM documents a board could announce one or more moderated conference calls in which directors would be available for investor questions." They suggest CII and NACD collaborate to forge a common questionnaire with questions such as the following:
That's an interesting idea... one that might be embraced by directors facing a "withhold" or "vote no" campaign but which eventually could become a "best practice" for all. Two variations on the same theme would be to hold rigorous live forms, of the type held by Gary Lutin's Shareholder Forum. Another idea would be to conduct such interviews over a longer period using the rules for electronic shareowner forums adopted by the SEC. Until we can actually have intelligent debates between competing candidates, some form of conference call, meeting or e-forum that allows shareowners to question directors would be a step in the right direction. Whatever form, I hope Davis and Lukomnik continue to promote this good idea. Converting Funds For years Phil Goldstein has made a living buying closed-end funds trading at a discount and then working to close the gap by open-ending or liquidating them. Then there is Make TIAA-CREF Ethical, which successfully lobbied the giant fund to make the fund more "socially responsible." Most recently, investors at Fidelity requested the "Board institute oversight procedures to screen out investments in companies that, in the judgment of the Board, substantially contribute to genocide, patterns of extraordinary and egregious violations of human rights, or crimes against humanity." 25% of the shares in Fidelity's $12.3 billion Mid-Cap Stock Fund voted for the proposal. (Investment Companies and Social Responsibility, theRacetotheBottom, 4/22/08) Is this a new activist tactic, "buy a standard mutual fund and convert it to an SRI fund"? Electronic Suggestion Box Is it "corporate democracy" in action, as reported in BusinessWeek (The Buzz from Starbucks Customers, 4/28/08) or simply a virtual suggestion box and "possibly worst" idea to come out of their annual shareowner's meeting. (Starbucks Drinker, the Mother Ship Hears You, New York Magazine, 3/19/08) Of course, MyStarbucksIdea.com is actually something in between. You can vote but management decides. Still, it opens something of a dialogue with customers and shareholders and is probably more constructive than Starbucks Gossip. Starbucks gets some good ideas and thousands of email addresses, since you have to register to post. Participants get a "sense" of community and the possibility of influence Starbucks direction. Yes, its more American Idol than Shareholder Forum but companies that listen to their shareowners and their customers are more likely to profit than those the don't and this looks like a good idea worth replicating and improving. Disclosure: The publisher of CorpGov.net is a Starbucks shareowner. PreMeeting on BofA Bank of America (BofA) said its quarterly profit declined 77%, it would set aside an additional $3.8 billion to bolster its reserves, and it announced nearly $2 billion in write-downs tied to a drop in the value of leveraged loans as well as mortgage-linked securities. (Bank of America Braces for Consumer Loan Loss, NYTimes, 4/21/08) The day before shareowers attend their annual meeting, a group organized by the Community Reinvestment Association of North Carolina, the California Reinvestment Coalition, and SEIU will hold a media briefing from 12:30-1:00 p.m., followed by a discussion and free lunch for participants from 1:00 to 2 p.m. at the Levine Museum of the New South, 200 E. Seventh Street, Charlotte. During the stakeholders meeting, the groups will release a report entitled, “Higher Standards? What America’s biggest bank owes its customers and Countrywide borrowers.” (Real Bank of America 'Stakeholders Meeting' to be Held in Charlotte the Day Before Annual Meeting of Shareholders, press release, 4/21/08) Could this be the beginning of a trend to organize disgruntled shareowners before annual meetings? Proxy Transfer Trials Underway Although most Americans are shareowners, their voices aren't heard in the executive suites and the boardrooms of the companies they own. Mutual funds typically vote in favor of management because of conflicts of interest. They are afraid that if they actually vote in the best interests of their investors, companies may no longer hire them to administer their retirement savings plans. While all funds are now required to disclose how they vote, none survey their investors to determine how to vote and none pass through their voting rights to their investors. Even shares owned directly by individuals aren't typically voted as those individuals would ideally want them to be voted because most individuals don't take the time to learn the issues and vote intelligently. In fact, the vast majority of retail shareowners don't bother to vote at all. That is increasing as companies move to electronic delivery of proxy materials. When proxies piled up on the kitchen table or office desk, many of us eventually got around to voting before the annual meeting. Now, they come with hundreds of other emails every day. Postponement becomes even more fatal. Even though it is easier to vote and you save a walk to the mailbox, as few as 4% now vote. Glyn Holton thinks the cure is a "proxy exchange" that would allow shareowners to assign voting rights to someone else who, ideally, holds values similar to our own but will actually take the time to research the issues and vote shares on our behalf. See his paper, Investor Suffrage Movement. Holton is taking the first initial steps towards such an exchange by facilitating and encouraging "proxy transfer trials" where shareowners assign their proxies to other shareowners, instead of to the corporation's management with instructions on how to vote. Legally, a proxy-holder can exercise any rights the shareowner could exercise, such as voting or filing a proposal. We are beginning to the test the transferability of these rights through a series of trials where we give each other proxy rights. The goal is for shareowners, brokers, companies, etc. to learn. How difficult is making a proxy assignment? It will vary by broker and company. What are the main hurdles? To keep things simple, proxy rights can be assigned based on who lives close to a corporation's annual meeting. That way, no one will have to travel far and we can learn with a minimum of time and expense. The main thing is to report back on the experience so that we can identify obstacles and best practices. To get started, become a member and go to the proxy trials portion of the Investor Suffrage Movement website. There you will find links to a spreadsheet that you can fill out on your willingness to assign your proxy and to another spreadsheet that you can review to accept proxies assigned by others. Shareowner activists can use these same lists to locate someone who holds shares in a company where the activist wants to submit a resolution or to identify someone who may be willing to attend an annual meeting and read a statement concerning a resolution. Please take a look and consider joining what I think will be an important movement. SVNACD Executive Compensation Event More than one-third of executives (34%) expressed at least some concern regarding their CEO's compensation in the latest survey by Korn/Ferry International, up from 21% in 2007. Four out of five (80%) indicated that shareholders should have at least some "say on pay" for their company's executives. When asked if they felt their CEO's compensation directly reflects company performance, 55% said it does not or it is only "somewhat" reflective. Only 42% judged compensation to be in line with company performance. (press release, 4/15/08) According to the AFL-CIO, the subprime mortgage crisis can be blamed in part on how CEO pay is structured. "Large stock option grants encouraged excessive risk-taking by CEOs to maximize their potential gains through short-term stock price increases... Return on equity, another popular performance measure for CEO pay, encouraged executives to use increased leverage. The pay packages of CEOs at mortgage lenders and investment banks also were sheltered from the inevitable decline in the real estate market because many of them were not required to hold their equity awards for the long term. This allowed CEOs to cash out before the bubble collapsed. Large golden parachutes further insulated CEOs from the financial risk of catastrophic results." (Why the Mortgage Credit Crisis Matters, 4/14/08) Hear AFL-CIO Secretary-Treasurer Richard Trumka discuss how unchecked CEO pay contributed to the subprime mortgage crisis and the nation's economic crisis. (iTunes) With this kind of negative news in the background, the April 17, 2008 meeting of the Silicon Valley Chapter, NACD, involved a distinguished panel discussion, "Executive Compensation: Where Is It Today (Really) and What’s Next?" Panelists included:
Spector began with an interesting observation, something like, "Never counter bad with good when bad looks so bad." Panelists all acknowledged, negative news sells. CEO pay doesn't look so bad next to celebrity pay or against several firm performance measures, market capitalization or compounded total shareholder return. Yet, there is no denying that many believe CEO pay increases are coming at the expense of the rest of the workforce. For many companies, their executive compensation strategy is "fluffy philosophy" at best, according to Dolmat-Connell. Panelists soon delved into the issues of finding good CEOs and the importance of negotiating contracts more thought out with regard to exit (e.g., change of control agreements should expire over time, not be doubled or redoubled), finding good board members (don't go after those motivated mostly by the pay), defining pay for performance and long-term incentives, and the performance review process. Shareholders push pay for performance. The Bear Sterns contract may have incentivized too much risk. Key, is finding the "sweet spot." Panelists reviewed both the good and bad of new proxy disclosure rules and advised some improvements. They focused on the compensation committee, its relationship with independent outside consultants and the need for better relations, and the importance of choosing the peer group. With regard to that crucial decision, the SEC wants disclosure not just of who you chose or what was decided but why. Companies typically want to compare themselves with larger companies in the industry because that's who they compete with for talent. The CD&A is a compensation committee document. Committees should take ownership and ensure it is understandable. The days are over when committee members could get by with four one hour meetings a year. With so many directors of fast growing Silicon Valley companies in the audience, discussion was lively concerning issues like "say on pay," the "red face test," the demand for better board members with specific skill sets, passion and more time for the task, as well how pre-IPO companies should get their storey ready for the CD&A process. Those companies also need to consider the perspective of employees concerned with equity issues, as well as those of the media and prospective shareowners. In short, it was another informative event at what is undoubtedly one of the NACD's most innovative chapters. Register now for the May 15th event on Business Ethics or review podcasts discussing past events on the SVNACD website. CalPERS Goes After Lilly CalPERS is now backed by Egan-Jones, Glass Lewis, RiskMetrics Group (ISS), and Proxy Governance in it attempt to require a simple majority for bylaw changes at Lilly. CalPERS is also withholding votes votes for newly appointed president and CEO John Lechleiter as well as existing directors Dr. Alfred Gilman and Karen Horn to protest the company's lackluster stock performance, which has lagged peers by 22.4% and the S&P 500 by 67.7%, according to the fund. (CALPERS gains allies in Lilly bylaw fight, Indianapolis Business Journal, 4/17/08; 3/27/08 press release) New Indices World's leading index provider Standard and Poor's (S&P) and United Arab Emirates (UAE)-based corporate governance institute Hawkamah have formed a new partnership to create a series of environment corporate governance and sustainability (ESG) indices for equity markets in the Middle East and North Africa (MENA) region. The new indices will be modelled on the S&P ESG India index, which was launched last year by S&P, CRISIL and KLD Research Analytics with partial financial support from the International Finance Corporation (IFC). (S&P To Launch Corporate Governance Indices, News Post India, 4/15/08) Chevedden Reports The following come from shareowner activist John Chevedden: Only four outside shareholders attended the Whirlpool (WHR) early-bird annual meeting (8:00 a.m.) meeting in Chicago. Two shareholder proposals win majority votes:
At EDS, a company-backed proposal to allow the holders of 25% of EDS stock to call a special shareholder meeting was approved with 75%-support, up from 58%-support in 2007 when proposed by Nick Rossi of Boonville, CA. A nonbinding "say on pay" measure was supported by 41% of the shares voted. The EDS board opposed the measure, saying it's more effective for shareholders to send their comments on pay to the board. Kimberly-Clark shareholders gave majority votes to two key proposals at the April 17 annual meeting in Irving, TX:
CtW Urges End to Broker Votes: Minow Forecasts World of Pain As previously noted, Mary Pugh, who chaired WaMu’s finance committee, resigned because she didn't get a majority vote. The CtW Investment Group urged SEC Chair Christopher Cox to promptly approve a NYSE proposal to eliminate uninstructed broker votes in all director elections that has been waiting 18 months for approval. CtW pointed to WaMu's annual meeting on Tuesday, where Director-nominees James Stever and Charles Lillis failed to garner majority shareholder votes, yet will be seated because broker votes were counted towards their totals. The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, a federation representing nearly 6 million North American workers, to enhance long-term shareholder value through active ownership. (press release, 4/17/08) Several union funds are calling on Stever and Lillis to resign. Nell Minow told the audience at a NIRI-NY chapter event that Mary Pugh's ouster was "the biggest news" of the year in corporate governance. "That is your future," Minow said. "This time it’s personal and [shareholder protest] is going to be much more focused on individual directors... IROs need to work with corporate secretaries to make it clear to the [audit and compensation] committees that they are in the hot seat," Minow said. "Companies will be in a world of pain if they get this wrong." (Governance guru says WaMu director resignation is news of the year, IR Magazine, 4/18/08) Non-Polarity "The unipolar era, a time of unprecedented American dominion, is over. It lasted some two decades, little more than a moment in historical terms....Today, there are literally dozens of meaningful power centers." Some, such as those headed by terrorists, we wish didn't exist. "Today's world is increasingly one of distributed, rather than concentrated, power. The successor to unipolarity is neither bipolarity or multipolarity. It is non-polarity." (What follows American dominion?, by Richard Haass, FT, 4/16/08) Johnson Heads CII Dennis Johnson, Senior Portfolio Manager of Corporate Governance for CalPERS has been unanimously elected Chair of the Council of Institutional Investors (CII), taking the place of Jack Ehnes, CEO of CalSTRS, who was termed out after completing five years on the CII Board, three as Chair. CII includes 130 public, union and corporate pension funds with combined assets of $3 trillion organized to advocate for good corporate governance and shareowner rights. (CalPERS press release, 4/16/08) Back to the top Director Reference Library in Thin Volume Clearly written, with a minimum of repetition, The Role of Independent Directors after Sarbanes-Oxley
SOX effectively federalized elements of corporate governance for publicly traded corporations and its standards have been incorporated into some state laws governing nonprofits. Additionally, private corporations considering an initial public offering or acquisition need structures in place to make a good “fit” if they should choose to go public. Therefore, the topics covered are critical to any type of board. Dravis makes quick review of major director responsibilities short work and the CD expands 165 brief pages to a ready reference guide with thousands of pages.
Link to the footnoted regulations and you learn that a company must also, under specified circumstances, report on the disposition of recommendations from a 5% holder or group “provided, however, that no such identification or disclosure is required without the written consent of both the security holder or security holder group and the candidate to be so identified.” Mutual Funds Beginning to Feel the Heat Historic opposition toward climate change resolutions by mutual funds is softening, with some firms such as Goldman Sachs supporting many climate resolutions outright, and others, such as Fidelity and Janus, abstaining on most after opposing them in the past. Opposition has dropped from three-quarters of fund votes to less than two out of three, while the number of abstention votes has more than doubled. Many mutual funds are acting inconsistently on climate change -- offering new climate-related funds and research products while continuing to oppose virtually all climate-related resolutions. The inconsistent behavior is especially apparent at Morgan Stanley, State Street Global Advisors and other Wall Street firms which are investing aggressively in new climate-related business activities, yet have opposed virtually all climate resolutions in recent years. One positive stand-out noted in the report: Goldman Sachs, which is both promoting climate-related investments while also supporting climate change resolutions. The report, based on proxy voting data compiled by researcher Jackie Cook, is the fourth by Ceres examining mutual fund proxy voting practices on climate change shareholder resolutions. The mutual fund industry still lags compared to other investors in supporting climate resolutions. While climate resolutions have garnered record votes in recent years (average voting support at annual meetings grew from 10.2 percent in 2005 to 21.6 percent in 2007), support from the mutual fund industry for climate resolutions has remained relatively stagnant. Socially responsible investing firms are setting the bar on best practices by supporting all climate resolutions in 2007. Calvert, Domini, Parnassus, Pax and Walden have consistently supported all climate resolutions, and often file or co-file many of the resolutions as well.
Get a copy of the report, Ceres Report: Mutual Fund Industry Opposition to Climate Change Resolutions Begins to Thaw. Disclosure: The publisher of CorpGov.net is a Goldman Sachs shareowner. Rockefeller Philanthropy Advisors For the fourth year in a row Rockefeller Philanthropy Advisors partnered with the As You Sow Foundation to produce and distribute the Proxy Season Preview. "Proxy voting is a natural extension of a foundation's mission and creates further social impact while positively and constructively influencing corporate performance and behavior. The Preview serves as a guide for foundations and their donors interested in linking their missions to their investments in publicly traded companies." An excellent publication. The only thing missing is a reference to CorpGov.net. Also check out their publication for foundation trustees. "With $600 billion in the endowments of U.S. foundations, we are significant investors with a significant voice. In addition to proxy voting, mission-related investing is another a way to channel these resources towards the values and goals of your giving. We are delighted to announce the release of a new monograph entitled Philanthropy's New Passing Gear: Mission-Related Investing, A Policy and Implementation Guide for Foundation Trustees." Board Trends Ralph Ward thinks that we may expect to see a bidding war for top director talent, given the shift to service on few boards and the greater responsibilities of chairing audit committees, for example. His latest issue of Boardroom Insider also discusses the latest trends in audit committee training, which include Enterprise Risk Management, and common mistakes in evaluating the CEO. Sign up for a free trail subscription. Advanced Notice Requirements Struck "If the recent JANA Partners v. CNET decision (currently on expedited appeal) wasn't enough to make corporations review and update their advanced notice bylaws, the attached opinion should do the trick. In Levitt Corp. v. Office Depot, Inc.,, Vice Chancellor Noble holds that (i) a bylaw requiring advanced notice of "business" to be proposed at an annual meeting extends to director elections and director nominations, but that (ii) the advanced notice bylaw was not applicable because the corporation had given notice that the election of directors would be an item of business at the meeting. In light of the second holding, the Court concluded that the stockholder did not have to give advance notice of its intent to run a short slate. As with CNET, this is a decision that will likely prompt an appeal." Broc Romanek then provides some advice on how companies might ensure their advance notice requirements. (Delaware Court of Chancery Permits Insurgent To Nominate Short Slate, TheCorporateCounsel.net Blog, 4/16/08) People Want Regulated Markets Over the last two years support for "the free market system" has eroded in 10 of 18 countries regularly polled by GlobeScan. In 17 of the 18 countries a majority (15 countries) or a plurality (two countries) agreed that "the free enterprise system and the free market system work best in society's interest when accompanied by strong government regulation." GlobeScan president Doug Miller says, "The results suggest that the free enterprise system was already beginning to lose the unquestioned trust of citizens before the current banking meltdown. It underscores the importance of re-building trust sooner rather than later." (Erosion of Support for Free Market System: Global Poll, WorldPublicOpinion.org, 4/15/08) It isn't just an A.A. Milne book written to show that childhood innocence never has to end, it is also the number of directors who have now left boards after a majority of shareholders voted against them. “Shareholders at Washington Mutual sent an unequivocal message today that they are ready for more independent and accountable directors,” said CtW executive director William Patterson. The resignation of director Mary Pugh, who chaired WaMu’s finance committee, represents a big victory for shareholder groups seeking boardroom accountability for the huge mortgage-related losses that have plagued large US banks in recent months. Investors also supported a resolution calling for Kerry Killinger, chairman and CEO to give up the chairmanship. (WaMu board director forced out, Financial Times, 4/15/08) Innocence renewed. Another report says, "As a result of this increased fury, activist investors picked off 32 board seats—a surprising number given their general lack of success in previous years." (Activist shareholders starting to make inroads, Financial Week, 4/16/08) EU Litigation Options While U.S. government and business leaders are doing everything in their power to stamp out class actions in America, the European Union is slowly embracing the class action mechanism. On April 3, 2008, the European Commission published a much anticipated “White Paper” setting forth recommendations to establish a system for the private enforcement of violations of EU antitrust laws. That paper proposes that antitrust victims be allowed to bring “opt in” actions to join a collective action. This stands in contrast to the U.S. “opt out” system, whereby a passive class member is bound by the resolution of the action unless it expressly chooses to be excluded. In order to compensate for the inadequate discovery mechanisms in Europe, the Commission recommends allowing courts to impose sanctions in cases where evidence is destroyed. Pomtalk points to the irony. "While many of these measures fall far short of the U.S. system for collective redress, other proposals—such as providing a rebuttable presumption of harm to indirect purchasers--go even further in protecting wronged consumers. Indeed, while Paulson and his cohorts are complaining that the U.S. capital markets are losing their competitive edge to the EU because of the U.S.’s class action system, the EU is slowly, yet inexorably, adopting this very system." (European Union Grapples With Class Action Model, 4/14/08) For a more detailed look at provisions, see European Commission Publishes Proposals to Encourage Private Antitust Litigation in the EU, Antitrust Law Blog, 4/7/08) Download the paper. Romanek's Take: "Say on Pay" Broc Romanek of TheCorporateCounsel.net ponders "say on pay" and leans in favor. I agree with him, "it's a slippery slope to have shareholders vote on a matter that is supposed to be a board task," especially when shareowners won't have all the information or time to digest it. Yet, pay is an issue many have been stuck on for the last 15 years -- and nothing seems to have worked. "So maybe 'say on pay' is necessary to shake up the boardrooms of this country so that directors truly understand that the excesses of the past need to be reversed. That the 15 years of being paid in the top quartile have added up to a batch of inflated data in peer group benchmarks - and the sole cure is to wind back the clock and take a huge pay cut. Boards may need to be pushed by 'say on pay' to see daylight on this issue, because nothing else seems to work." See Romanek's interesting discussion at Obama Pushes "Say on Pay" to the Fore, 4/15/08. SEC Abridges State Rights J. Robert Brown posts an interesting series of discussions around Jana Master Fund, Ltd. v. CNET Networks, Civ. Action No. 3447-CC (Del. Ch. March 13, 2008). In brief, Brown argues the case presents more evidence that the SEC is acted to deny shareholders state law rights to nominate directors through its recent denial of proxy access to shareowner board nominees. (Advance Notice Bylaws, Corporate Governance, and Jana Masters v. CNET Networks (multiple parts), theRacetotheBottom.org, 4/15/08) No-Action Requests Up The SEC is granting more no-action requests this year, letting companies keep an increasing number of shareholder proposals off the proxy statement. That’s according to data tracked by RiskMetrics Group, which found that, as of March 25, the SEC had granted 69 percent of all no-action requests, up from the overall 48 percent the agency had granted last year. “In the past, they gave shareholders the benefit of the doubt; this year, they’re not,” says Richard Ferlauto of the American Federation of State, County, and Municipal Employees. (No-Action Letters Fly This Proxy Season, Compliance Week, 4/15/08 and Spike in No-Action Requests Worries Investors, Risk & Governance Blog, 3/26/08) More Backdating Evidence Thousands of US companies appear to have secretly backdated stock options. Option Backdating and Its Implications analyzes three forms of secret option backdating:
The author, Jesse Fried The above is from the paper's abstract. Fried ends with the following statement: "By refocusing attention on the persistent problem of managerial influence in U.S. firms, option backdating may help pave the way for such desirable reforms." Let's hope so. As Fried also notes, " The political obstacles to such reforms are significant. Corporate executives wield considerable power not only in the boardroom but in Washington as well." Italian Boards Show the Way A 2005 law made it mandatory for all publicly traded companies to reserve some board seats for lists not related to the controlling shareholder, which Telecom Italia board member Robert C. McCormack writes is a stronger version of the much discussed proxy access recently denied by the SEC. "Opponents of this reform in the US have argued that such access will transform corporate boards into small parliaments, where majority and minority will fight to the detriment of companies." "Given the legendary passion of Italians for politicking, if there were any merit to this concern, we would certainly see it in spades in Italian boards." The evidence so far doesn't justify the worry. "Unlike parliaments, corporate boards' primary function is not to redistribute resources but to create them. Unlike parliaments, corporate boards have to compete in the marketplace. And unlike parliaments, corporate boards live under the constant monitoring of the stock market, which promptly punishes inefficient decision-making." His board, for example, cut the CEO's fixed pay component by 40% and increased the variable one by 14%, based on pressure from minority shareowner appointees. Led by the same members, they also approved a new procedure on related party transactions to require pre-approval of a committee of independent directors. According to McCormack, the Italian experience also addresses the threshold issue by setting it low. "The result is several 'minority' lists competing for the reserved seats." (Italy leads the way in protecting minority investors, Financial Times, 4/14/08) Back to the top Yahoo! to Facebook Les Greenberg was an early adapter, organizing shareholders of Luby's Inc., the Texas-based cafeteria chain, on a Yahoo! message board in 2001. Now, in 2008, Brian Hunter is using Facebook to organize 250 members, concerned with ABCP in Canada and trying to join big institutional and corporate investors at the restructuring committee table. "20 conduits, or trusts, holding ABCP were placed under court protection last month pending approval by investors. All - big and small - have an equal vote." The restructuring committee has now organized a series of information sessions across the country. The Financial Times reports, "The Facebook group's lobbying bore fruit last Wednesday when Canaccord agreed to buy back C$138m of ABCP held by 1,430 clients at par." (Campaigning investors turn to Facebook, 4/14/08) Bill of Rights The AFL-CIO is working on a "Bill of Rights," which might include provisions on executive pay, requiring all publicly traded companies to reveal how salaries for their top executives are set, and forcing businesses to disclose the role of compensation consultants in the setting of executive pay levels. Look for it in the fall. (Shareholder bill of rights in the works, union claims, Financial Week, 4/14/08) CorpGov Bits Despite a “vote no” campaign led by CtW Investment Group and supported by labor investors and public pension funds, all the directors at Morgan Stanley were re-elected with at least 90 percent shareholder support, the Wall Street firm announced after its April 8 annual meeting. (Muted Protest at Morgan Stanley, Risk & Governance Blog, 4/14/08) A 2007 review of proxy statements by consulting firm Mercer, a subsidiary of Marsh & McLennan, shows that 60% of 182 U.S. companies, with median annual revenue of $3.3 billion, altered change-in-control provisions because of shareholder pressure. 64% of surveyed companies that altered change-in-control provisions added double triggers and 56% put conditions on gross-ups for top executives. Campaigns by activists such as AFSCME are having an impact. (Terminated? Who Cares?, WSJ, 4/14/08) More than 90 companies face resolutions demanding that shareholders be given a "say on pay." The sight of chief executives walking away with millions after presiding over disasters at firms such as Merrill Lynch & Co. Inc. and Citigroup Inc. has infuriated investors. In 1980, average CEO compensation was 42 times the pay of the average worker. In 2006, it was an eye-popping 364 times average worker pay. That is obviously hard to justify, especially given the anemic performance of stocks over the past decade. Giving shareholders a say on pay, besides getting the attention of compensation committees and chief executives, also might encourage shareholders to become more engaged with the companies whose stocks they own. (Shareholders look to keep heat on executive pay, InvestmentNews, 4/14/08) Proxy advisers are joining activist pensions and unions in urging shareholders to oust directors at major financial companies most affected by the fallout of the credit crisis. For example, all four of the major proxy voting services have recommended the ousting of various directors at Washington Mutual. Another issue taking off is split CEO/chair. 37% of large companies had separate chairmen and chief executives last year, up from 30% in 2005. So far this year there have been 20 resolutions on that issue. (Off With Their Heads!, Forbes, 4/11/08) Companies that restate their earnings have substantially higher rates of involuntary CFO turnover, a new study by four professors shows. The study also finds that post-SOX, terminated CFOs have a harder time finding employment. "The reputational effects of being implicated in an accounting misstatement can be potentially devastating to the subsequent career path of the executive." (Restating: The Career Killer, CFO.com, 4/14/08) With the economy deteriorating and prices for gas and heating fuel skyrocketing, consumers who are seeking new sources of cash are increasingly jeopardizing their retirement income by taking out loans from their retirement plans. The number of hardship withdrawals increased 32% in the first two months of 2008 compared with the same months last year. (Consumers increasingly take loans from retirement plans, InvestmentNews, 4/14/08) According to the AFL-CIO 2008 Executive PayWatch, the CEO of a Standard & Poor’s 500 company made, on average, $14.2 million in total compensation in 2007, according to early estimates. In comparison, the median pay for workers rose only 3.5 percent, to $36,140 in 2007, from $34,892 the previous year, according to the U.S. Bureau of Labor Statistics. PayWatch features case studies of CEOs whose push for short-term financial gains helped spawn the $1 trillion mortgage crisis. (AFL-CIO PayWatch: Mortgage Company CEOs Fueled Crisis, 4/14/08)
7th Annual Responsible Business Summit Billed as the biggest CSR conference in Europe -- 13th and 14th May in London at the Park Plaza Hotel. Program information. Home Depot Settlement Revisited Les Greenberg of ConcernedShareholders located a copy of the Home Depot Stipulation for Settlement and he annotated it with a few thoughts. It does give more power to shareowners but doesn't require the board to accept shareowner nominees. Current law requires that boards consider shareowner nominees but are only required to report out on the disposition of those nominated by 5% owners and the law doesn't require an independent evaluation by an outside consultant. The settlement requires an independent evaluation of the first round of nominees from 1% owners by LENS Governance Advisors (or another governance consultant, if LENS is unable to serve) and gives owners a second chance if the board rejects any from the first batch, although apparently without the outside independent evaluation for the second go-round. That's clear progress. According to Greenberg, "The settlement would be more interesting if HD was required to release the entire content of the report by LENS along with any decision." Although I generally favor transparency, I don't see why HD should release the report on shareowner nominees unless they also evaluate and release a report on candidates nominated by the board that don't come names submitted by shareowners. A better arrangement would have been to allow 1% shareowners to place their nominees on the proxy and to have LENS provide an independent evaluation of all candidates to voters. If there are more than 2 candidates for a board seat, the election could use "instant-runoff voting." Upcoming Meeting: Office Depot, which is fighting for proxy votes ahead of its upcoming annual meeting, got mixed support from RiskMetrics, which recommended that stockholders vote against the board nominees backed by dissident shareholder group Woodbridge Group. But RiskMetrics also recommended that shareholders withhold votes for members of the board’s current compensation committee. (Accusations fly in Office Depot proxy battle, FinancialWeek, 4/14/08) Disclosure: The publisher of CorpGov.net is a Home Depot shareowner. TBLI Conference™ Asia 2008 The Asian financial community demonstrates a rapidly growing interest in Environmental and Social Governance, as well as Sustainable Investment. Asia is rapidly catching up and SRI will soon be an general integrated part of investment schemes and corporate governance. May 29-30, 2008 at the Landmark Bangkok Hotel. More information. Short and Distort "The increased awareness of possible 'short and distort' practices, the strong statements by securities regulators and the number of investigations currently pending suggest that an increase in regulatory enforcement and litigation in this area is likely," concludes Weil, Gotshal & Manges. 'Short and Distort' Conduct Scrutinized, Directorship, 4/7/08, discusses rumors of liquidity problems shich may have helped push Bear Stearns over the edge and subsequent briefings and discussions. Political Donations: Further Reform Needed A survey, conducted by Mason-Dixon Polling & Research, showed corporate political giving to be a significant issue for directors, a strong majority of whom also support disclosure. However, the survey also indicated that directors possess considerably less knowledge about campaign finance rules and their own companies’ policies and activities than they say. (Survey Assesses Director Views on Political Disclosure, Risk & Governance Blog, 4/11/08) Only 14% knew that trade associations are not required to disclose their corporate members nor the candidates and political organizations receiving their contributions. Yet, 88% said corporations should be required to publicly disclose all corporate funds for political purposes. Two-thirds of the directors agreed that scandals related to corporate political giving have “damaged the public’s confidence and trust in corporate America.” The Bipartisan Campaign Finance Reform Act (BCRA) of 2002 banned direct contributions by corporations, labor unions and other groups to national political parties and doubled the limit on the amount of hard money that individuals can give to candidates. However, it left the regulation of political action committees in place and continued to allow issue-based 527 committees to spend money to influence campaigns. A recent Supreme Court decision eroded some of the BCRA restrictions on ads in the runup to primaries and general elections, opening a floodgate. The report says the US Chamber of Commerce will spend $60 million to oppose anti-business candidates. Company in compliance with campaign finance laws, which contributes to 527 or 501(c)(4) tax-exempt groups risks harm to their reputation if such groups publicly promote causes that run counter to the company’s positions. A recent study from the University of Minnesota found political donations are negatively correlated with future excess returns. An increase in donations of $10,000 is associated with a reduction in excess returns of 7.0 basis points. Worse corporate governance is also associated with larger donations. Firms that make donations engage in more acquisitions and donating firms' acquisitions have significantly lower cumulative abnormal announcement returns than firms that do not make donations. Results suggest that political donations are more symptomatic of agency problems within the firm. The Mason-Dixon survey identified the following companies as having agreed to political spending disclosure, including payments to trade association, and board oversight:
Sovereign Wealth Funds: Friend of Entrenched Managers While most of the press has been covering the xenophobic reaction of the public, Alexandra Tracy, president of Hoi Ping Ventures, reminds us the pledge of inactivity by sovereign wealth funds can also have negative consequences. What group of entrenched managers would not welcome them? "They have deep pockets, are willing to be long term investors, don’t want board seats and have clearly stated that they won’t be activist." As a result, those businesses most in need of corporate governance reform may feel reduced pressure to change. (Why sovereign wealth funds have provoked schizophrenia in western markets, Responsible Investor, 4/10/08) Shareholder Forum: Evolving Views of Advisory Voting on Executive Compensation Relating to the Forum project initiated in December 2006 to consider advisory voting on executive compensation, a “Roundtable” meeting was conducted yesterday by Yale’s Millstein Center for Corporate Governance, hosted by Pfizer in New York,[*] to present views of experts relating to what has been transformed into an increasingly politicized “Say on Pay” campaign.
Gary Lutin, Lutin & Company, 575 Madison Avenue, 10th Floor, New York, New York 10022, Tel: 212/605-0335, Email: gl@shareholderforum.com Value Investor Insight We've added this informative publication to our list of Stakeholders. Berkshire Hathaway’s Charlie Munger frequently counsels investors on the importance of constantly updating their skills: "If you don't keep learning, other people will pass you by." Each monthly issue of Value Investor Insight highlights the strategies, tactics and detailed favorite ideas of the best value-oriented money managers in the business. Subscribers also receive weekly Bonus e-mails with articles, meeting transcripts, research and other information to inform profitable investment decisions. By delivering timely – and also timeless – investment wisdom, Value Investor Insight’s goal is to help readers invest more successfully tomorrow, next year and 10 years from now. To sign up for a no-obligation free trial, click here or call 866-988-9060 (toll-free). Back to the top Stoneridge Symptomatic In January 2008, the U.S. Supreme Court decided Stoneridge Investment v. Scientific-Atlanta, labeled by commentators “the most important securities case in a generation.” At issue was whether third party vendors, whose conduct played into a public company’s scheme to defraud investors, could be liable to those investors in a private securities fraud class action. The Stoneridge decision lived up to its billing, establishing important principles concerning the scope of Section 10(b) and private rights of action. How will Stoneridge affect the enforcement priorities of the SEC? What action might Congress take in response to the case? Professor Joseph Grundfest moderated a discussion of the decision and its implications with a panel of experts, including advocates in the decision on 4/8/08 at Stanford Law School. A brief summary of some of the arguments follows but relies on my memory, which has often proven faulty: The discussion began with Jay Brown, of U. Denver Sturm College of Law, calling the Court's decision one of policy based on a perceived threat to IPOs. There was really no question of guilt. Scientific-Atlanta knew it was giving Charter the appearance of better cash flow. Their input was directly related to the falsification of documents which fed into statements that investors relied on. "The Court wanted to reduce shareholder rights by limiting the instances when these rights could be vindicated in court. It wasn't about the law, it was about policy, and an anti-shareholder one at that." (Much more Brown's opinion at theRacetotheBottom.org) Steve Williams, a partner at Cotchett, Pitre & McCarthy, also disagreed with the Court's decision, citing several cases involving sham transactions. He noted a trend of litigating in state courts where individual investors, such as CalSTRS, can often obtain settlements exceeding those obtained in federal class action suits. The trend could lead to fewer filings under the PSLRA because cobbling together groups of smaller investors may not result in high enough proportions of owners to make settlement worthwhile. After Stoneridge, we may see more firms served under common law fraud. Timothy Bishop, partner at Mayer Brown, said it was the right decision if one looks back at the original intent of the law in 1934. Such cases should be criminally prosecuted. The courts made a mistake in the 1970s by allowing a private cause of action under Section 10(b). Even if a defendant is innocent it is rational to settle to avoid expense, publicity and juries which look unfavorably on large corporations. The system appears incapable of sorting the guilty from the innocent. Extending 10(b) to contractors who haven't spoken to investors would lead to an unhealthy risk premium. The SEC enforcement authority is enough, especially given the "fair funds for investors" provision of Sarbanes-Oxley. Andrew Vollmer, of the SEC, was interested in drawing the line between the issuer and vendor...primary conduct and aiding and abetting. The Court's majority rejected deceptive acts as sufficient for primary liability. The decision hinged on "reliance." On the majority were judges who resist expansive interpretations of law...don't take Congress' job away. In the minority were those who feel freer to act when they see injustice... every wrong should have a legal remedy. Joseph Grundfest concluded that everyone agrees the underlying conduct was bad. Investors got squatter's rights to 10(b) in the 1970s but the Court wasn't willing to expand those rights unless Congress enacted legislation. The words of the decision were those of "reliance" but the underlying music was of "causation." As I drove home, what struck me most was a conversation I had before the event with one of the presenters about CEO pay being an extremely popular subject with union members and Bishop's argument that companies have to settle because they won't win. Juries are not sympathetic to corporations. That's a shame. Justice should be available to all. However, is it any wonder? A recent opinion poll showed that 58% of Americans think globalization is harmful; only 28% think it helps. The poor and middle class haven't benefited proportionately to corporate CEOs and others at the top. According to a report in the Financial Times (Mind the Gap, 4/8/08), the Gini coefficient, which measures inequality of income in the US, is the highest ever recorded. "Between 1979 and 2005 the pre-tax income for the poorest households grew by 1.3 per cent a year, middle incomes before tax grew by less than 1 per cent a year, while those of households in the top 1 per cent grew by 200 per cent pre-tax and, more strikingly, 228 per cent post-tax...The process reached its extreme point with US President George W. Bush's tax cuts. Emmanuel Saez of the University of California at Berkeley estimates that in the economic expansion of 2002-06 the plutocratic top 1 per cent captured almost three-quarters of income growth." The share of US total wealth owned by the top 1% grew from 20% in 1976 to 38% in 1998. The author of Mind the Gap wonders why the public hasn't revolted. He concludes that growing inequality and stagnant incomes were tolerable as long as the housing market created a sense of increasing wealth. Now, "The examples of Stan O'Neal at Merrill Lynch and Chuck Prince at Citigroup, who seemed to be rewarded for failure, grate hard...There is anger, too, about a system that permits bankers to earn huge bonuses when finance booms, while taxpayers pick up the bill when banks fail...Business once again has a legitimacy problem." "In the UK Nicholas Ferguson, chairman of SVG Capital, which invests in private equity, caused a furore among his peers by saying it was unfair for private equity partners to be taxed at a lower rate than their cleaning ladies." Democracy cannot hold when cleaning ladies on juries are willing to award damages not based on guilt or innocence but based on occupation, class, and deep pockets. If juries in the US are unsympathetic, consider those in other countries. In Africa, food riots have swept across the continent, with recent protests in Burkina Faso, Cameroon, Ivory Coast, Mauritania and Senegal. In most of West Africa, the price of food has risen by 50%, in Sierra Leone, 300%. Stoneridge is symptomatic of a larger problem. CalPERS Clout Could Grow CalPERS clout in the corporate governance world could grow substantially if AB 2940 is enacted. The bill would allow private sector employees and employers to set up IRA accounts administered by CalPERS. About 6 million California workers, 43%, work at jobs that don't offer such plans. Even those who have such options may prefer CalPERS because they could move from job to job under the same coverage. CalPERS could become a huge sovereign wealth fund. The bill begins with bipartisan support from Governor Arnold Schwazenegger, author Assemblyman Kevin de León, and sponsorship from the New America Foundation. AB 2940 contains language that it wouldn't go into effect until legal concerns are worked out with the IRS, so as to not put CalPERS' status at risk. However, the move would still dilute the focus of CalPERS from state and other public employees to a more amorphous group. The Sacramento Bee article, Governor: Open CalPERS doors, 4/9/08 attracted dozens of negative comments from current CalPERS members. Current CalPERS members, especially state employees might be convinced to support the bill if it were amended to transfer benefit programs such as dental, vision, and savings plus from behind closed doors at the Department of Personnel Administration to the more open forum of CalPERS. CalPERS already administers similar programs for its local government members. In 1994, three unions representing state employees sued DPA for over-charging on dental care between July 1, 1992, and Dec. 31, 1995. DPA instructed Delta Dental, the insurance vendor, to inflate its service charge and transfer the excess back to the State. The action predates but is reminiscent of U.S. v. James A. Brown (the "Nigerian barge case," which involved Enron's sale of a power-generating barge to Merrill Lynch in 1999 to goose its year-end numbers). Such phony accounting would have never occurred at CalPERS where such action would require a motion at an open meeting. Additionally, CalPERS has no incentive to defraud its own members. Another benefit of AB 2940 would be to reduce the system's vulnerability to attack. CalPERS has suffered several attacks in recent years from those who want to dismantle its influence over corporate governance. (see Making Corporate Governance Decisions that Work for Whom? under the heading CalPERS Under Attack) Unfortunately, the idea has substantial traction with voters, jealous of public employee benefits, but who rarely consider that the higher benefits of public employees also comes with lower salaries. AB 2940, if amended, could guarantee against future DPA abuses, protect CalPERS from future attacks, increase CalPERS clout in corporate governance, and provide California employees and employers with a safe, effective vehicle for retirement savings.
Boards Overrule Shareowners on Director Elections The Corporate Library's Annalisa Barrett and Beth Young examined more than 3,000 U.S. companies and found that boards often fail to listen to the messages sent by shareholders who withhold their support from director candidates. The study identifies 18 directors who failed to receive support from a majority of shareholders at 2006 and 2007 annual meetings. Nearly two-thirds of these directors continue to serve on the boards of these companies. (2008 Proxy Season Foresights #8, 4/8/08) Bearly Legal Steven M. Davidhoff raises several legal issues concerning JPMorgan Chase’s deal to buy Bear Stearns and accuses the Federal Reserve of jamming the transaction through "at all costs, no matter the rules." JPMorgan has supposedly put aside as much as $6 billion to cover litigation. Advice on Hedge Fund Activism The Conference Board Working Group on Hedge Fund Activism released a set of proposed recommendations for public companies and institutional investors who might find themselves involved in an activism campaign mounted by hedge funds. I've reproduced only the summary recommendations for investors below. Ensuring Voting Integrity
Overseeing Hedge Fund Management
E-Proxy Statistics Broc Romanek reports on the latest e-proxy statistics from Broadridge. (Broadridge's Latest E-Proxy Stats, TheCorporateCounsel.net Blog, 4/4/08) As of February 29th:
Do relatively small shareowners matter? Yes. If nothing else, small sharowners speak to a culture of ownership and potential empowerment. Losing that would be a shame. Wall Street could lose any positive connection to voters altogether. Executive Pay and Progress The New York Times ran an informative series on executive pay. A Brighter Spotlight, Yet the Pay Rises says that even with the SEC's new disclosure requirements, "true links between pay and performance remained scarce." Shareowners appear to be most upset that companies that have lost shareowner value continue to award enormous pay to their CEOs. Some glimmers of hope were noted. Compensation research firm Equilar found 14.7% of the stock options and shares awarded to executives in the fourth quarter of 2007 had performance-based vesting criteria — an increase from 8.2% in the fourth quarter of 2006. The article also says that more companies are adopting "clawback provisions," requiring executives to return bonuses or stock options awarded based on faulty numbers. AFSCME is asking companies to limit or bar “gross-ups,” where companies pay the CEO's taxes and which The Corporate Library says covered 20% of CEOs in 2006. The United Brotherhood of Carpenters has filed pay-for-superior-performance proposals at 33 companies. TIAA-Cref is looking for greater transparency. The article concludes with another option, the "quintessentially simple fix: Have directors sit down with shareholders and ask what they really want to know." The online edition includes an interesting graphic at Executive Pay: The Bottom Line for Those at the Top, which displays winners and losers among 200 top execs. Say on Pay: A Whisper or a Shout for Shareholders? explores the state of that initiative and interviews an early adaptor at Aflac. Yet, I think Dennis Johnson of CalPERS expressed the sentiment of many, “We’ve been supporters of say on pay for several years, and we still think it’s a good tool. But we don’t really want to prescribe pay practices. We want to elect truly independent directors who will align compensation with shareholder interests...” and that will take proxy access. Ben Stein presents the reasons for overpay in a somewhat humorous, In the Boardroom, Every Back Gets Scratched. Shareowners have little say and the boards that do are beholden to management for their positions. "How do you keep your job? You are really nice to the person who put you in that job. You don’t know the little stockholder in Muncie who might have 500 shares. But you do know the guy who repeatedly reappoints you for your post at the directors’ table." The system "shrieks greed and contempt for shareholders and workers." J. Robert Brown's commentary was almost as biting as Stein's. "In characterizing the disclosure, the NY Times noted an increase in non-performance based compensation. This is of course no surprise. As stock markets fall and performance targets become harder to make, boards search for ways to nonetheless pay handsome amounts of compensation." (Executive Compensation and the Swallows of Capistrano, 4/7/08) Gary Lutin, of the Shareholder Forum, has indexed a wealth of additional links for those interested in studies and working groups: • Project Reference: Advisory Voting Model (2006-2007) More hopeful is WSJ's Boards Give Up Taming Act, which presents evidence that more boards are opting for compromise with activist investors, instead of a costly proxy fight. "In the first quarter, 30 U.S. companies ceded seats to dissidents without proxy fights, up from 23 in the same period last year and nine in 2006, according to data tracker FactSet SharkWatch. Among companies formally targeted by activist investors, fewer take the matter to a shareholder vote: 32% last year, down from 61% in 2001." Back to the top Nine Tips for Small Shareowners Recently, I got a call asking my advice for small shareowners who don't subscribe to proxy monitoring services. Sure, if you've invested with a loser, dump the stock. However, if the company has potential that isn't being realized, start acting like an owner. Sometimes management and the board just need to know shareowners are watching and using tools available to hold them accountable. Here's my response.
For another primer for shareowner action, see Co-op America's Shareholders in Action.
Home Depot Suit Results in Proxy Access Home Depot will pay $14.5 million in legal fees and expenses and adopt a sweeping array of corporate governance reforms to settle combined shareowners' suits that the company's board of directors had for nearly 20 years backdated the stock options granted to executives; fraudulently manipulated the company's "return to vendor" (RTV) program; and provided hugely disproportionate payments and benefits to former board chairman and CEO Robert L. Nardelli. (Home Depot Settles Shareholder Suits With Changes in Board Policies, $14.5 Million in Legal Fees, Law.com, 4/7/08) The company also agreed to corporate governance changes, including:
A settlement hearing to finalize the order will be scheduled within 60 days to allow any other documents or objections from Home Depot sharehowners to be filed. Proxy access should become a common condition for such settlements. Disclosure: The publisher of CorpGov.net is a Home Depot shareowner. Many CEOs Don't Pay Taxes The Corporate Library found that 20% of major American companies, or 657 of nearly 3,300 examined, picked up the tab on at least one tax owed by the CEO. The Corporate Library report singles out Ryland Group (RYL), a home-building company, as the biggest provider of "gross-up" payments to its CEO. For 2007, Ryland provided CEO R. Chad Dreier with $4 million in gross-ups as part of a pay package that totaled $12 million. (20% of companies pick up CEOs' taxes on perks, USA Today, 4/1/08) Preemptive Moves by Sara Lee and Coach Sara Lee and Coach changed bylaws for nominating directors to require disclosures of hedge funds or other activists that might not have the company's long-term interests at heart. At Sara Lee, since 3/27/08 a shareowner who nominates a board member or submits a proposal that change the company's business must also disclose if it has "hedged its ownership" or has "any short position. " On 2/14/08 Coach required that "any hedging activities engaged" in must be divulged when a proposal is submitted. In a Dow Jones news feed (Sara Lee, Coach Set Rules To Deter Devious Shareholders, 4/2/08), Stephen Davis said the moves "clearly reflect the worry" about the increased role of hedge funds in the stock market...I can understand why a board really wants to know that the investor has got the welfare of the company at the top of their agenda, not the weakening of the company." Richard Ferlauto, of AFSCME, is quoted saying they've had "significant concerns" about the manipulation of the voting process through empty voting. "We don't want to see our voting power diluted by someone gaming the system." The article goes on to discuss past short seller targets, including Bear Stearns. The strategies are legal, but are known to aggravate companies that have publicly complained about short sellers, such as Biovail Corp. (BVF) and Overstock.com Inc. (OSTK) Henry Hu and Bernard Black researched short sales and empty voting - voting while holding greater voting power than economic ownership, most recently in their Equity and Debt Decoupling and Empty Voting II: Importance and Extensions. In that paper and others, the professors warn of a potential decoupling of incentives to exercise voting rights to increase share value. "Shareholders can now readily decouple economic from voting rights, resulting in such patterns as empty voting, hidden ownership, morphable ownership and empty appraisal." Their recommendations included limiting the voting rights of empty voters, reconfiguring the relationships among annual meeting dates and voting and record dates and encouraging institutional investors to recall and vote lent shares. More immediately, they recommended that corporations amend their charters to address empty voting. The moves by Sara Lee and Coach are among the earliest efforts to directly address the issues raised. Much more needs to be done to prevent the market from degenerating into a speculators betting pool with little relation between price, quality and performance. Pension funds and other institutional investors should, for example, heed the call by Hu and Black to ensure recall of lent shares so they can be voted in accordance with the investor's policies. Board Training The Executive Education Department at UC Irvine’s Paul Merage School of Business and the Forum for Corporate Directors present: Effective Boardroom Leadership for New and Aspiring Directors. Conference will take place over two 2-day sessions: April 24-25 and May 22-23, 2008 at UCI. "No other local university affiliated program in director education is as affordable, at only $2,900 per participant for 28 hours of instruction." IR Global Rankings In Europe, companies with the best corporate governance practices by technical criteria were: Royal Philips Electronics (NYSE: PHG), also best in global industry, Telekom Austria (Viena: TKA.VI), also best in global industry, Bayer (XETRA: BAY.DE), Deutsche Post World Net (XETRA: DPW.DE) and TOTAL (NYSE: TOT). Norsk Hydro (NYSE: NHYDY.PK) and QIAGEN (NasdaqGS: QGEN) were the best in their global industries. IC RUSS-INVEST was awarded the best in the small/mid cap category. (IR Global Rankings Announces 2008 Benchmarks and Winners for Europe, 3/24/08) In Asia, Pacific and Africa, companies with the best corporate governance practices by technical criteria were: Infosys Technologies (Nasdaq: INFY), also best in global industry; Satyam (NYSE: SAY); ICICI Bank, also best in global industry (NYSE:IBN); Bursa Malaysia Berhad (OTC: BSAMF.PK); and Kotak Mahindra Bank (BSE:600247.BO). Global Sources (Nasdaq: GSOL) was awarded the best in the small/mid cap category. (IR Global Rankings Announces 2008 Benchmarks and Winners for Asia, Pacific & Africa, 3/24/08) In North America, companies with the best corporate governance practices by technical criteria were: Nexen (NYSE: NXY), also the best in global industry; The Procter & Gamble Company (NYSE: PG), also the best in global industry; General Electric Company (NYSE: GE); and Wachovia Corporation (NYSE: WB). (IR Global Rankings Announces 2008 Benchmarks and Winners for North America, 3/19/08) In Latin America, companies with the best corporate governance practices by technical criteria were: TOTVS (Bovespa: TOTS3), Perdigao (NYSE: PDA), Masisa (OTC: MYSZY.PK); ICA (NYSE: ICA) and Enersis (NYSE: ENI), also the winner in its sector, which reflects the most transparent practices of information management and investor disclosure. Brazil's leading 5 companies in this category also included Natura (Bovespa: NATU3), CPFL (NYSE: CPL) and TAM (NYSE: TAM). (IR Global Rankings Announces its Latin American Winners, 4/2/08) Disclosure: The publisher of CorpGov.net is a shareowner of Infosys, ICICI Bank, and Procter & Gamble. J-SOX Japan Modeled on Sarbanes-Oxley, J-SOX rules that went into force on April 1 apply to about 3,800 Japanese listed firms, their large subsidiaries and affiliates. The new law requires companies to review how well risk is managed. (Corporate governance law comes into force in Japan, Business Insurance, 4/1/08) Challenges include:
Marsh Warns Companies of Risks in Japan's 'Sarbanes-Oxley' Legislation, Insurance Journal, 4/2/08. Implementation of Shareowner Proposals Doubles SocialFunds.com reports on a recent study that found the rate of implementation of shareowner proposals almost doubled, from about 22% in 1997-2002 seasons to over 40% in 2003-2004 proxy season. "The report finds that proposals with higher percentages of votes cast in favor, proposals presented by larger shareholders, proposals adopted by peer firms, and proposals dealing with removing anti-takeover defenses and instituting certain shareholder rights are more likely to be implemented." (Do Your Proxy Votes Really Count?, 4/3/08) E-Proxy: Impact on Retail Voters In a March posting to IR Web Report’s Investor Relations Blog, Dominic Jones contended that Apple Inc.’s foray into e-proxy cost the company crucial retail votes. Broadridge interviewed three "early adopters" willing to share their experiences and published A Frank Discussion on Notice & Access. The April edition of Kennedy's Investor Relations Newsletter includes an article (E-Proxy Is Turning Off Retail Voters) that draws from that publication. The corporate drivers are cost and, to a much less extent, reducing carbon footprint. Another factor was that the rule ending broker votes hasn't been okayed by the SEC, so turnout isn't such a critical issue. The IR Newsletter summarizes some of the recommendations to make e-proxy work better for retail voters and I've taken their summary even further, as follows:
I'd like to see efforts go much further. Worthy of corporate funding would be a "proxy exchange" of the type described by Glyn Holton in his writings on an Investor Suffrage Movement, which would allow millions of investors around the world to conveniently transfer proxy rights to whomever they like. Another option would be for concerned institutional investors, such as CalPERS, CalSTRS, TIAA-CREF, Domini or Vanguard to simply offer to accept proxy assignments from retail shareowners. Both ideas are inspired from ideas Mark Latham wrote about in his paper, Proxy Voting Brand Competition. Neither have the advantage of increasing the knowledge base of votes that Latham's proposal has. However, both are relatively simple and would be preferable to a dramatic drop in voting by retail shareowners. I've written several times about the "proxy assignment" idea, such as here (at Fill Empty Votes) and hope to spend some time in May gathering these fragments into a more coherent post. Your ideas and contributions are welcome via email.
Phil Goldstein Phillip Goldstein, the hedge fund manager who successfully sued to overturn the SEC’s hedge-fund registration requirement announced plans to sue again...this time over a rule about hedge-fund advertising that has been blamed for prohibiting them from even having a web site. (Breaking the Hedge-Fund Silence, NYTimes, 3/10/08) Almost ten years ago, when CorpGov.net maintained a bulletin board, Phil posted the following in response to a plea from a student wanting a good subject for a paper on corporate governance:
In 2005, Phil cc'd me on a letter to Phyllis Plitch, a frequent writer for the Wall Street Journal. He had read Chairman Cox’s speech at the National Endowment for Democracy and remarked on the irony of "passionately promoting democracy around the world while shareholders right here in America live under a one-party electoral system that Fidel Castro would envy."
Justified outrage, for sure. But what I really like about the guy is his use of SEC filings and his sense of humor. For an example, in his battle with Lincoln National Convertible Securities Fund, Inc. he included this provocative "letter." The March 31, 2008 issue of Value Investor Insight includes an extensive interview with Goldstein and his partners at Bulldog Investments. They explain their investment strategies... primarily buying closed-end funds trading at a discount and then working to close the gap. Their most obvious strategies are to open-end the fund or liquidate it. As they've grown, they are also making their own tender offers. Goldstein also explains how to buy Berkshire Hathaway, financials and gold at a discount. To read the full interview, sign up for a no-obligation free trial with Value Investor Insight.
Back to the top Governance Highlights The March 20008 edition of Governance: The International Corporate Governance Newsletter includes several interesting articles. An editorial advises new directors to review issues the board focused on over the preceding year.
Another article discussed a recent survey by PricewaterhouseCoopers, which found that Investors consider risk management, transparency and compliance to be as important if not more important than returns. Yet, only a minority of investors have processes in place to make appropriate assessment of factors other than performance. The issue also includes important advise concerning the 2008 Audit Committee Agenda. The following are ten headings that will give you a clue as to content:
CorpGov Bits Lucian Bebchuk's 4/3/08 post to the Harvard Law School Corporate Governance Blog discusses the progress he is making in getting additional companies to adopt his innovative poison pill. JCPenney’s has now joined Safeway, CVS Caremark, Disney and Bristol-Myers Squibb. RiskMetrics Group’s Governance Services released a study contrasting the corporate governance protections available to investors in Hong Kong and China. They will hold a special forum to share the findings from the study on Tuesday, April 8. See 4/2/08 post. "Indian Companies are increasingly making acquisitions abroad at a scale which could not have been thought of a few years ago, reports The Financial Express (Corporate governance norms promote outbound investments, 4/3/08). The author makes a plea that "Employing talented and professional managers, even if the company is family controlled, sends out a strong corporate governance signal particularly in these days of talent crunch. It may be an expensive proposition, but it’s worth it when a company is seeking to make global strides." Noteworthy editorial in 3/31/08 Pensions&Investments. "The SEC should modify 13(f) and 13(d) disclosure to incorporate techniques to prevent activist investors from evading disclosure, but should do so without undermining the benefits to the market and economy of swaps, short selling and other such investing innovations...Corporations concerned about hedge funds subverting proxy voting should also call for the SEC to ban broker voting of uninstructed shares in elections for corporate directors. The SEC has not acted on a New York Stock Exchange proposal to ban such voting. With some form of majority voting at 66% of S&P 500 companies, such votes cast by brokerage firms in favor of management undermine the votes of shareholders seeking corporate governance changes, and tip the balance to the incumbent boards. Undermining the proxy-voting process, whether it favors activist shareholders or entrenched corporate management, should be stopped." Executive Compensation: Where Is It Today (Really) and What’s Next? Executive compensation is almost always portrayed negatively in the news. The potential for government regulation and shareholder scrutiny is at an all-time high. SVNACD separates fact from fiction, bringing together a panel representing Board, compensation consultant, and legal perspectives. Topics include the recent round of proxy disclosures, what Boards and Compensation Committees need to be thinking about, and how to better link executive pay and firm performance. Thursday, April 17, 2008, 7:30 – 9:30AM, Location: Palo Alto, WSGR. More info. and registration. Stoneridge Reviewed at Stanford on April 8 In January 2008, the U.S. Supreme Court decided Stoneridge Investment v. Scientific-Atlanta, labeled by commentators “the most important securities case in a generation.” At issue was whether third party vendors, whose conduct played into a public company’s scheme to defraud investors, could be liable to those investors in a private securities fraud class action. The Stoneridge decision lived up to its billing, establishing important principles concerning the scope of Section 10(b) and private rights of action. How will Stoneridge affect the enforcement priorities of the SEC? What action might Congress take in response to the case? Professor Joseph Grundfest will moderate a discussion of the decision and its implications with a panel of experts, including advocates in the decision. Tuesday, April 8, 2008, Stanford Law School, 5:30 - 7:30 p.m. More info and registration. GAO Investigates SEC According to this report in the FT.com, the GAO will examine the SEC's enforcement division to ensure it has adequate recources. Repayment of ill-gotten gains ordered by SEC fell by almost half in the last fiscal year to $1.6bn. Corporate Responsibility Reports CRO.com has a content partnership with the UK's CorporateRegister.com that gives visitors access to "the globe's largest database of corporate responsibility and sustainability reports." Links to reports published by CRO's corporate members are featured on the Corporate Responsibility Reports page. Reports from companies that are not members of CRO are available through their partnership with CorporateRegister.
Throw the Bums Out AFSCME urges shareowners of Washington Mutual (WaMu) to withhold support from members of their Human Resources Committee (HRC) members: James Stever, Stephen Frank, Charles Lillis, Phillip Mathews and Margaret Osmer McQuade. Shareowners experienced a 70% loss in 20007 alone. Yet the HRC excluded sub-prime losses from performance measures used in calculating 2007 bonuses and restricted stock award payouts, raising the CEO's restricted stock award from 16,597 to 46,644 shares. Why? HRC explained it was "because the Extraordinary Charges were not part of the Company's business plan." Of course, it is just that lack of planning that screwed shareowners. For further information, see AFSCME's letter to shareowners and AFSCME, WaMu and the Withhold Campaign at theRacetotheBottom, 4/1/08. Of related interest is Wall Street Housecleaning May Bypass Boardroom, where WSJ's George Anders agrees with RiskMetrics, "Investors don't appear to be interested in turning directors into scapegoats for credit-related problems." Scapegoats? Hardly. Citigroup "is actively seeking new directors" and is placing a "particular emphasis on expertise in finance and investments." Currently, only two of its outside directors have experience in financial services. (Citi Seeks Finance-Savvy Directors, WSJ, 4/1/08) Better late than never. Anders is correct, "Frustrated investors might be better served by asking how banks can build stronger boards in the future." As Les Greenberg writes to WSJ's forum, "Real Director accountability will remain non-existent unless and until Shareholders have an efficient and low cost means of nominating Director candidates." Corporate Governance in the African Context Karugor Gatamah, the former CEO of the Centre for Corporate Governance in Kenya, has an interesting post at the Center for International Private Enterprise. Corporate Governance in the African Context argues that corporate governance should not simply be "preached" as a way to attract foreign investment – it must be better adapted to the African context. Reformers should make the case for corporate governance application within family-owned enterprises, which account for the majority of African corporations. African citizens need to make the connection between good corporate governance practices and job creation, better domestic products, and the more efficient collection and use of taxes. Only when citizens understand these connections will they be motivated to demand best practices. Backdating Charitable Donations Pom Talk reports on a recent study by David Yermack, a finance professor at NYU, who previously studied options backdating. Yermack finds that donations of company’ stock by corporate CEOs and chairmen to their own charitable foundations tend to be dated just before the market price of the donated stock plunges. From Yermack's abstract: "Evidence related to reporting delays and seasonal patterns suggests that some CEOs backdate stock gifts to their own family foundations in order to increase personal tax benefits. Financial Advisors Assets owned by high net worth individuals (HNWI) reached $50 trillion in 2007, according to a study (The Future of Private Banking - A Wealth of Opportunity?) by management consultancy Oliver Wyman, and are expected to reach $75 trillion by 2012. Since only about 50% of that sum professionally managed or advised, opportunities abound five themes:
The report comes as the SEC is proposing amendments to Part 2 of Form ADV, which would require advisors to provide a plain English narrative brochure to clients on the advisor’s business practices, types of advisory services, fees, and risks. Also required, disclosure of their disciplinary history, and potential conflicts of interest. Comments must be received on or before May 16, 2008. Include File Number S7-10-00 on the subject line. See comments already filed. CorpGov Bits After suffering $20 billion in losses from the credit crunch, Citigroup "is actively seeking new directors" and is placing a "particular emphasis on expertise in finance and investments." Currently, only two of its outside directors have experience in financial services. (Citi Seeks Finance-Savvy Directors, WSJ, 4/1/08) Better late than never. The Bush administration finally announced it intends to nominate securities lawyer Luis Aguilar, who spent nearly a decade as a general counsel of Invesco PLC and long-time regulator Elisse Walter, of the Financial Industry Regulatory Authority, to fill the vacant SEC positions. That will allow the Commission to move forward with proposals to ease restrictions over investors' access to foreign markets, accept international accounting standards from U.S. companies further regulate rules for credit rating firms, and grant some form of proxy access. (Bush Set to Nominate SEC Democrats, WSJ, 3/29/08; White House announces plans for SEC democrats, MarketWatch, 3/31/08) Frankly, I hope the SEC waits until next year to address proxy access. In an effort to spice-up and broaden the appeal of its famous case studies, Harvard Business School has unveiled a new agreement with popular romance novelist Danielle Steele. (HBS hires Danielle Steele to pen case studies, Wharton Journal, 4/1/08) No doubt, the result of a Kaizen process at HBS. David M Webb recommends shareholders vote in favour of Bob Bunker and incumbent director Bill Kwok Chi-piu, and against all other candidates at the HKEx. Jim Kristie writes, "There is something missing from the credit crisis that we entered into last summer. In past crises — going back to the financial wreck of the Penn Central Co. in 1970 up through the bank and S&L failures in the 1980s and Enron and its ilk collapses in the 2000s — inevitably an aggrieved chorus sang out, 'Where was the board?' Not so this time, it seems." An exception is Directors & Boards article of the month by Ellen Hexter who writes, "What was absent in many of the companies that took undue risk was good governance." If you're quick (before they delink), you can also read a contrary opinion by Gary Sutton. Sovereign wealth funds now have assets between $1.9 trillion and $2.9 trillion and this could grow to $15 trillion in the next eight years, according to U.S. Treasury estimates. Since the start of the credit crisis, sovereign funds, mostly from Asia, have invested more than $60 billion in U.S. and Swiss banks. (Sovereign Wealth Funds Enjoy 18% Asset Increase, PlanSponsor.com, 3/31/08) Wouldn't laws to making it harder for these funds to take invest in the US increase inflation and FDI opportunities? A seven-part PBS series helps viewers understand how inequalities in income, housing, jobs, status and education – combined with a lack of power and control over one’s life, can get under our skin and affect our risk for chronic diseases like stroke, heart disease, asthma, hypertension, diabetes, even cancer. We spend about twice per person on health care than any other nation – almost $2 trillion a year. Yet American life expectancy ranks 30th in the world. (Unnatural Causes) More democratic corporate governance - from the standpoint of shareowners and employees could make a substantial contribution to reducing this crisis. Changes at Review Corporate Governance: An International Review is going through a transformation. William Judge and Maureen Muller-Kahle, both at Old Dominion University in Norfolk, Virginia, have been Editor-In-Chief and Managing Editor respectively since July of 2007 but the January 2008 edition (notably thinner) is the first to reflect their work. While the editors promise to continue many of the traditions of this flagship publication founded by R.I. (Bob) Tricker, they are also:
In addition to an interesting review of Robert Monks' Corpocracy
Back to the top News from 2008: March, February, January News from 2007: December, November, October, September, August , July and June There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are sitll current.
Equal access? The SEC's recent rulemakings, S7-17-07 Shareholder Proposals Relating to the Election of Directors (comments) and S7-16-07 Shareholder Proposals (comments) offered conflicting solutions to what was a nonexistant problem after the decision in AFSCME vs AIG. Unfortunately, they opted for no access and choice-free elections. The SEC's prior 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
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by Bruce F. Dravis is an excellent general guide to board duties. Those who seek greater depth can readily attain it through the accompanying CD. 
with the Corporate Governance NETwork!