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Current News and Commentary. 2008: 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. Contact Presidential Candidates on Proxy Access: End the Electile Dysfunction of Choice-Free Elections. Final results of our poll are in. 40% of respondents thoght access resolutions should have the same thresholds as other resolutions. 18% thought proponents should have held their stock for 2 years. 16% wanted a threshold of 1% of owners, 12% said 1% for two years. Only 14% thought it should be 5% held for a year, as in the SEC's now dead limited access proposal. In a similar poll of ICGN members, "82% stated that shareholders should have the right to propose directors for the board of the company. 76% thought the rules and requirements for proposing directors should be no different to that for introducing other resolutions to the agenda." The SEC received 34,000 letters and emails on their proxy access proposals by the close of public comment on October 2. Short "no access" release S7-17-07 (comments). Long limited proxy access proposal, S7-16-07 Shareholder Proposals (comments). The SEC voted to strip shareowners of their rights. Thanks to everyone who opposed repealing proxy access. Cox will bring the issue back in 2008 but who will trust him? What are the next roadblocks? 'Long Term Responsible Investing' (LTRI): A Factor in Manager Sales and Evaluations Using LTRI is not a new or boutique sales approach. For years now, mainstream institutions have marketed it through studies showing that screening for governance improves their performance. Press coverage has focused clients on this issue. A search of the word “Governance” on the Pensions & Investments web site returned 500 citations in the last two years. Recent P&I articles included the Analyzing for 'Governance Risk' editorial, Watson Wyatt Hires Environmental/Social/Governance (ESG) Specialist' and U.N.-Mercer report urges use of ESG factors. Executive pay and other governance issues are now featured daily on CNBC and retail media.
by Brian Connolly, Sales Director, GovernanceMetrics International. Contact: 212-949-1313 x320, bconnolly@gmiratings.com. This article is also posted to our Commentary section for future reference. The publisher, James McRitchie, welcomes informative news and commentary from experts and students of corporate governance. ESG Consultants in Demand "Institutional investors, notably in the US, are increasingly demanding that consultants integrate environmental, social and governance (ESG) into their manager evaluation process for all mandate hires." (Investors increase demands for ESG on all manager hires, Responsible Investor, 2/26/08) The impetus for the additional attention is that forty leading US and European institutional investors, with $1.75 trillion in assets, to commit investment managers to report on how they are assessing climate risks in their portfolios, whether from new carbon-reducing regulations, physical impacts or competitive risks. (Coalition Asks SEC for Climate Risk Disclosure, Environmental Defense) Tighter Controls Needed on 10b5-1 Plans (Publisher's note: I've updated this post with a response from Professor Jessie Fried at the bottom.) Last month, RiskMetrics mentioned a new shareowner resolution introduced by AFSCME at Safeway and SanDisk calling on these companies to adopt tighter controls on executive stock sales under “Rule 10b5-1” plans. (2008 Preview: Pay Proposals: New Concerns Spotlighted, Risk & Governance Blog, 1/30/08) As Subodh Mishra noted in the article, a September 2007 study by Stanford University researcher Alan D. Jagolinzer found that the rule “appears to enable strategic trade[s],” and SEC officials have warned that the study suggests the possibility of abuses, which they are investigating. AFSCME's proposal at Safeway (I haven't seen the SanDisk proposal, but assume it is similar) seeks to close potential loopholes by having boards adopt a policy which includes the following principles:
The resolution notes, "Alan Jagolinzer found evidence that trades executed within 10b5-1 plans were more lucrative for the insiders than trades executed by insiders at the same firms who had not adopted 10b5-1 plans, and that early terminations of 10b5-1 plans are associated with impending disclosures of negative news." (see Sec Rule 10b5-1 and Insiders' Strategic Trade, SSRN) In its supporting statement of their resolution AFSCME writes, "The limitations on amendment and early termination and the waiting period would constrain senior executives' ability to trade (or terminate a plan and thus refrain from trading) based on material nonpublic information." While I applaud this new measure, I think it could be substantially improved based on the recommendations of Jesse Fried in Hands-Off Options (Vanderbilt Law Review, Forthcoming, available at SSRN). The abstract reads as follows:
Fried reviews the studies, including that by Jagolinzer and notes that his "suggests that 10b5-1 does not prevent insiders from trading on inside information. In fact, it suggests the opposite: insiders seeking to sell on inside information set up 10b5-1 plans to do so, perhaps to camouflage their informed trading from shareholders or to reduce the risk of legal liability. Thus, Rule 10b5-1 may actually increase, rather than decrease, executives’ propensity to sell on inside information." The most important element of Fried's hands-off approach are:
While AFSCME's resolutions address Fried's first point, they do little to address his second. Unless each sale cashes out only a small fraction of the grant, executives will retain substantial incentives to manipulate the stock price around their sales by engaging in real earnings management as those windows approach. Fried provides the following example of a more ideal redemption plan:
The key to an improved resolution at future companies would be to the ensure board policy requested requires that each sale cashes out only a small portion of the grant, like the 5% in Fried's example. If each sale represents a small fraction of the grant, the effect will be to reduce the benefit "from inflating the stock price around any given disposition date. Moreover, to the extent the cash-out schedule extends into the future and the price-boosting manipulation would reduce long-term shareholder value, the cost of such a strategy would be higher." (to any manipulating executive) Additionally, Fried recommends that the SEC require firms "to describe, in the compensation disclosure and analysis section of their annual proxy statements, the arrangements governing the unwinding of executives’ equity incentives. In particular, firms not using hands-off options could be asked to explain why shareholders are best served by giving executives discretion over the timing of their stock sales. The difficulty of explaining why managers should have freedom to unwind their equity incentives may make some firms more susceptible to shareholder pressure to adopt hands-off options. At the very least, this requirement would help concentrate directors’ attention on a major problem with executive compensation." AFSCME should build upon the findings and recommendations of both Jagolinzer and Fried to refine their ground breaking resolutions. Additionally, all concerned shareowners should urge the SEC to require firms not using hands-off options to explain their rationale. Fried Responds: "I think AFSCME's proposal, if adopted, would substantially improve equity compensation arrangements. The hands-off arrangement I describe is a little more restrictive. First, as you note, it would limit the amount of stock/options that can be cashed out in a given period, to reduce executives' incentive to manipulate the stock price before unwinding. AFSCME's proposal would allow an executive to dump all his shares under a 10b5-1 plan entered 90 days in advance of the trade date. Second, my proposal essentially sets up a non-modifiable 10b5-1 plans for all stock options at the time of grant. AFCSME's proposal does not appear to require executives to sell through a 10b5-1 plan, in which case they would retain full control over the timing. It only puts restrictions on 10b5-1 plans once they are adopted." Grand Theft "Just days after Take-Two Interactive, the troubled video game maker, received a buyout offer from a rival, Electronic Arts, the board of Take-Two approved a measure that significantly increased the compensation that management would receive in a merger or takeover, according to regulatory filings." The NYTimes article goes on to recount that before the bid became public, Take-Two’s shares had fallen 17% on CEO Zelnick’s watch. Under the new agreement ZelnickMedia will receive two restricted stock grants totaling 780,000 shares, worth about $20 million at the $26 offer price under a change in control. (Filings Show Take-Two Raised Management Payout in Takeover, 2/27/08) Is it any wonder that shareowners want more of a "say on pay"? The WSJ reminds us that "In Australia, Sweden, Britain and the Netherlands, shareholders vote each year on whether a company's executive compensation is acceptable." Almost 100 resolutions have been filed this year calling for advisory votes on executive-compensation plans. Last year, such proposals averaged a 40% support level.
The article concludes by reminding readers of the likelihood shareowners won't have to continue slugging it out one firm at a time if a Democrat is elected. "Sen. Barack Obama last year introduced a say-on-pay bill in the Senate, a measure that attracted support from his main Democratic rival, Sen. Hillary Clinton." ('Say on Pay' Gets a Push, But Will Boards Listen?, 2/27/08) E-Proxy Reduces Voice Adoption of e-proxy may substantially reduce costs but it also reduces voice and further entrenches management. According to Broadridge, as reported in the Corporate Counsel.net Blog, "Retail vote goes down dramatically using e-proxy (based on 61 meeting results); number of retail accounts voting drops from 18.3% to 4.4% (over a 75% drop) and number of retail shares voting drops from 28.8% to 12.6% (over a 55% drop)." (Coming Soon: California Legislature to Fix E-Proxy Problem, 2/27/08) This information should prompt investors to push the SEC to end broker votes. Good Governance Pays "Companies with the best corporate governance levels in the FTSE All-Share have produced returns 18 pct higher than those with poor governance, according to new research by the Association of British Insurers (ABI)." The study period was 2003-2007. Breaches of pre-emption guidelines, ensuring shareholders have an opportunity to prevent their stake from being diluted by new share issues, was among the most significant factors contributing to lower returns. (UK companies with best corporate governance outperform worst by 18 pct - ABI, Thomson, 2/27/08) Sarbox: Non-event, Says Whitworth Re: Sarbanes-Oxley, Ralph Whitworth is quoted, "I think the changes have been positive, but it's been a mile wide and an inch deep . . . Sarbanes-Oxley was a non-event in terms of addressing the fundamental issues that caused those corporate scandals." "His grand plan is to create a set of standards on issues such as compensation, capital allocation and shareholder communications. Companies that abide by those would be given Relational's 'seal of approval', which in turn could attract other investors interested in corporate governance." (Lone Ranger of boardroom battles, FT.com, 2/25/08) Public Pension Funds Threaten Economic/National Security? Randal Quarles, a Managing Director at the Carlyle Group, and former senior advisor to four different Treasury secretaries in two presidential administrations, told those attending an American Enterprise Institute forum "there are a variety of reasons to be less concerned about foreign government investment in the United States frankly than about our own government investment in the U.S.,” according to a report by Financial Week. That led to an initial headline in Financial Week of "Ex-Treasury official: State pension funds a bigger worry than sovereign wealth funds," later changed to Ex-Treasury official: State pension funds a bigger influence than sovereign wealth funds -- Quarles says foreign funds a ‘moderate force’ in world economy, 2/25/08. Sovereign wealth fund investments are less likely to be controlling investments and are typically limited to a 10% interest. Additionally, "there is less incentive for political pressure because those funds are not in control of regulators in the United States," according to the article's interpretation of Quarles' remarks. I wasn't aware that public pension funds controlled US regulators. That certainly didn't appear to be the case when the SEC rejected proxy access, even though public pension funds overwhelmingly supported it. I listened to the remarks by Quarles and thought Financial Week may be putting words in Quarles' mouth. If it is true, it is amazing that he would be so critical of public pension funds when CalPERS owns a 5.5% stake, estimated to be worth about $1 billion, with Carlyle. Of course, at least one soverign-wealth fund also has a stake in Carlyle. After a discussion with Financial Week, their title was changed. In a related note, California AB 1967, seeks to stop the CalPERS and CalSTRS from investing in private-equity firms owned in whole or in part by a sovereign-wealth fund, or in any funds managed by those PE firms, according to a report in the Deal Journal (Using Private Equity to Target Sovereign Wealth Funds, 2/25/08) Humor I'm not a big Oscars person, but this satirical montage is hilarious, particularly if you've seen any of the movies that were nominated for "Best Picture." (TheCorporateCounsel.net Blog, 2/25/08) Thanks Broc. Investors in India Benefit From Solid Framework In Focus, a periodic publication of GovernanceMetrics International (GMI) featuring recent developments in the world of corporate governance, notes the debut of Tata Motors' car with a price-tag of only $2,500 brought recent attention to India. "Car-owners might struggle on the country’s crumbling and congested network of roads, but investors benefit from corporate governance policies rooted in India’s solid framework of laws. Tata, for instance, is one of many companies to have enacted shareholder-friendly policies and earn an above-average governance rating. Overall, India sits in the top three among GMI’s Emerging Market Country Rankings." (Corporate Governance: India’s Cup of Tea) GMI ranks the USA below Australia, UK, Ireland and Canada in its corporate governance. Disclosure: CorpGov.net's publisher is a Tata Moror shareowner) Fund Seeks to Ban Shareowner Voices The $11.5 million Free Enterprise Action Fund (FEAOX), based in Bethesda, MD, has filed bylaw resolutions with Exxon Mobil and Schwab seeking to ban future consideration by those firms of shareowner resolutions, which fund co-head Steven Milloy says, "have simply become a way to harass companies." According to an article in CNNMoney.com and SmartMoney, "Exxon Mobil faces dozens of 'nuisance' proposals from shareholders each year, said Milloy. He added that Schwab has been 'besieged' by labor unions because the online brokerage firm's chief executive, Charles Schwab, supported the Bush administration's call for Social Security reform." The article goes on to note, "While Milloy has been affiliated in the past with think tanks and non-profits that received funding from Exxon Mobil, he said he no longer has any financial connection to the company aside from being a shareholder." Labor unions, environmental groups and socially conscious investors supply the vast majority of non-binding shareholder proposals, and "we don't consider them real shareholders," Milloy said in a telephone interview. (Activist Fund Seeks Ban On 'Nuisance Shareholders', SmartMoney, 2/22/08) Steven Milloy's resolutions should be rejected out -of-hand and any further corporate handouts to this conflicted shill should be terminated. Both Exxon Mobil and Schwab should be recommending a "no" vote, unless they want to be associated with a nut. For more information on Milloy, see: I've heard rumors that Exxon Mobil has said they plan to oppose this resolution, but it hasn't announced its position. If Exxon Mobil and Schwab don't want to become a lightening rod for shareholders, they will oppose the resolutions. The SEC got over 30,000 comments on their proxy access proposals last year, many driven by the possibility that shareowner rights to submit resolutions might be curtailed. Supporting Milloy's resolution would probably be seen as such a dramatic mistake that shareowners would call for directors to be turned out of office. Additionally, if companies were precluded from considering shareowner resolutions, it is likely that Glass Lewis, RiskMetrics, The Corporate Library and others would lower their governance ratings because of reduced communication. One unintended result might be lower stock values. I can't imagine Exxon Mobil or Schwab would want to take that chance. Shareholder Forums Find Common Ground John Olson's post, Shareholder-Centric vs. Director-Centric Corporate Governance, to the Harvard Law Corporate Governance Blog, adds to the ongoing debate as to the balance of power between directors and shareholders. He goes through arguments raised by Marty Lipton, on one side and Lucian Bebchuk on the other. Olson concludes:
He is much more concerned about proxy access and corporate funding of proxy contests. Worried about hedge funds, he questions "whether investors with such powers should continue to have limited liability when things go wrong in the business or the enterprise engages in unlawful conduct." Yet, Olson does note with approval a survey by the Business Roundtable, which found that nearly 38% of its members had informal meetings between directors and shareholders during 2007. Pfizer's meeting between the independent directors who chair its three key board committees and 35 of its largest shareowners was the most publicized. Regardless of one's position on shareholder-centric vs. director-centric corporate governance, most will agree that increasing dialogue between independent directors and shareowners is a positive development. In a recent e-briefing, Who Knows Best?, Directors & Boards editor Jim Kristie writes,
Lutin's efforts have been those of a Herculean volunteer. He started holding the forums in 1999 as an educational public service with the New York Society of Security Analysts. The forums were such effective mechanisms for defining issues and resolving them that Lutin continued them on his own after they became too hot for the NYSSA. Resources remain scant, but he's working with corporations, professionals and investor groups to assume the costs and develop a standardized approach that can be replicated. I wish him all the best. For more information, google "Gary Lutin shareholder forums" and you'll find almost 800 entries, including the following:
CEO Succession Planning, NACD Northern California National Association of Corporate Directors, Northern California members and guests heard from Michael Franklin, a partner at Oliver Wyman, on CEO succession. The event was held in Sacramento on February 14th and was well attended. Franklin began by noting a 300% increase in the turnover rate for US CEOs in the last decade. Tenure has declined to 6.4 years. Of newly appointed CEOs, 40% fail within their first 18 months. Nearly half of NACD directors surveyed indicated their boards were ineffective in dealing with the issue. About 2/3 in a Heidrick & Struggles survey responded unfavorably when asked to rate their boards' effectiveness in CEO succession planning. An article published in the Harvard Business Review found that 60% of surveyed large companies had no succession plan at all. That got our attention. Franklin went on to set the context, discuss emerging roles and models. He spent the bulk of his talk walking us through the process from beginning early in the CEO's tenure (avoiding "why now" questions that surface if you wait), stepping us through a tested process through to "onboarding the new CEO" and managing the rational, political and emotional dynamics. He provided several case examples, especially helpful in developing criteria and assessment tools. I found it much more hands-on and practical than most articles or presentations on the subject. Of course, the discussion generated by many directors at the event also added substantial value. Learn more about the Northern California Chapter of the NACD and upcoming events. Of related interest: See "Why do so many companies fail at succession?" in the current issue of Directors & Boards. Joseph Bower argues, "acorns don't grow well in the shadow of great oaks." Many successful inside candidates have recently spent several years outside headquarters. "Managing new business with distinct business units pays a big long-term dividend in the form of general managers who can grow business and potentially lead the company." If Franklin's statements weren't enough to spur boards to action, shareowner advocate CalPERS recently amended their Global Principles of Accountable Corporate Governance (update not posted as I write this) to advise that board of directors should proactively lead and be accountable for the development, implementation, and continual review of both CEO and Director succession plans.
Succession planning isn't just an issue for CalPERS. An article in the 1/28/08 edition of Agenda (CEO Succession Disclosure Comes Under Fire) reports the Council of Institutional Investors is taking up the issue and the Laborers’ International Union has already filed a shareholder proposal that asks companies to adopt and disclose a detailed CEO succession plan in their corporate governance guidelines at Bank of America, Toll Brothers, Verizon Communications, Merrill Lynch and Meritage Homes. See also, Shareholder Proposals on CEO Succession Planning, BusinessWeek, 1/24/08. Although the SEC granted a no-action letter letter to Toll Brothers, based on the "ordinary business" exemption, and others are also appealing to the SEC, don't expect the issue to go away. Sometimes it takes a year or two to tighten up resolution language.
Coalition Petitions SEC on Climate Change A broad coalition of investors, state officials and others petitioned the SEC to clarify that publicly traded companies must assess and fully disclose their financial risks from climate change. They are aware that climate change and legislation/regulations at state/local and international/national levels to address that enormous fundamental issue on both will also have enormous implications for investors. To make better investment and governance decisions they need to know how business leaders and companies are taking climate change into account, if at all. The petition requests an interpretive release clarifying that material climate-related information must be included in corporate disclosures under existing law and provides guidance to the SEC, including factors to evaluate, in putting together such a release. In a separate letter, the coalition separately requested the Commission's Division of Corporation Finance, "when reviewing registrants’ 10-K and 10-Q filings, devote particular attention to the adequacy, under existing regulations, of disclosures concerning climate risk." (Coalition Asks SEC for Climate Risk Disclosure, Environmental Defense) I applaud the coalition's action and ask that members also seek legal or other amendments to extend such disclosure obligations to their own actions, requiring them to explain how they use such information. Just as it is now recognized that pensions and mutual funds must treat proxy rights as assets, disclosing proxy voting policies and actions, they should also have a fiduciary obligation to disclose what role, if any, long-term responsible investing (LTRI) considerations, such as global climate change, play in their investment policies. In addition, they should disclosure implementation through investment screening, engagement with corporations, proxy voting, selection and retention of asset managers, etc. (see LTRI Disclosures Would Encourage Sustainable Development) Back to the top CorpGov Bites Rob Fekner was elected to a fourth term as head of CalPERS. George Diehr was elected Vice President. California Assembly Speaker and Senate Pro Tem appointed Louis F. Moret to the CalPERS Board. Moret replaces Mike Quevedo Jr., a CalPERS Board Member since 1998. Moret was chief operating officer for 12 years at the Southern California Association of Governments and a mayoral appointee to the Los Angeles public safety retirement system for the past 17 years. (2/21/08) Libby Edgerly argues that while environmental, social and governance (ESG) issues that will have a “material” long-term impacts on company are often recognized five to ten years before they become relevant to stock price, as communication improves, the lag between that recognition and laws and regulations narrows. (A moral lens provides focus on the long-term for mainstream investors, KLD Blog, 2/20/08) In a landmark ruling eagerly awaited by the retirement services community, the U.S. Supreme Court unanimously declared that defined contribution participants can bring fiduciary breach suits to recover individual damages. Handing down the decision in LaRue v. DeWolff, justices declared that the continuing transition from defined benefit pensions to defined contribution programs made it appropriate to lift the prohibition against individual recoveries under 502(a)(2) imposed in a 1985 case. (Justices OK Individual ERISA Suits in Landmark Ruling, PlanSponsor.com, 2/20/08) A Standard & Poor’s Ratings Services report, “Market Volatility Could Shake Up State Pension Funding,” said the mean funded ratio for large state-sponsored defined benefit pension funds was 81% in 2006, down from more than 100% in 2000. (State pension funding could be in peril, S&P says, P&I, 2/20/08) There have been 72 campaigns waged by activists so far this year, as of Feb. 11, with targeted companies ranging from Countrywide Financial to the New York Times. More than half, or 38, were initiated by hedge funds. (Investor Activism Tops Last Year's Record Pace, WSJ, 2/16) Shareholder proposals demand that major banks better disclose mortgage-related risks, that Wall Street investment firms provide more transparency on their executive succession plans, and that credit-rating agencies address potential conflicts of interest that arise from what critics say is an all-too-cozy relationship with companies that pay them to rate securities. (Economic Downturn Emboldens Shareholder Activists, Washington Post, 2/19/08) More details about potential withhold campaigns at financial institutions have been posted by CTWIG, including letters to 6 companies. Directors’ College at Stanford, 6/22-24/08 is now accepting registration. The program offers a blend of the latest information on critical issues facing every board today – Sarbanes-Oxley compliance, compensation, audit committee practices, litigation, D&O insurance coverage, and ethical concerns – combined with seasoned perspectives on best boardroom practices. The Center for Retirement Research at Boston College (CRR) finds that even if households work to age 65 and annuitize all their financial assets, including the receipts from reverse mortgages on their homes, 44% will be "at risk" of being unable to maintain their standard of living in retirement. When health care costs are included, that number increases to 61%. (Health Care Costs Increase Risk of Unpreparedness in Retirement, PlanSponsor.com, 2/19/08) According to a Mercer press release, on a one-year basis, corporate plans had average gains of 8.1%, while public plans and foundation/endowment plans earned 8.3% and 10.2%. (2007 Positive for Institutional Plans, Despite Negative Q4, PlanSponsor.com, 2/19/08) ERI Economic Research Institute and Career Journal found that during the most recent 12 months, revenues of U.S. publicly traded companies increased 2.8% while executive compensation increased 20.5%. The average top executive received overall total compensation of $18,813,697, $1,262,888 of which was pension benefits. (Exec Comp Far Outpaces Revenues over Last Year, PlanSponsor.com, 2/15/08) IRS issues letter that an accelerated payout--e.g., at the target or maximum level--upon the holder’s involuntary termination without cause or resignation for good reason would not qualify as performance-based under Section 162(m). (IRS Gets a Little Tougher on Performance-Based Pay, Risk & Governance Blog, RiskMetrics, 2/20/08) LTRI Disclosures Would Encourage Sustainable Development
Of course, social investing based on ethical values and the use of negative screening is unlikely to violate fiduciary duties. Furthermore, utilizing environmental and social factors to increase value is clearly not a violation. Hess references a frequently cited legal survey by Freshfields Bruckhaus Deringer, which suggests that it would be a violation of fiduciary duties not to consider environmental and social issues in certain situations. He goes on to quote from the Uniform Management of Public Employee Retirement Systems Act and Employee Retirement Income Security Act of 1974, that consideration of collateral benefits is consistent with a trustee's fiduciary duties if the investment has an expected rate of return commensurate with alternative investments of similar risk.
Hess' recommendations deserve immediate attention. I am currently investigating how to petition the GASB. Coincidently, at Stanford University's recent New Directions for Corporate Governance conference, I got into an interesting discussion with Brian Connolly, Sales Director for GovernanceMetrics International (GMI). We discussed environmental, social and governance issues in the US and abroad, including the Enhanced Analytics Initiative. An analogy would be cosmetic companies that test their products after the fact to determine toxicity and then advertise those that come out clean, instead of factoring such information into formulation. Still, if it helps sell the product, one has to believe providers will eventually work this data up the pipeline to the investment department. See also: Light Green Advisors, Mission Compatible Investing; UK Social Investment Forum's, Responsible Investment Self-Assessment Template. Update (2/19/08): Eugene Ellmen, Executive Director of the Social Investment Organization wrote to say, "In Canada, the Social Investment Organization has urged both the Ontario provincial government and the Canadian federal government to introduce similar measures. We consider this to be one of our top policy and advocacy priorities. Our view is that this is important not just to encourage sustainability and social responsibility, but that it represents an important right of access to information by pension plan members. Our recommendation applies not only to public pension funds, but to all pension funds under federal or Ontario jurisdiction. In terms of the possibility for action, the federal consultation on this matter is stalled because of the current minority federal Parliament, but we are hopeful that the commission looking into pension reform in Ontario will recommend our proposal for legislative or regulatory reform in the next few years." see their Brief to the Ontario Expert Commission on Pensions and much earlier Consultation on defined benefit pension plans and the Pension Benefits Standards Act.
New Conference Board Report on Pensions As more companies discontinue their defined benefit plans, employees face a twofold risk. First, many employees will outlive their retirement income and experience a significant decline in their standard of living because they are underestimating their life expectancy and overestimating earnings. Second, employees are investing more than they should in equities, due in part to the limited options for their defined contribution monies, inflation and market volatility. Even though many employers are using target fund dates, some experts believe that these funds — which have been endorsed by the Department of Labor and the Employee Benefits Security Administration for default investment options — are generally too risky for the average employee. One option is phased retirement, with 48% of current retirees transitioning into retirement through part-time work, but mostly on their own. Another option is to create solutions that provide lifetime income, such as inexpensive and flexible annuities. Offering employees in-plan opportunities to purchase income annuities with their defined contribution assets can also provide lifetime income. Programs that allow a rollover into IRAs with institutional annuity rate purchases are another way to accomplish this. (Can Continuing Changes in Pension Management Provide a Secure Retirement: Executive Action No. 257, The Conference Board) Albright Aids Norwegian Fund Norway's $387 billion Government Pension Fund is raising the ESG bar by hiring the Washington DC-based Albright Group to examine ethics issues, including the effectiveness of high-profile divestment and engagement strategies. The fund’s highest profile exclusion was Walmart, the US supermarket giant, which in 2006 was banned over child-labour violations by its suppliers in the developing world as well as obstructing union representation for its workers in the US. A report on the fund's ethical guidelines is due for public comment by the end of summer. (Ex US secretary of state Albright hired for Norway fund ethics review, responsible investor, 1/17/08; Diplomat's new role, P&I, 2/4/08) New Low at Sparton Corporation In September 2004 electronics-manufacturing company, Sparton Corporation, held a special meeting and vote to remove cumulative voting rights from shareholders and also to tighten shareholder notice requirements for shareholders to nominate director candidates. When management didn't get the results it wanted, they abruptly postponed the vote for three weeks. I thought that was an affront to democratic principles. However, that behavior pales in comparison to allegations in a 13D filing by Lawndale Capital Management regarding administration of the Company's pension plan, which as of June 30th 2007 had allocated 44% of its equity investments to Sparton stock. Since that time Sparton's stock has declined 31%. Here's an excerpt:
In short, Sparton management is accused of over-allocating pension plan stocks to the Company (rather than properly diversifying) in order to vote the shares in their own interests to stay entrenched. Lawndale goes on to call on the Board to take the following actions:
An attached letter furthered the case:
Disclosure: James McRitchie, the publisher of CorpGov.Net has an investment in a fund managed by Lawndale Capital Management, LLC, which owns 9.8% of Sparton's stock. Lawndale has been a shareowner of Sparton since 1999 and believes Sparton's current stock price fails to reflect the value of the businesses, largely because of inadequate corporate governance practices that have effectively entrenched Sparton's underperforming management team. For more on Lawndale's leading man, Andrew Shapiro, see The Gary Cooper of Governance: No board is too tough for activist investor Andrew Shapiro (BusinessWeek, 5/29/2000) Access Denied, Again RiskMetrics reports the SEC has granted requests by Bear Stearns, JP Morgan Chase, and three other companies to exclude proxy access proposals from investors. “The ‘no action’ rulings were expected. We believe they were based on a flawed rule-making process,” said Richard Ferlauto of AFSCME. In the meantime, investors are pursuing workarounds to promote board accountability. The blog mentions reimbursement of solicitation expenses incurred by successful dissident investors in “short slate” contests, qualification of future board nominees by holdings, separate the roles of CEO and board chairs, and majority threshold voting in board elections. (SEC Allows Omission of Proxy Access Proposals, 1/12/08) See also, Investors Try to Even Score on Proxy Access, AgendaWeek, 2/11/08. (We added a link to AgendaWeek on our Links page under Boards and Officers.) The SEC posted all 5 no-action letters. Back to the top Crocodyl I recently ran across Crocodyl, a corporate research collaboration between nonprofit organizations such as Center for Corporate Policy, CorpWatch, Corporate Research Project, other contributing organizations and individual contributors. Crocodyl enables disparate groups and individuals to pool knowledge about specific corporations and issues. The open-source type project allows users to create and edit pages but content must be clearly sourced. Community and editors to vet and verify posted material. We've added the site to our Corporate Sites page, which focuses on locating information on individual corporations, including Wall Street Research. Caution: An astute reader points out that Crocodyl includes a profile for Mittal Steel, although the company agreed to a merger with Arcelor Steel in 2006 and is now called ArcelorMittal. Furthermore, the article makes no mention of Arcelor in the profile, and there is no profile for Arcelor Steel on the site. This, even though Crocodyl notes their article was updated on January 23, 2008. Still, the site might be a good jumping off point for some research and the format has potential. Stanford Graduate School of Business: Recent CorpGov Cases I've abbreviated summaries but this should give readers enough to determine probable interest. Unless you're part of the Stanford University community, you'll need to email Case Services to obtain pdf copies. The price is generally around $6.50. I've also linked on our Education/Classes page. Title: Executive Compensation at Nabors Industries: Too Much, Too Little, or Just Right? Title: Sovereign Bancorp and Relational Investors: The Role of the Activist Hedge Fund Title: There's a New Sheriff in Town: Institutional Shareholder Services Abstract: In 2007, ISS was the largest proxy advisory in the world, with over 1,700 institutional clients managing an estimated $25 trillion in equity securities. ISS increasingly found itself in a central position as an authoritative and lucrative voice in the debate over shareholder rights. Critics, however, wondered whether ISS's positions on important issues were the correct positions and whether it was beneficial to have one organization hold such influence. Title: Corporate Governance Ratings: Got the grade... What was the test? Title: Shareholder Democracy: Does Gretchen Get It Right? Title: 10b5-1 Plans: Mortgaging a Defense Against Insider Trading Title: Models of Corporate Governance: Who's the Fairest of Them All? New Directions for Corporate Governance: CorpGov.net Impressions The Stanford Law Review, together with the Rock Center for Corporate Governance, held its 2008 annual symposium focusing on several current issues corporate governance, featuring a keynote address by Richard Breeden, founder of activist hedge fund Breeden Partners and former Chairman of the SEC, and distinguished panelists over the course of both days. The format provided plenty of opportunity for questions and for networking. They will be uploading audio/video archives. When I have the link, I'll post it here. One minor recommendation for improvement would be to post or link to major papers, which served to focus the discussion of panelists, on the agenda page. The following are a few impressions and highlights: The first panel dealt with executive compensation. Jesse Fried quickly reviewed the evolution of the issues. One area getting additional attention now are departure and post-departure payments, which were largely hidden before the new SEC rules. Additionally, directors have an incentive to give as much as possible to endear themselves to the CEO who holds the key to their future rewards. Steven Seelig sees more legislation on the way but gave some good advice, including:
Kevin Murphy pointed out that many CEOs get 5 years of benefits even if fired. The problem is in the dynamics of the initial contracts, especially when boards typically decide one candidate and then negotiate terms. Ron Olson advised boards to take Buffett's position and try to find CEOs who "love the business more than they love the money." Board members should have "skin in the game." Lay out terms to potential candidates... don't wait until you've narrowed down to one candidate. Most panelists seemed to agree that large blockholders and board members with substantial investments in the firm lead to lower CEO pay or better alignment of pay with performance. You would then think that shareowner proposals requiring board candidates have substantial investments in the company would be successful...but they haven't been. As I have mentioned previously, qualification could, for example, be contingent on nominees investing a substantial portion of their wealth in the firm with the proviso that they remain so invested throughout their tenure or being certified by any organization of shareowners whose members collectively control over 1% of the specific company's stock or $2 trillion of stock in general. That could essentially give an "advise and consent" role to organizations such as the Council of Institutional Investors and/or the International Corporate Governance Network, both of whom represent mostly long-term shareowners. Panel two discussed the next scandal. Simon Lorne briefly reviewed recent scandals, going back as far as foreign bribery cases 30 years ago. He found comment elements to be that people on the inside knew all about it...everyone was doing it. Secondly, discovery came through economic meltdown, which made such practices more visible, and through academic research now possible with growing reporting and statistical analysis. Priya Cherian Huskins sees a renewal of interest in bribery and gift-taking. Alan Jagolinzer described some findings from a paper on Rule 10b5-1 trading patterns that weren't statistically random. David Yermack placed his bets on jets, houses and spouses, also noting that insider trading laws don't apply to gifts to charitable trusts... so officers can give to their own private foundations and maintain essential control. Joe Grundfest described some preliminary work on strategic rounding of EPS data... also looking to be nonrandom. Richard Breedon then gave the keynote address...an informal discussion of his work at Breedon Partners. Interestingly, they haven't hedged or taken short positions. They go take positions in a very limited number of firms with a 3-5 year expected holding period. He went over several characteristics they look for, including a defensible franchise and strong cash flow. The trick is to figure out why they are underperforming. He seemed amazed at the fact that many board rationalize poor performance and do very little investigation. It was a very interesting discussion of several cases and what drove negotiations at each. He wants directors to leave after 12 years because they lose their independence. He also emphasized skin in the game, citing an example where directors were given cash for their service but were required to reinvest 25% of it in the company and to hold it for six months after they went off the board. The third panel focused on duties for activist investors and the focus of much discussion was around the recent paper Fiduciary Duties for Activist Shareholders by Iman Anabtawi and Lynn A. Stout. Here I thought it would have made more sense to have Lynn Stout briefly describe the paper and then hear the criticisms. Instead Todd Henderson led by noting that Stout's proposal would raise the cost of activism and that boards should focus on maximizing firm value, not shareholder value. Trevor Norwitz noted that hedged shareholders may have very different goals than long-term investors. Ideologies, such as CalPERS and other activists have moved power from directors to shareholders and the proposal would correct that by imposing fiduciary duties on the re the firm. Then we heard from Stout and those of us who hadn't read her paper got a bit more insight. Basically, she and Anabtawi argued the legal assumption is that while corporate officers and directors are understood to be subject to extensive fiduciary duties, shareholders traditionally have been thought to have nearly none, unless they are controlling. Changes in markets and law have given minority shareholders greater power. Conflicted investors, such as hedge funds and unions are using this new power to pressure managers into pursuing corporate transactions ranging from share repurchases, to special dividends, to the sale of assets or increased wages for employees that may harming the firm and other long-term shareholders. Fiduciary duty to the firm ought to extend to all shareholders that have ad hoc control. Andrew Shapiro pointed out that gaining power doesn't mean having power. The proposal would simply become a direct cost to owners, much like the cost of D&O insurance. He cited the likelihood of frivolous lawsuits with companies essentially using the shareholders money to fight. What's the definition of ad hoc control? It appeared to be a morass. Fiduciary duty should extend before actual control. Shareholders should be allowed to voter their self-interest. Breedon thought it was a solution for a nonexistent problem and full employment for trial lawyers. Other issues raised were ISS' influence and the evidence that poison pills collectively reduce shareholder value but add value at specific companies faced with buyout offers. The final panel on white collar crime focused on the difficulty of holding corporations liable for what its employees do and the fact that because reputation is so important, prosecutors essentially become judge, jury and executioner. Concerns were expressed about the ability of employees to defend themselves. On the other hand, nothing motivates like the threat of prosecution and companies often have far more resources at their disposal in any legal battle. Generally, prosecutors go after individuals if they can. The end game must be to restore trust in the markets. Of course, some of the more interesting conversations at such events are during the breaks. I had a wonderful discussion at my lunch table about the idea of creating a duty for pension funds to take corporate governance into account when investing. It seems like a logical extension of treating voting rights like plan assets. If corporate governance really does make a difference, perhaps pension funds should be required to specify how they take that into account when investing, just as they are currently required to document how they use, or don't use, their proxy voting rights. Maybe Bob Monks needs another stint at the DoL. SVC of NACD I also bumped into Lon Allan, the CEO of the Silicon Valley Chapter of NACD. He has been pulling together some great educational programs. Upcoming is Money, Timing & Roles: VC's on Boards, the Implications & Opportunities, Thursday, March 20, 2008. The Chapter's site includes an archive of podcasts, including The high tech IPO post Sarbanes-Oxley - an interview with Lon Allan. Links are also included on our Education/Classes page. It was a great conference. I'll be touching base with several others who attended look forward to next year's event. Boston: ICCR 2008 Directions Advocates of responsible investing are invited to attend a reception in Boston on 2/12/08 to welcome Laura Berry as ICCR’s new Executive Director and to hear her share her vision and goals for ICCR. Other speakers will include Peter Kinder, President and Co-Founder of KLD Research & Analytics, and Sydney Morris, Chair of the Committee on Socially Responsible Investing for the Unitarian Universalist Association. Time: 6:00 - 9:00 PM at the Unitarian Universalist Association, 25 Beacon Street. Their Proxy Resolutions Book 2008 is now available, containing the full text of socially responsible shareholder resolutions submitted for 2008 annual corporate meetings. Back to the top Shareholders and "Ordinary Business" Shareholder Backlash Emerges on Subprime Mess in the 2/11/08 WSJ notes that several activist shareowners, such as Change to Win, are focusing on those involved in the subprime meltdown, concerned that boards didn't adequately evaluate risk. "Companies are fighting back, claiming the shareholders are meddling in day-to-day decisions that should be made by managers." Proposals run from disclosure of more operational details concerning mortgage practices and how they asses risk exposure to calling on boars to "disclose a 'detailed' succession-planning policy and update the report annually." Several companies are trying to exclude the proposals, claiming they fall under the "ordinary business" exclusion. However, the SEC has several times made it clear that "the presence of widespread public debate regarding an issue is among the factors to be considered in determining whether proposals concerning that issue 'transcend the day-to-day business matters.'" (Division of Corporation Finance: Everyone vies for the limited time and attention of directors. For example, this morning in the Financial Times Boardroom debate: Technology management is a board issue (2/11/08) argues, "Good governance, cost management, innovation management and ultimately shareholder value all require strong board level technology management...future board members are likely to have spent part of their career in the IT function." Although the "ordinary business" exclusion gets a lot of flack, I'm glad its one area where the SEC wields some judgement... let's hope they don't filter out proposals that might lead board to consider better systems to monitor risks, which can and do seem to come from just about any direction. Access Workarounds (revised) J. Brown's provocative post Denial of Access and the Rule of Unintended Consequences Continues at The Race to the Bottom (2/2/08) should get our creative juices flowing, especially, when read in conjunction with Jeffrey Gordon's Forget Issuer Proxy Access and Focus on E-Proxy at Harvard Law's Corporate Governance Blog (2/4/08). Brown notes that denial of access simply pushes shareholders "towards other avenues, some likely to be far more intrusive in the affairs of the board than access." Proposals to require the company to pay the costs of an opposing solicitation is one example but Brown points to another at ExxonMobil. There a shareholder submitted a proposal that would impose "qualifications" on board members by requiring:
As Brown notes, "the approach sidesteps the Commission's position on access because it does not require the inclusion of a shareholder nominee in the company's proxy statement... While the nominees are still vetted by management, they can only be selected from a limited pool of candidates." Exxon Mobil sought exclusion under rule 14a-8(i)(6), saying they don't have the authority to control the qualifications of ALL nominees, especially those from shareholders in a proxy contest. The SEC failed to concur. I don't think the proposal will get many votes. My understanding is that similar proposals last year won low levels of support, as follows:
Of course, shareowners don't want to limit the pool of candidates that severely. However, what it the resolution were a bit more creative? Combine this resolution's core idea of "qualification" with Joseph Grundfest's idea of "advise and consent." (Grundfest, Joseph A., "The Wizard of Oz, the United States Constitution, and Corporate Governance," November 9, 2007) Article II Section 2 of the United States Constitution requires that a majority of the Senate confirm Presidential nominees. It forces the President to negotiate with the Senate in order to obtain the necessary Senatorial approvals. Grundfest proposes a similar advice and consent mechanism in corporate America, based on widespread acceptance of "majority vote" requirements. Shareholders are cast in the role of the Senate, with the incumbent board cast in the role of the Executive. Under his scenario, the board is required to obtain approval of a majority of the shareholder base before a director is allowed to serve. One concern with the Grundfest model is that shareowners still have no mandated say over the selection of nominees. Additionally, boards can simply replace rejected nominees with other directors that are still unacceptable to shareowners. These potential flaws could be reduced or cured by requiring that all nominees be "qualified" by substantial long-term shareholders. Exactly what form that would take is anyone's guess at this point. Qualification could, for example, be contingent on nominees being certified by any organization of shareowners whose members collectively control over 1% of the specific company's stock or $2 trillion of stock in general. That could essentially give an "advise and consent" role to organizations such as the Council of Institutional Investors and/or the International Corporate Governance Network, both of whom represent mostly long-term shareowners. Also inteesting is Jeffrey Gordon's post on the Harvard Law governance blog. Gordon argues the real need right now is to focus on what type of disclosures are needed of a shareholder nominator no matter which avenue is used, wether through proxy access or through e-proxy challenges. This could be another good CII or ICGN project. New e-proxy rules should substantially reduce the cost of proxy solicitation (especially if the SEC ever approves NYSE's request to bar "broker voting" for directors). Mailing costs, for example, drop from an average of $5.64 per package to $.43, according to Gordon's estimate. Extending further on Gordon's suggestion, CII or ICGN could put together a model of how to use e-proxy for short-slate contests, drawing on the experience of dissidents at the Alaska Air Group using VotePal.com. Contests Up There were 501 activist campaigns for corporate control at U.S. public companies in 2007, up from 429 in 2006, according to FactSet SharkWatch. The 2007 tally is the highest since 2001. Proxy battles are set to rise again in 2008 with FactSet SharkWatch identifying 47 contests already. (Proxy Battles at Highest Levels in Years, Agenda, 2/4/08, subscribe) Bebchuk's Anti-Pill Bylaw Accepted at CVS Caremark Lucian Bebchuk withdrew his shareowner proposal on poison pills after CVS Caremark agreed to adopt a by-law provision that any extension of a poison pill plan not ratified by the shareholders must be approved by at least 75% of the members of the board of directors, and a pill not so extended will expire one year after its adoption or last such extension. The proposal and adopted by-law are based on a model by-law that was the subject of litigation and a court decision in the CA case. (Harvard Law corpgov blog) See The Bebchuk Bylaw: Devilish...but brilliant. Bebchuk not only sets a new standard for the anti-pill pill, he is also becoming the model of an academic stepping out of the ivory tower of Harvard and acting in the real world. Also of interest is Lipton vs. Bebchuk. "A duel between two corporate-governance titans is bringing new intellectual firepower to an age-old debate. Which side will prevail will have great influence on the role of boards." (Directorship, 12/1/08) Self-Study of Arbitration Suffers Same Fate as Customers The Securities Industry Conference on Arbitration (SICA) released a Report entitled Perceptions of Fairness of Securities Arbitration: An Empirical Study, based on a survey of arbitration participants before the self-regulatory organizations (SROs). The survey was sent to individual parties and counsel in investor-initiated arbitration cases at the NYSE and NASD arbitration forums that were concluded between 2005 and 2006. Conclusions include the following:
Activist attorney, Les Greenberg has published an annotated copy of the "study" and concludes it would have shown securities arbitration to be perceived by customers as "much more unfair had SICA and the SROs not been allowed to participate in important aspects of the data gathering process and/or impose limitations upon the vendors." In other words, an unbiased study not including people who derive their income from the arbitration study, would have probably showed even worse results. You would think that an investigation into alleged unfair treatment would take extra care to ensure the study itself is unbiased. CEO Succession Planning in America's Pension Capital National Association of Corporate Directors, Northern California members and guests will hear from Michael Franklin, a partner at Oliver Wyman, on CEO succession. How do boards structure the CEO succession process? When do they start planning? Who takes responsibility? How do they time the process? What criteria do they use to assess candidates? How do they make the decision? And how do they ensure things don't derail during the critical transition period? I understand it isn't too late to register for this Sacramento event to be held February 14th from 7:30 am - 9:00 am. Details and registration. If you attend, please catch me during a break and let me know what you think of CorpGov.net. Its the Consultants Nine out of 10 respondents to a directors survey by Heidrick & Struggles and the Center for Effective Organizations at the University of Southern California said CEO pay should be no more than two to three times higher than the next highest paid executive. A growing number said CEOs are overpaid and blamed it on compensation consulting firms and the creation of new incentive compensation programs as the major reason for the continuing increase in CEO compensation. CEO board members didn't agree that CEOs are overpaid. (Most CEOs Overpaid, One in Three Company Directors Say in Study, Fox Business, 2/5/08) Rep. Henry Waxman, chairman of the House Oversight Committee, issued a scathing report in December that found widespread conflicts of interest among compensation consultants among roughly half of Fortune 250 companies. Obama Leads with Investment News Readers For what its worth, now that former Massachusetts Governor Mitt Romney is ending his presidential campaign, Senator Barack Obama takes the lead with Investment News readers, favored by 25.6% of respondents, followed by Arizona Senator John McCain with 22.6%, Senator Hillary Clinton with 12.4% and Governor Mike Huckabee with 6.4%. (InvestmentNews voters may miss Romney, 2/7/08) Take the poll. Addressing institutional investors, brokers and investor relations officials at the RiskMetrics' 2008 Governance Conference, Patrick McGurn predicted, "If it's a blue-state sweep, expect legislation that could incorporate director ballot access and 'say on pay' to move quickly in the first 100 days." He added that a McCain administration could also be very interesting, since not too long ago he was a "lone voice in the wilderness" for options expensing. (RiskMetrics' 2008 Governance Conference: A Dem win means corporate governance law changes, The Deal, 2/5/08) Chevedden Reports Activist John Chevedden reports that shareholders approved his advisory proposal to change the Company's "poison pill" corporate takeover defense or make it subject to shareholder approval at Oshkosh Corp., previously known as Oshkosh Truck (OSK), on 1/5/08. The proposal won on an 83% vote. That sends a strong message that Oshkosh should allow its current poison pill to expire in 2009. Chevedden also reports that a proposal for annual election of each director also won an 83% vote at Becton, Dickinson (BDX) on 1/29/08. The proponent was Kenneth Steiner. Shareholders rejected two other shareowner proposals, one sought cumulative voting for directors; the other asked the Company to publish a report on certain environmental activities. Back to the top The Latest on the SEC From TheCorporateCounsel.net
Members of TheCorporateCounsel.net are able to attend this critical webcast at no charge, you need to renew or try a no-risk trial. The webcast cost for non-members is $595. You can renew or sign up for a no-risk trial online – or by fax or mail via this order form. If you need assistance, send an email to info@thecorporatecounsel.net - or call them at 925.685.5111. Course materials are now available for review. Postscript: If you missed it, you can still catch the excellent program in the archieves. Alastair Ross Goobey Alastair Ross Goobey, one of the giants in corporate governance as chief executive of Hermes Pension Management and founder of Hermes Focus Asset Management after leaving Hermes , died at the age of 62. FT's obituary called him "a tireless advocate of ethical corporate behaviour and a relentless opponent of greed." A great speaker, Developments in European Corporate Governance, delivered in 2005 was typical. See also, The Times, 2/5/08. He will surely be missed. Hedging Weather The Cumulus Climate Fund launched by PCE Investors is a long-short equity fund seeking to profit from the financial impacts of global warming. Companies at risk from climate change, such as fossil fuel electric companies, will be shorted. Long bets may focus on renewable energy market and some sections of agriculture expected to benefit in the longer term from global warming. (Fund warms to weather, FT, 2/4/08) Mortgage Lenders Named Gretchen Morgenson notes the FBI "has opened criminal investigations into 14 companies that played a part in the mortgage boom and bust." According to Mortgage Lender Implode-O-Meter, 225 US lenders have vanished since late 2006. "Nabbing even a fraction of the mortgage captains — those who jumped ship and those who didn’t — could take eons." Morgenson goes on to list several individuals who made out like bandits as worthy of consideration. "When boom goes bust, the handful of winners moves on, bankrolls largely intact. The legions of losers, meanwhile, try to figure out what hit them. As the American taxpayer will probably foot much of the bill for this crisis, those legions include you." For those named, I recommend listening to the Rolling $20 Billion Dice: The JDS Uniphase Trial via webcast on the Arthur and Toni Rembe Rock Center for Corporate Governance site under Recorded & Past Events...could save you a few million and time in jail. Outside Directors Moving Up WSJ notes "the latest version of management musical chairs, outside directors are moving inside as chief executive officers. More than a dozen U.S. companies have installed independent board members as permanent CEOs since late 2004. They include Boeing Co., Delta Air Lines Inc., Bristol-Myers Squibb Co., Sun-Times Media Group Inc. and Owens-Illinois Inc. The trend will accelerate, predicts Mark D. Ketchum, a Newell Rubbermaid Inc. director who was named CEO in 2005, initially on an interim basis." Former SEC chair and shareowner activist, Richard Breeden, contends that a CEO chosen from the board signals cronyism and weak succession planning. While it could, there are certainly cases where board members could reasonably serve as a transitional CEO. (Should Companies Pick CEOs From Their Boards?, 2/4/08) Can't Duck Fiduciary Duty to Monitor Having found a number of trustee agreements at ERISA-covered plans that attempt to relieve financial institutions serving as trustees of the responsibility to collect delinquent contributions without legally reassigning that responsibility to someone else, the DoL has issued Field Assistance Bulletin (FAB) 2008-01. Bottom line: "Although a fiduciary may enter into a trust agreement under which a particular trustee is not responsible for monitoring and collecting contributions, if no trustee or investment manager has this responsibility, the fiduciary with authority to hire the trustees may be liable for plan losses due to a failure to collect contributions because the fiduciary failed to specifically allocate this responsibility." Higher Valuations for Better Governed Firms in Emerging Markets Researchers at Pace University asked, Does Better Corporate Governance Result in Higher Valuations in Emerging Markets? Their study of monthly data for 21 emerging markets countries for almost a five year period from AllianceBernstein found that "improvements in corporate governance result in significantly higher valuations." Previous studies generally found that better governance is linked with higher market valuations. However, it has been difficult to determine if better governance causes higher market valuations or if higher valued firms choose better corporate governance. The Pace researchers attempt to overcome this issue through use of an event study to determine what happens to market valuations before and after corporate governance improves or declines. Because they examined specific firms that show a change in governance over a specific time their results are not as subject to the endogeneity issues that plague so much of the previous literature. Their results found that "investors do care about governance and not that better valued firms simply have better governance" over the following three months. Additionally, | ||||