Current News & Commentary. 2009: November, October, September, August, July, June, May, April, March, February, January. 2008: December, November, October, September. News Archives back to 1995. Corporate governance defined. Disclaimers, Copyright & potential Conflicts of Interest. Book bites.
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SVNACD: The White Collar Defendant -- Fighting Back, 1/21/10.

January 2010 & Beyond

Almost 15 years after establishing the first comprehensive internet site on corporate governance, we are now moving many functions to the CorpGov.net blog. We have already moved current news and commentary, links, and many more recent book reviews. I have also included a search box on the new blog that allows you to search this archived site. Much of value remains... have fun exploring. Of course as soon as I wrote this, I began having technical difficulties with the blog. As of January 11, 2010, everything appears to be working. That's where I will be posting so that everyone can link to individual entries. Check out the CorpGov.net blog and let me know if your like the new format.

Directors Forum 2010

One of the country’s premier corporate governance conferences and a personal favorite. Deliberately kept small to offer up-close interaction with thought leaders like Leo Strine, Jr., John Castellani, & William Ackman. Don’t miss Pre-conference Bonus Sessions: “Legal Issues in the Year Ahead.” January 24-27, 2010 in San Diego, CA. More Details. See our extensive coverage of the 2009 event, Directors Forum 2009. See you there!

How to Be a Good Lead Director: Be the Chairman

In July 2009, the SEC proposed new proxy disclosure rules that will require public companies with a combined CEO/Chairman to disclose why the company believes such a leadership structure is appropriate and what specific role the Lead Director plays in the leadership of the company. via How to Be a Good Lead Director - Boardmember.com. Unreported in the article is the fact that the new rules have an effective date of February 28, 2010.

A January 6th Georgeson Report provided much better and more specific advice: "If the same person holds both positions, companies should disclose whether they have a lead independent director and what role that person plays. In this regard, companies would be well advised to review the details that RMG considers when evaluating whether or not to support a shareholder proposal calling for an independent chairman." They also discuss what is required in the way of disclosing consideration of diversity in the nomination process.

I think the concept of "lead director" is on the way out. Are the new SEC rules an indication of the U.S. heading toward "comply or explain"?

ABO? Better Yet, Eliminate Street Name

Chris Kentouris does a good job of explaining Kenneth Altman's proposal to supplement the system of NOBOs and OBOs now used by banks and brokerages with an “all beneficial owners” (ABO) system. Under this approach, companies who have issued stock to the public would know exactly who their beneficial shareholders are at limited times during the year, such as before annual meetings or during a proxy contest.

Identifying who owns shares in their company is certainly more important in 2010 with the revision of Rule 452 preventing brokers votes and because under notice-and-access only 4.03% of retail accounts using e-proxy voted their shares. Altman wants Broadridge and other proxy distributors to make their lists available to issuers who could do their own mailings, use their transfer agents, or use a proxy distributor such as Broadridge, Mediant Communications or Inveshare. (The New ABO's of Proxy Communications, Securities Industry News, 1/4/2010)

While Altman's proposal would reduce "empty voting," and bring shareowners closer to issuers, it wouldn't help shareowner activists communicate with each other nor would it address the legal glitches that have arisen because ownership of immobilized shares in "street name" places the rights of shareowners in jeopardy. (see Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration, CorpGov.net, 11/25/09) We hope to have a better proposal within the next couple of weeks.

Excellent Critique of Convergence on the Anglo-American Model

European Corporate Governance: Readings & Perspectives, a new reader, edited by Thomas Clarke and Jean-Francois Chanlat offers up one of the first critiques of the subprime financial crisis within a framework that compares Anglo-American governance features with those of Europe.

At the heart of the collapse was the growth of the derivatives market that was supposed to hedge against losses. Settlements grew from $106 trillion in 2002 to $531 trillion by 2008. In the introduction, Clarke and Chanlat provide an excellent overview of how the crisis unfolded, both in the US and in Europe. They then turn to the contributions of the governance framework: re-regulation, ratings agencies, risk management, incentivization and to more specifics within the framework of financial institutions.

Convergence is in progress but there is tension between the parallel universes. The Anglo-American is characterized by liquid markets, high transparency and where the market for corporate control provides the major discipline... until markets fail. Europe and Asia are characterized by controlling shareowners, weak markets, less transparency and more monitoring by banks.

Many are now questioning convergence and what appears to be a basic philosophy behind the American model... growing inequality. "In the last few years alone, $400 billion of pretax income flowed from the bottom 95% of earners to the top 5%, a loss of $3,660 per household on average in the bottom 95%."

With the highest level of inequality and poverty among its peers, why follow the US? What about the rights of workers and citizens to a more sustainable system? Can the EU transform its economies so that they can sustainably continue to provide a high standard of living? Those are just a few of the topics addressed in the reader through an examination of various dimensions and examples.

Most of the essays are excellent. I especially enjoyed Robert Boyer's, "From Shareholder Value to CEO Power: The Paradox of the 1990s." Boyer looks at why CEO remuneration continues to skyrocket in an era of shareholder value. Labor long ago lost power in the US and managers have used the pressure of institutional investors to their own benefit.

Boyer reviews the rise of concern over CEO pay, various options that have been used and their limitations. A series of long-run transformations has occurred in the bargaining positions of workers, consumers, financial markets, the international economy and nation states. The 1960 were characterized by an alliance between workers and managers.

By the 1980s internationalization eroded worker power and by the 1990s we entered a period of hidden alliances between managers and financiers. Managers used the demands institutional investors to redesign their own compensation. Part of that alliance involved a shift away from defined benefit plans to 401(k) type plans and a huge inflow of savings into the stock market with workers at risk.

As support for a political hypothesis of increased managerial power, Boyer analyzes the micro-structure evidence concerning insider trading, diffusion of stock options, lower CEO pay sensitivity of large firms, surge in M&A activity, windfall profits, asymmetrical power on compensation committees, distortion of profit statements, innovation in hiding compensation and the financialization of CEO compensation in a corporate culture that has shifted from engineering to financial management.

He then looks at the larger political arena where economic power is converted into political power. Here he discusses the context of rising inequality and growth of the super-rich with evidence that concentration of wealth is enhanced by stock market bubbles and a tax system that tilts in favor of the rich.

How do we extricate ourselves from this situation? Boyer's analysis provides some hints. A shift towards a stakeholder conception "would reduce the probability of managerial greed and erroneous strategic decisions." More public control of accounting practices is needed "to prevent an alliance between CEOs and auditors, at the expense of rank-and-file shareholders." Last, we need to recognize that monetary policy has been "at the heart of erroneous business strategies and unjustified wealth from CEOs."

The volume should give readers pause concerning the desirability of convergence on an Anglo-American model and provides well-informed analysis of European models that may lead to a more sustainable path.

December 2009

Overlooked Lessons From the Financial Crisis

In the year-end reflections two contributing factors deserve more attention. First, "prophetic warnings" from religious groups on the dangers of subprime loans via shareowner resolutions. Second, a call from Sanford Lewis for boards to revoke implicit policies of "don't ask, don't tell" with regard to liability issues.

The current financial meltdown should remind us of the importance and interconnections between ESG issues. Fully a dozen years before Wall Street experts and regulators reluctantly recognized the contribution of subprime mortgages to the current financial crisis, faith-based organizations urged major corrective action. The summer 2008 issue of The Corporate Examiner, a publication of the Interfaith Center on Corporate Responsibility (ICCR), carried an extensive review entitled The Buck Stops Here: How Securitization Changed the Rules for Ordinary Americans.

Subprime mortgages came about as a way to extend credit to lower-income people after passage of the federal Community Reinvestment Act in 1977, which encouraged banks to lend money in their local communities. Many ICCR members had pushed for the Act because subprime mortgages can give low income applicants access to home ownership when the cost and terms of conventional mortgages would be prohibitive. However, IRRC members were also on the forefront calling for subprime loans to be used responsibly, with reasonable terms.

As early as 1993, ICCR members filed six resolutions to more closely regulate subprime mortgages. “When our institutional investor members view their holdings through the lens of justice and sustainability, the priorities for action that emerge frequently anticipate market moves. Time and time again, the prophetic voice of faith has allowed our members to anticipate emerging areas of corporate responsibility, in investment policy as well as in social, economic and environmental policy. For more than a decade before anyone else, our visionary members have been expressing concerns related to predatory lending practices, inappropriate underwriting standards and the potential consequences of securitization of debt instruments," says ICCR Executive Director Laura Berry.

If financial markets had paid more attention to ICCR, perhaps we wouldn't have gotten into the financial meltdown... certainly, it wouldn't have been as big. Boards and shareowners would do well to pay more attention to this "early warning" system.

Earlier this year, I had the pleasure of providing editorial and substantive advice to Sanford J. Lewis, Counsel to the Investor Environmental Health Network, on his paper Don’t Ask, Don’t Tell: A Poor Framework for Risk Analysis by Both Investors and Directors (HLSCG&FR, 11/15/09) Lewis describes a growing clash between the needs and duties of directors and investors to manage risks, and attorneys who advise “don’t ask; don’t tell,” in order to minimize corporate liability in any possible future litigation. He warns that a strategy based on culpable deniability serves no one well.

Accounting principles for reporting environmental liabilities, for example, include subjective language such as “to the extent material,” “when necessary for the financial statements not to be misleading,” and “encouraged but not required.” At the same time, section 302 of Sarbanes-Oxley requires the CEO or CFO to certify the financial statement “fairly presents” the company’s financial condition, regardless of whether the financial statement is technically in compliance with generally accepted accounting principles.

Directors are caught between a rock and a hard place. If they report only “known minimum” liabilities, they risk violating SOX. However, a "fair presentation," could be used as evidence in court and raise possible settlement costs.

Lewis recommends a principled approach to “prejudicial” information, where a balancing test is used to weigh how prejudicial and how useful information will be. Under federal and state rules, evidence which might be considered prejudicial will nevertheless be found to be admissible in evidence if it is “more probative than prejudicial.” "A similar balancing test should be applied by accounting and securities rulemakers in considering the types of required disclosures to support the needs of investors."

Boards who listened too closely to the advice of their attorney's may have been ignorant of potential risks but they can hardly be though blameless. We need to move from "don't ask, don't tell" to a careful weighing of the evidence and accounting standards that provide for more in the way of disclosure.

Whole Foods: Progress But Still a Lapdog Board

As I previously posted, Whole Foods Splits Positions, WFMI's shareowners are making progress. Now, I see from their SEC filing they did more than split CEO and Chair positions.

Additionally, our board of directors amended Article IX of our bylaws to provide that, in order for shareholders to approve an amendment to, or a Bylaw inconsistent with, certain bylaw provisions, the amendment or inconsistent Bylaw must be approved by the affirmative vote of a majority of the outstanding shares. This requirement applies to the advance notice bylaws, written consent procedures bylaws, vacancies bylaws, Article III, Section 1 of the Bylaws which pertains to the composition of the Board of Directors, Article VII of the Bylaws which pertains to indemnification, and Article IX of the Bylaws which pertains to bylaw amendments. Previously, the affirmative vote of 75% of the outstanding shares was required to amend, or adopt a Bylaw inconsistent with, those provisions.

That's great news. Leroy McDowell provided coverage of the change for Westlaw (Corporate Governance Watch: Activist Pushes Whole Foods Toward Simple Majority Voting, 12/29/09). McDowell attributes the change to be the result of "a longer standing shareholder proposal, submitted by the infamous John Chevedden." McDowell fails to note that Chevedden's last resolution on the topic won 57% support. Yet, the Board took no action until a few days ago.

Frustrated by the Board's inaction, I submitted a resolution for the 2010 annual meeting that calls on the Board to establish an independent board committee to meet with me and to obtain any additional information needed before presenting a recommendation to the full Board. Perhaps this pushed the Board to act. While I'm pleased with the move to split positions and do away with supermajority requirements, I'm not so pleased with the explanation offered in the SEC filing.

Whole Foods Market always has strived to maintain high corporate governance standards. In keeping with this goal, the Board added the Lead Director designation in 2000, and since that time, has shifted all of the responsibilities of the Chairman of the Board to the Lead Director. Despite this shift in responsibilities which has rendered the Chairman role to a mere title, the Company repeatedly has received proposals from corporate activists to separate the Chairman and CEO roles. To avoid unnecessary distraction and protect the Company’s corporate governance profile, Mr. Mackey believes giving up the Chairman title to be in the best interests of the Company and its stakeholders. (my emphasis)

From the language, it would appear that Whole Foods is making the changes, not because they believe in good governance but because they want to avoid unnecessary distraction. Additionally, although the changes were made by the Board, it is obvious Mr. Mackey was "the decider," as our former President would say. On his blog (12/29/09), Mr. Mackey writes, "Was I forced to give up the Chairman’s title? Absolutely not! Both the idea and the decision to give up the title were completely my own... At no time has anyone on the Board or in management ever asked me to give up the title."

As I indicate in my resolution to Form a Majority Vote Committee, WFMI's Lead Director, John Elstrott now Chairman, has been on the board for 14-years. That should be a red flag to shareowners. Back in 1996 the relatively conservative National Association of Corporate Directors, in its Report on Director Professionalism, called for term limits. The NACD suggested a term limit of between 10 and 15 years.

After about 10 years, most directors have been completely captured by the CEOs who brought them to the board and who decide their pay and perks. Long-term directors also get too comfortable. They are not generally innovating against themselves.

If Elstrott ever was independent, he should no longer be considered so. Additionally, three other directors are insider-related and 30% owned no stock. Shareowners should continue to push on directors to invest a substantial portion of their own wealth in the company (not through grants for board service but from their own savings) and should also push on them to act independently.

Mackey was ahead of most with his vision of a shift toward natural food and his adoption of decentralized decision-making, something of an experiment in workplace democracy. Team members meet regularly to decide everything from local suppliers to who should get hired. Democracy seems to have worked well for Whole Foods at the shop floor level. It is time the company also adopted more of a democratic approach with regard to the Board and its shareowners.

Directors From Failing Boards: A More Nuanced Approach

Gretchen Morgenson's What Iceberg? Just Glide to the Next Boardroom (12/26/09) tells of directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae and how many have moved on to other boardrooms. Morgenson's article implied that shareowners should vote them out at their new companies. In I Read Morgenson; Now What?, I tried to tell readers how to do just that. Paul Hodgson - Senior Research Associate with The Corporate Library offers up another approach. (Directors and Blame. Where does the fault lie?, 12/30/09)

Paul's is much more nuanced, pointing out that being a member of a failed board shouldn't necessarily brand one for life. "Fair enough, the two PACCAR directors who served on the Washington Mutual board (for 38 years) and the Countrywide board (for four years) are two among a total of 12 directors, but they must still be having some kind of effect. Is it a good one and was the 38 years at WaMu just a bad dream? Or is their service on a failed company board irrelevant. Or is it an advantage?"

His blog post seems to lead on that such experience could be an advantage if they learned from it, or a disadvantage if they were incriminated in the failure. He notes Peter Cohan's recommendation from Why American Corporate Governance is a Bust as adding a requirement or best practice that directors be required to "buy significant stakeholdings." If their wealth is tied to the company, they will be vigilant in protecting shareowners. Paul then asks, "Might they not be driven by the kind of impetus that drives executives with millions of stock options to book revenue that hasn’t been earned yet, to manipulate earnings, to artificially boost stock prices?"

He recognizes there is no single solution that will always apply but then concludes that at least an apology may be due. "It goes a long way when you are asking for forgiveness, and re-election is a form of forgiveness." In general, I agree with Peter Cohan and would like to see more directors with their wealth ties into the firm. Yes, that can lead to accounting gimmicks, but that why we should require that substantial holdings be long-term, extending even for some time after they have left the board.

I like Paul's call for apologies but even that is not so straightforward. What if these directors did everything they could to avoid trouble at Washington Mutual and Countrywide? Would they need to apologize for not convincing the rest of the board or for remaining on the board, instead of making a noisy exit?

One of the fundamental problems that shareowners have in monitoring boards is that boards are such a black box. We don't know who is responsible for what, other than by what committees they sit on.

Instead of an apology, or perhaps accompanied by one, directors should offer up an explanation of what went wrong, their role in it, and what lessons they learned.

The SEC's new disclosure requirements will mandate proxies include an evaluation of each nominee's “competence and character,” including the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director of the company. Such notice is also required to include a list of other directorships held by each director or nominee at any public company during the previous five years, rather than only current directorships. I would love to read, among these disclosures, explanations from candidates about their roles as directors and why we should elect them despite the taint that may come from such service. Will apologies and explanations be forthcoming?

While Weil, Gotshall & Manges put out an excellent briefing today SEC Disclosure and Corporate Governance (December 30, 2009) that goes over the disclosures and many other new requirements, I don't see any recommendations for apologies. "As a starting point, the nominating committee chair and company counsel should consider requesting updated CVs from each of the directors (some companies may choose to include additional questions in the D&O questionnaire). Companies should begin drafting this section of the proxy statement early since each director will likely take a keen interest and may have comments."

Keen interest indeed, as Paul Hodgson notes, "PACCAR coyly omits the WaMu and Countrywide service in its directors’ bios." Next year they can't. Will they include apologies or explanations? Maybe Michelle Leder will be the first to let us know at footnoted.org.

Top Ten for 2010

Ira M. Millstein, Holly J. Gregory and Rebecca C. Grapsas of Weil, Gotshal & Manges LLP offer up Ten Thoughts for Ordering Governance Relationships in 2010, including recommendations for boards, shareowners and regulators.

This Week in the Boardroom: 12/24/09 TK Kerstetter and Scott Cutler also addresses their Top 10 Board Issues for 2010. Response to one item from Kerstetter -- no, we haven't gone too far in requiring independent directors. Independent directors can certainly have expertise and can contribute the same value with less potential conflicts of interest.

Neither the top ten lists offer up anything earth shattering; both are well worth attention. See also How Socially Responsible Investors View Companies in 2010 from the GreenBiz Staff.

Fix the Boards - Fix the System

Money for Nothing: How the Failure of Corporate Boards Is Ruining American Business and Costing Us Trillions by John Gillespie and David Zweig begins with a story familiar to just about everyone on the globe -- corporate and economic collapse brought on by greedy CEOs. The authors look behind the headlines to reveal and document the systematic failure of corporate boards who are supposed to look out for shareowner interests but are still too often picked by the very ones they are supposed to advise and monitor... the CEOs.

They discuss how companies spend enormous sums of shareholder money to fight off reforms, either directly or through organizations like the US Chamber of Commerce or the Business Roundtable. According to the authors, "corporate boards remain the weakest link in our free enterprise system."

A brief overview is provided on how we got here and what it means for shareowners and society. Much of the book is given over to example after example of conflicts of interest, overlapping boards, and a world driven by the greed and status needs of CEOs. Studies have shown that 80% of acquisitions fail to deliver and many fail outright. Too often they are driven by incentives that reward empire building over the generation of profits.

Jennifer Lerner, the only psychologist on the faculty of Harvard's Kennedy School of Government, finds that "Americans tend to exhibit anger more readily than those in many other cultures, and the effects of being in power closely resemble those of being angry." CEOs and other executives, it turns out, have substantially larger appetites for risk and are more optimistic about outcomes. Changing the context can improve outcomes, especially where the environment demands "predecisional accountability to an audience with unknown views." In the case of corporations, that would be a diverse independent board, not predictable lapdogs of management.

Later chapters review "The Myth of Shareholders' Rights" and other issues, including proxy mechanics that allow moving shares to be voted multiple times based on the "day of record," when large blocks of stocks may be most likely to have several different owners. They document that not only do shareowners have little power, the gatekeepers and guardians paid to protect shareowner interests are almost always conflicted, leading to de facto control by management. At the same time, laws like the "business judgment rule" make it nearly impossible to hold fiduciaries accountable. Pension assets that are turned over to plan managers who provide kickbacks back to corporations earned 29% lower returns, according to a cited 2009 GAO report. The failures documented by Gillespie and Zweig cost investors and the public trillions, bringing the world economy to its knees.

It is time boards stopped being the CEOs friend and instead took on the role of the CEO's boss. After a thorough examination of the issues, documented with an abundance of real-life examples, Gillespie and Zweig close with a list of recommendations that could go far in changing the culture of the boardroom, strengthening accountability, reducing conflicts of interest, and getting shareowners involved. In a very abbreviated form:

• Create a new class of public directors and a training consortium
• Insist of gender, ethnic, and perceptual diversity
• Limit directors to three or fewer boards and require substantial "skin in the game"
• Initiate more communication between directors and shareowners
• Split chair/CEO roles & learn lessons from nonprofits
• Allow 10% of shareowners to call an extraordinary general meeting
• Add clout to say-on-pay, reform executive compensation, and shareholder approval of golden parachutes
• Ban staggered boards and require majority votes elections
• Proxy access for shareowners, daylight nominating & election processes, & require real board evaluations
• Require board risk committees & empower boards to gather independent information
• End conflict of interest in mutual fund voting by allowing third party voters per Investor Suffrage Movement
• Reform voting mechanics to end manipulation by management
• Reform auditor business model & Fix "up the ladder" provision of SOX
• Reform rating agency model, fully disclose lobbyist expenses, provide real funding for SEC enforcement
• Federalize corporate law
• Better coverage of governance issues by the financial media
• Better financial education, including how corporate governance works

Gillespie and Zweig hit all the bases for a solid home run. They tell us how the game is fixed and how the rules can be changed to play fair. After all, shareowners own the "ball" and all the other equipment. Will we listen? Even more importantly, will we act?

Corporate Governance Idol

We're all critics now with TV shows like American Idol, So You Think You Can Dance?, Project Runway, Top Chef, etc. Stephen Marche calls out an important trend in Is "American Idol" Holding America Together? (Esquire, 01/10) Here are a few snippets:

The sense of entitlement to judge everyone and everything, all day and every day, feeds and fuels our pop-culture appetite, and it finds its broadest, most democratic expression in the "Idol" format... a mass of contestants, a group of gatekeepers, and a victor chosen by popular vote.

We watch for the judges, not the judged, and to listen to their instruction for the next generation of talent... Who would have thought that Simon Cowell rather than some Nobel prize winner would be the one bringing Americans together?

Last March I heard Nell Minow on Intelligence Squared... a good show that could be even better with more focus. Here's an idea for Gary Lutin's Shareholder Forum, the Investor Suffrage Movement, Moxy Vote or Broadridge Communications -- prior to the annual meeting hold a debate between resolution proponents and corporate representatives. Or, pit the Chamber of Commerce against The Corporate Library, the Business Roundtable against the Council of Institutional Investors. Have a panel of academics, knowledgeable on the subject critic presentations, provide their votes and their reasons -- then give verified shareowners and the general public an opportunity to vote on the resolutions.

At first, such a show is unlikely to take top billing on YouTube or some other media but over time it has the potential to become popular. After all, Exxon Mobil's policies impact us all a lot more than the next great vocal performer. Shouldn't viewers be more excited about the opportunity to influence an outcome that can actually impact them? Change corporations, save the habitable Earth.

Corporate Governance Idol or whatever it is called could provide investors with an education they are unlikely to find at American Association of Individual Investors or other sites that focus on stock picking, rather than share owning. While the SEC's educational efforts aim at consumer protection, CorpGov Idol would aim at empowering investors to take ownership of their corporations, educating them on issues that are likely to apply to other companies as well... issues like splitting the chair/CEO positions, annual elections, majority vote, threshold for a special meeting, more disclosure of potential environmental liabilities and how they will be addressed.

It will be interesting to see if shareowners vote differently than the general public. It would also be interesting to identify trends over time as issues are more fully explored and participants are educated. Could Andrew Shapiro, Richard Breeden, or John Chevedden be the next American Idol. Tune in next week to find out and don't forget to vote.

I Read Morgenson; Now What?

Gretchen Morgenson's What Iceberg? Just Glide to the Next Boardroom (12/26/09) tells of directors who were supposedly minding the store as disaster struck at companies like Countrywide Financial, Washington Mutual or Fannie Mae and how many have moved on to other boardrooms. For example, Thomas P. Gerrity was a board member of Fannie Mae from 1991 to 2006 and is now on the board of Sunoco.

After going through a litany of such directors, Morgenson notes that "because of the way director elections are structured, board members can win their seats if they receive just one vote of support." While that is still true at most companies, at 2/3 the S&P 500 and many others directors must offer their resignation if they don't get a majority of share votes. Of course, boards can reject such resignations. Even if they are accepted, the board can simply replace Tweedledum with Tweedledee.

"Shareholders interested in ousting a director or two must mount an expensive proxy fight," writes Morgenson. The SEC will probably adopt a mild form of proxy access in 2010, which will allow a few directors to be nominated by very large shareowners or groups beginning in about 2011. Other solutions offered up include: instituting term limits for directors, separating the roles of board chairman and chief executive, and allowing shareowner groups holding 10% a company's to call special meetings where we can throw tainted directors out.

So, what should the average retail investor do with this information? If you have a pension plan or own mutual funds, see how they are voting. You can either do this by:

• going to the fund's individual site and searching for their proxy voting record and policies or
• going to FundVotes or ProxyDemocracy. Here you can quickly see if your fund actively votes against directors, votes in favor of corporate governance measures (term limits, split CEO/chair, 10% threshold) or see if your fund is basically a lapdog... always voting with management.

Once you get a look at how your funds are voting, you may want to either switch to other funds that take their fiduciary duties to vote seriously or you may want to write them a letter or e-mail suggesting they support measures such as those mentioned by Morgenson.

If you own stocks you should be exercising your right to vote. Think your votes don't count? Think again. Read On2 Adjourns Meeting on Google, Solicits More Votes, where the ProxyDemocracy Blog discusses the impact of Moxy Vote, the proxy-voting platform for individual investors. Management has extended the voting deadline twice, in part because ballots representing 18.9 million On2 shares, or 11% of those outstanding, were cast through the Moxy Vote Web site. Under e-proxy rules, up to 95% of retail shareowners are simply clicking delete. In such circumstances, your one vote can basically have the power of twenty! Apathy may make you stronger as an individual voter, but since we also need to overcome the apathy of all those lapdog funds, we need to mobilize retail shareowners.

If you have some time and want to put in some effort, check out our proxy voting and research links. If you just want to "do the right thing" and are willing to trust funds and advisors, check out the following three resources and copy from your trusted brand:

1. TransparentDemocracy.org not only offers advice from various sources on proxy voting but also voting in civic elections. They are just getting started, so one of the problems is that you are likely to find yourself looking up a company but finding no advice.
2. ProxyDemocracy.org has been around the longest and reports on advanced voting by some huge funds like CalSTRS, CalPERS, and Florida SBA, as well as SRI/CSR funds like AFSCME Employees Pension Plan, Calvert, CBIS, Domini, Green Century, MMA Praxis and Trillium Asset Management. Go to this site a week before the deadline and you'll probably be able to see how several funds are voting. In fact, you can tell them what stocks you own and they will notify you by e-mail when they know how funds are voting.
3. MoxyVote.com is the newest site. Again, you'll probably find they won't have advocates offering advice on many of the stocks you own at this point. However, a handy feature is that you can actually vote your stock through their platform and they keep track of votes cast. You can either manually enter the control number sent by your broker or you can link your brokerage account directly.

Now that you know how to be a responsible owner of stocks by voting your proxies, you should also consider signing up at Shareowners.org to network with like-minded shareowners. You'll get some news, intelligent discussion and they'll help you prod elected officials. It is critically important to work to reform corporations as well as they government, since corporate managers have so much influence over both.

Also sign up at the Investor Suffrage Movement. Volunteer to be a "field agent. You could save an activist shareowner hundreds of dollars in travel expenses by simply standing up at an annual meeting near you and reading a prepared statement in support of a shareowner resolution, like one calling for shareowners representing 10% of a company's stock being able to hold a special meeting. If you want to get further involved, this is the place... from t-shirts to building a proxy exchange database.

Last, keep up with the news at CorpGov.net. We're moving much of the news to a blog format by the beginning of 2010, so you'll be able to subscribe through RSS or via e-mail and each news item will finally have its own URL... so important to many of you who would like to link to our coverage and comments.

Moving Toward Democracy

Andrea Bonime-Blanc and Mark Brzezinski, writing for the NYTimes (Business and the Way of Democracy, 12/26/09) argue "Much like transitions to democracy over the past four decades transformed governments from mostly authoritarian to mostly democratic, we are currently witnessing a transformation of global corporations from a more or less opaque shareholder-centric model to a more transparent multi-stakeholder model."

According to Bonime-Blanc and Brzezinski, companies are embracing five trends:

1. Adopting better governance with stronger shareholder rights, board rules, director accountability and pay for performance.
2. Integrating corporate integrity programs into business strategy and leadership development.
3. Pursuing dialogue with multiple and increasingly vocal stakeholders.
4. Engaging proactively with regulators intent on trans-border cooperation and enforcement (especially regarding anti-corruption, anti-money laundering, antitrust and anti-fraud).
5. Catering to two critical constituents — employees and customers — who have shown greater willingness, and ability, to “vote with their feet.

CEO Greed Doesn't Work for Shareowners

"Firms that pay their CEOs in the top ten percent of pay earn negative abnormal returns over the next five years of approximately -13%. The effect is stronger for CEOs who receive higher incentive pay relative to their peers. Our results are consistent with high-pay induced CEO overconfidence and investor overreaction towards firms with high paid CEOs." That was the conclusion of Performance for pay? The relationship between CEO incentive compensation and future stock price performance by Cooper, Gulen, and Rau... one of two studies highlighted in Does Golden Pay for the CEOs Sink Stocks? (Jason Zweig, WSJ, 12/26/09).

According to Rau, CEOs in his study averaged $23 million—but leave their shareholders poorer (relative to other companies in the same industry) by an average of $2.4 billion per year. Each dollar that goes into the CEO's pocket appears to take $100 out of shareholders' pockets. If that is true, there is obviously something very very wrong with the typical incentive structure.

The CEO Pay Slice by Bebchuk, Cremers, and Peyer investigated the fraction of the aggregate compensation of the top-five executive team captured by the CEO – and the value, performance, and behavior of public firms. They found "CPS is negatively associated with firm value as measured by industry- adjusted Tobin's Q." CPS is found to be correlated with

1. lower (industry-adjusted) accounting profitability,
2. lower stock returns accompanying acquisitions announced by the firm and higher likelihood of a negative stock return accompanying such announcements,
3. higher odds of the CEO’s receiving a “lucky” option grant at the lowest price of the month,
4. greater tendency to reward the CEO for luck due to positive industry-wide shocks,
5. lower performance sensitivity of CEO turnover,
6. lower firm-specific variability of stock returns over time, and
7. lower stock market returns accompanying the filing of proxy statements for periods where CPS increases.

Zweig's article goes on to cite Benjamin Graham's 1951 recommendation that directors "must have an arm's-length relationship with management; they also should combine "good character and general business ability" with "substantial stock ownership." (They should have purchased most of their shares outright rather than getting them through option grants.)" He also notes that Graham called to independent directors to publish a separate annual report analyzing whether the business is "showing the results for the outside stockholder which could be expected of it under proper management."

Each month I take readers on a time trip in CorpGov.net's "WayBack Machine," to see what we were discussing 5 and 10 years ago. It is interesting to see how often we are grappling with the same issues. If we had only listened to Graham 58 years ago, how different would corporate governance be today? While we can't change the past, we can at least work to ensure CEO pay is better aligned long-term shareowner value in the future.

Service Employees International Union (SEIU) Master Trust launched a campaign recently, mostly aimed at banks, proposing the following reforms:

• Requiring that at least 80 percent of an executive’s annual compensation be subject to multi-year vesting and/or holding periods;
• Requiring executives and directors to hold a significant equity stake in the company and basing that stake on the value of the executive’s annual compensation package;
• Making the timing of the equity awards predictable so shareowners know by the annual meeting date the total compensation level awarded to the executive team in the previous year;
• Enacting effective clawback provisions that call for the automatic return of any bonus or incentive compensation awarded on the basis of financial results that subsequently required restatement;
• Requiring a substantial portion of annual cash and/or equity bonuses to be held until performance criteria are achieved;
• Making retention grants conditional upon executives remaining with the company;
• Prohibiting executives and directors from engaging in any hedging, derivative or other transactions with respect to equity-based awards granted as incentive compensation;
• Placing restrictions on severance payments, death/disability payments, compensation related to changes in control and perquisites;
• Forming a shareowner advisory committee to advise the board and the compensation committee on executive and director compensation;
• Allowing shareowners to cast an annual advisory vote on executive compensation;
• Including in proxy statements information about the steps being taken to align compensation with long- term incentives, to avoid incentives that promote undue risk taking and to prevent windfalls where there is no long-term shareowner gain;
• Requiring that at least three independent directors serve on the compensation committee;
• Prohibiting compensation committee directors from serving on the audit committee; and
• Adopting bylaws that allow shareowners to place director candidates on corporate ballots subject to certain conditions.

These seem like a good start. However, the devil is in the details. For example, requiring 80% of an exec’s annual compensation be subject to multi-year vesting and/or holding periods... getting 80% two years later meets that vague definition but certainly doesn't meet criteria that would dissuade CEOs from gaming the system. Certainly, much more needs to be done in this area. RiskMetrics made an important change to their policy for 2010 by assessing the alignment of CEO’s total direct compensation and total shareholder return over a period of at least five years.

More discussion at How to Tie Equity Pay to Long-Term Performance, HBR, 6/24/09; Executive Compensation, Ethicsworld.org; Are senior executives worth what they are paid? Steven N. Kaplan vs Nell Minow, The Economist, 10/28/09.

CII Supports SEC Effort to Increase Potential Liability at Credit Rating Agencies

The SEC is considering a proposal to rescind an exemption that would cause Nationally Recognized Statistical Rating Organizations to be included in the liability scheme for experts set forth in Section 11, as is currently the case for credit rating agencies that are not NRSROs.

NRSROs "have generally escaped accountability for their shoddy performance and poorly managed conflicts of interest, at least in part because of their statutory exemption from liability. Rule 436(g) shields only those few rating agencies designated as NRSROs from liability as experts for making untrue or misleading statements when their ratings are included in registration statements," according to the Council of Institutional Investors. CII believes effective reform of the credit ratings industry hinges on the following steps:

• Enhanced SEC oversight
• Reduced reliance on ratings by all market participants
• Strengthened internal controls of NRSROs
• Expanded transparency of credit ratings
• Heightened standards of accountability for NRSROs

See CII's letter to the SEC in support of Concept Release on Possible Rescission of Rule 436(g) Under the Securities Act (File Number: S7-25-09) (see also Concept Release No. 33-9071A). SEC Fact Sheet. Speech by Commissioner Luis A. Aguilar.

Whole Foods Splits Positions

Whole Foods Market Inc. said co-founder and Chief Executive John Mackey has given up the title of chairman in order to conform with current standards for good corporate governance. As of last spring, about 37% of companies in the Standard & Poor's 500 stock index had separate chairmen and CEOs, up from 22% in 2002, according to the Corporate Library, a research firm in Portland, Maine. (Whole Foods CEO Gives Up Chairman's Post, WSJ, 12/24/09)

Both the Conference Board's Commission on Public Trust and Private Enterprise and the Council of Institutional Investors have long recommended roles of the CEO and Chairman be split to ensure an appropriate balance of power.

CEOs who retain the dual role make it extremely difficult to challenge a powerful chief executive if necessary to protect shareowner interests. When I approached WFMI on this issue several years ago, independent directors didn't even routinely hold meetings without the CEO present. and be “more likely to have certain troubling governance characteristics than companies where the roles are separated.”

Spearheading the reform effort is the Chairmen’s Forum, an organization of independent chairs convened by The Millstein Center for Corporate Governance and Performance at the Yale School of Management. Last spring, Mary Schapiro told the Council of Institutional Investors that the SEC is “considering whether boards should disclose to shareholders their reasons for choosing their particular leadership structure – whether that structure includes an independent chair, a non-independent chair, or a combined CEO/chair.” If such a requirement goes through, expect withhold votes for directors at companies that provide poor explanations of why they haven't split the roles.

As an activist shareowner of WFMI, I've been after them for years to make this change. I'm under no delusion that Mackey is now under the thumb of the board chair. I'm sure he remains the driving force behind WFMI. However, given his track record of blunders like faking his identity on blogs and denying shareowners the right to present resolutions during the business portion of the annual meeting, at least he now has a better chance of not making a mockery of WFMI's shareowners. The content of Mr. Mackey's online postings were directly at odds with the Company's core values of transparency and stewardship. His refusal to allow shareowner resolution proponents an opportunity to speak during the normal business portion of an annual meeting, even though SEC Rule 14a-8(h)(3) requires that a proponent or representative of a resolution contained in the company proxy must present their proposal, also conflicted with our Company's "Declaration of Interdependence," which "requires listening compassionately, thinking carefully and acting with integrity."

According to Richard Bernstein, chief U.S. strategist at Merrill Lynch, companies in the top 100 of the S&P 500 with split chairman and CEO outperformed those that combine the roles during the last decade. Corporations with split roles posted a 22% annual return since 1994, outpacing the 18% return earned by firms that did not. WFMI is a great company that could be even better if it took the role of shareowners as seriously it does that of customers and employees. Splitting the roles of CEO and chair is a good sign attitudes may be changing. Instead of viewing participation by shareowners as creating a circus atmosphere, as Mackey has characterized it in the past, maybe now we will see real dialogue that will increase long-term value.

How Politics Shaped the Political Economy of Global Finance

The Political Economy of Global Finance Capital by Richard Deeg and Mary O'Sullivan review 6 influential books on the topic in light of the recent financial crisis.

The most important developments highlighted:

• the move from a predominant focus on state-centered patterns of regulation to a more comprehensive understanding of the role of states and private actors in building a transnational governance regime that mixes public and private regulation;
• the intensified effort to understand the causal forces that shape the political economy of global finance based on more complex models that allow for an interaction among interests, institutions and ideas; and
• increased attention to new sources of systemic risk in the global financial system, as well as a greater consideration of the consequences for domestic politics of interactions with the global financial system.

They argue that we must do more to understand the behavior of actors who enact the rules of global finance, not just those who generate the rules. More must be done to assess the costs and benefits of financialization at the global and national levels.

Some interesting points highlighted:

• The financial crisis emanated not from the periphery but from the very core of the system.
• Facilitated flows from poor countries to rich countries, rather than the historically opposite direction.
• Coordinated market economies that rely on welfare production regimes for promoting and protecting the investment by firms in skill sets and specific assets may have a competitive advantage with financial globalization, the opposite of conventional thinking.
• These protections inhibit convergence in corporate governance.
• Financialization, where maximization of short-term shareowner value through dashboard metrics, has compromised the interests of other stakeholders and corrodes the coordinated system of capitalism.
• Extraordinary incentives contributed to willingness to pursue aggressive strategies without due attention to risks.

How is it that false illusions were conferred sufficient legitimacy to deafen alternative views and stymie reform? In our thinking, a lot may come down to the power held by CEOs and their organizations like the Business Roundtable and the Chamber of Commerce. They can spend shareowner money like there is no tomorrow in defending a system that still gives CEOs virtually dictatorial power. On the other side, institutional investors are held to fiduciary duties that limit such lobbying efforts, even by the few that don't have direct conflicts of interests, such as in trying to attract those 401(k) accounts from CEOs.

Happy Holidays: More, More, More: Gifts For the CEO Who Has Everything (clip from Nightly Business Report via The Corporate Library Blog, 12/24/09)

CorpGov Bites

Check out the CorpGov Blog, a work in progress. After years of demands that we have indexed articles, an RSS feed and other advantages of blogs, we're finally beginning to adapt. With our 15th anniversary coming up in 2010, maybe it is time to join the 21st century. Your feedback is appreciated, either via e-mail or through your comments on the blog. I'm still not sure about the look, how it should be organized, how to maintain the number one search status we've had on the term "corporate governance" since before google, how to change the URL from http://corpgo.fatcow.com/wordpress to http://corpgov.net, how to add an e-mail subscribe function, etc., etc. Your suggestions, especially when accompanied with instructions, are more than welcome.

WorldBlu discusses How to Democratize Corporate Ownership, using Equal Exchange as an example of a for-profit Fair Trade company in the US that owned and governed by employees on a one-person/one-share/one-vote basis.

Faith and finance: Of greed and creed (FT, 12/23/09) explores the morals of the financial sector. Was it a "greedy focus on the short term?" Others cite a diminished a sense of responsibility, allowing personal and institutional self-interest to overshadow customer service and risk management. "The root problem, Lord Turner, free-thinking chairman of the Financial Services Authority, the UK industry regulator, famously said this summer, is that too much business over the past decade has been 'socially useless.'" The article reports mixed responses as to lessons learned.

I would ask, just how useful is the entire financial sector? As Simon Johnson discussed in The Quiet Coup (theAtlantic, May 2009) "From 1973 to 1985, the financial sector never earned more than 16 percent of domestic corporate profits. In 1986, that figure reached 19 percent. In the 1990s, it oscillated between 21 percent and 30 percent, higher than it had ever been in the postwar period. This decade, it reached 41 percent. Pay rose just as dramatically. From 1948 to 1982, average compensation in the financial sector ranged between 99 percent and 108 percent of the average for all domestic private industries. From 1983, it shot upward, reaching 181 percent in 2007."

A new report from Ceres and Mercer, Energy efficiency and real estate: Opportunities for investors, identifies efficiency as a significant front in mitigating climate change, and recommends that investors focus on efficiency measures in their real estate holdings. The report recommends that as a first step, investors launch energy efficiency initiatives by developing benchmarks and then create achievable targets in the implementation of projects. (Investing in Energy-Efficient Buildings Can Reduce Emissions While Strengthening Portfolios, Sustainability Investment News, 12/24/09)

A study by Pascual Berrone and Russell Reynolds Associates of Spainish companies found 60% of board chairs said institutional investors exercised little or no involvement in corporate governance. (The Need for Investors to Wield More Board Influence, IESE Insight) How different is it elsewhere?

“Everybody who works with retirement plans should presume that they will owe a fiduciary duty or they will owe a duty for loyalty to those who they service,” says Matthew Hutcheson, an independent pension fiduciary quoted in Coming soon: Broader definition of fiduciary under ERISA (InvestmentNews, 12/23/09). “Brokers who haven't viewed themselves as fiduciaries need to ask what they might need to do differently.”

The common statement that the world was becoming flat was questioned at the Global Ethics Forum held at the UNOG-United Nations Office at Geneva. In our many problems of poverty, environment, Ponzi schemes, growing income gaps – speakers emphasized how civil society had lost confidence in business and in its leaders.

Overcoming Short-termism: The Key Issue

Gary Larkin, who blogs for the Conference Board, did a great interview Q&A With Martin Lipton and Richard Ferlauto: Short-termism. (12/09/09) Here's a snippet on the question, Do you think short-termism played a role in the destruction of long-term shareholder value:

Lipton: Absolutely. Short-termism resulted in financial services companies taking undue risk, more so than in the past. They created more and more leverage. Businesses were generally borrowing on a short-term basis and subjected themselves to a liquidity crisis. Monetary policy created historically low interest rates and too many companies did not resist the “bargain.”

Ferlauto: The time horizons and its parallel investment orientation may be the most fundamental question that investors — especially fiduciaries for retirement funds — face today. Too many investors till think that they are better off with “Make the money and get out [of the market]’ or ‘Make the money now and not care about its longer term repercussions.’ You’re eating your seed corn for short term gains. Many firms are not competitive now because they didn’t make the investments in technology, human resources or internal development that in the long run contributes to wealth creation for shareowners and other stakeholders.

I found it interesting that it is the conservative, Lipton, who sees the solution in direct action by the federal government, while Ferlauto appeals to issuers to work more closely with their shareowners... although in the end Ferlauto also sees intervention by the federal government as necessary, since individual companies aren't willing to break out of the model on their own.

Harrington Files Resolution at Goldman Sachs (updated 12/21/09)

Goldman Sachs announced that its 30-member Management Committee will receive equity instead of cash bonuses and will allow shareowners to vote on executive compensation in 2010. Paul Hodgson of The Corporate Library offers up a good rant on how we shouldn't be fooled.

John Harrington, President and CEO of Harrington Investments, filed a shareowner resolution that addresses executive compensation at Goldman Sachs by requiring at least require the top management to hold on to their stock positions after retirement, adding an incentive to create a more long-term outlook for the company and benefit shareholders. According to Harrington, "In the absence of a requirement to hold on to the shares after retirement, the executives will have continued incentives to manipulate short-term profits once their ability to sell bonus shares ripens.” (Will Goldman’s New Bonus Policy Continue to Encourage Short-Termism?, Sustainability Investment News, 12/17/09)

A close look at the resolution reveals top managers would be required to "retain 75% of the shares acquired through the Company's compensation plans, excluding tax-deferred retirement plans, for at least three years from the termination of their employment." It further calls for more meaningful links between these rewards and the company’s long-term performance, "rather than to performance of the stock market as a whole."

In support of "hold past retirement" policies, Harrington cites the Aspen Principles, endorsed by the Chamber of Commerce, Business Roundtable and the Council of Institutional Investors, which recommends that "senior executives hold a significant portion of their equity-based compensation for a period beyond their tenure."

I know the AFL-CIO submitted similar resolutions during the last proxy season to at lease AIG, where it got 28% support, and Bank of New York Mellon, where it got 30% of the vote. According to Jesse Brill:

Holding equity compensation through retirement is perhaps the single most important—and fundamental - fix to getting executive compensation back on track because it also addresses all the past outstanding excessive option and restricted stock grants. And, by requiring CEOs to keep their skin in the game for the long term, it will go a long way to restoring public trust in our companies and our market, which is so important to restoring stability to the markets.

Needless to say, the fundamental hold-through-retirement fix should apply to all companies - not just TARP financial institutions—and can be adopted at the same time that Congress adopts say-on-pay legislation (if such legislation is adopted). (It will have much greater impact and do more good than say-on-pay.)

Brill notes that when Warren Buffett bought into Goldman Sachs under the terms of agreement with Berkshire Hathaway, Goldman’s CEO, CFO and co-Presidents (as well as their families and their estates) must not sell more than 10 percent of all the common stock they own until the earlier of October 1, 2011 or until Berkshire redeems its $5 billion in preferred stock. In his Nov-Dec/2008 newsletter, The Corporate Executive, is warns subscribers, "Now is the time for companies to consider how to “get ahead” of this issue in time to implement policies that can be discussed in the 2009 CD&A." See also CompensationStandards.com.

If it it good enough for Warren Buffet, why aren't hold through retirement provisions being demanded by all shareowners? (Note: the publisher of CorpGov.net's portfolio includes shares on Goldman Sachs.)

Update: TheStreet.com reports that it may have been shareowner resolutions from the Nathan Cummings Foundation and the Benedictine Sisters of Mt. Angel, Oregon urging its Board of Directors to review pay disparity and the appropriateness of its compensation packages that led to the pay changes for top execs at Goldman. "It was kind of a brilliant move on the company's part to deflect the focus," said Sister Judy Byron. "The absolute compensation levels remain the same, and that is really what has angered so many people in the first place." (Goldman, Catholic Nuns Discuss Compensation, 12/21/09)

SEC Adopts New Disclosure Requirements

Beginning Feb. 28, 2010, the new rules will require quicker reporting of proxy voting results and will improve corporate disclosure regarding risk, compensation and corporate governance matters concerning:

• Director and Director Nominee Qualifications and Experience
• Other Directorships and Legal Proceedings
• Diversity Consideration in the Nomination Process
• Leadership Structure and Rationale
• Board Role in Risk Oversight
• Compensation Policies and Practices as Related to Risk Management
• Valuation of Equity Awards
• Fees Paid to Compensation Consultants and Potential Conflicts

See Weil Briefing issued 12/17/09. SEC press release, 12/16/09.

Recent SSRN Reports

Local institutions serve as more effective monitors of corporate behavior because monitoring costs vary inversely with distance. (Distance Matters! Shareholder Proximity and Corporate Policies)

Proposals submitted by institutions or coordinated shareholder groups gain stronger support than those submitted by individuals and religious groups. Targeted firms are more willing and more likely to reach agreements with institutional investors so as for the activists to withdraw their proposals. (An Empirical Analysis of Canadian Shareholder Proposals)

Shareholder Voting and Corporate Governance surveys major research developments in the area of shareholder voting, including:

• Studies on the design and conduct of corporate elections.
• Cross-sectional studies of voting in elections of corporate directors.
• Studies of vote-buying, vote-lending, and other strategies related to the decoupling of voting rights from cash flow rights.
• Studies on voting on various aspects of executive compensation.
• Shareholder activism.

Using BNP Paribas and AIG as examples, When 'Good' Corporate Governance Makes 'Bad' (Financial) Firms: The Global Crisis and the Limits of Private Law, makes the counter-intuitive argument that, insofar as "good" corporate governance made directors and managers responsive to the shareholders' interest, it may have caused those same directors and managers to take on unsustainable risk so as to increase current profits and support the public stock price valuation. "Good" corporate governance is not really a solution to remedying or protecting against the next Crisis. The answer may be long-term, systemic risk-regarding, prudential regulation.

Critical Corporate Governance and the Demise of the Ultra Vires Doctrine finds the demise of ultra vires is indicative of a bias in company law and government policy in favour of an elite group of controlling shareholders.

With creation of the “New Market and Governance Levels I and II”, Brazil became a unique country for corporate governance studies. Corporate Governance and Volatility in the Capital Markets: Brazil Case Study compared companies that formally adopt good practices of corporate governance from those that don’t and found:

• higher levels of governance had positive effect in the reduction of the short and long term volatility;
• the volatility of the companies with the worst practices of corporate governance seems to be more reactive to the market;
• the persistence of the volatility of the companies with good practices is higher than that of the companies with worse practices;
• the convergence speed of the volatility of the companies with good practices is lower than that of the companies with worse practices; and
• the presence of information asymmetry or leverage effect in companies with worse practices of corporate governance and absence in companies with better practices of governance.

The political interests of the managers who spend the corporate money may diverge from the political interests of shareholders who provided the funding. British companies must seek permission from shareholders to make political expenditures under the Political Parties, Elections and Referendums Act of 2000 and must report such spending to U.K. shareholders on an annual basis. Shareholders in U.S. companies have some protections limiting the amount of money that could be spent in federal elections by corporations, unions and banks through corporate political action committees (PAC's). These are under attack. Large corporate political expenditures are linked with lower shareholder value and poor corporate management. Corporate Political Spending & Shareholders’ Rights: Why the U.S. Should Adopt the British Approach argues adopting the British approach would improve corporate governance and minimize corporate risk. The need for this reform has become heightened with the Supreme Court’s re-argument of Citizens United and the possibility that the ability of managers to spend corporate treasury funds will expanded markedly. In a world where corporations can spend an unlimited amount corporate treasury funds on federal and state elections, shareholders will need new protections to guard against self-interested political spending by corporate managers.

We Don't Give a Shit

Hat tip to SIF member Cliff Feigenbaum of GreenMoney Journal for pointing us in the direction of some fun Friday humor - a video parody about Wormwood Bayne, the stock fund for socially irresponsible investors.

Not as funny but along the same check out a theatre project from Belgium did. They set up a fake “unethical bank” and invited people from off the street to sit through marketing pitches on different investment funds specializing in weapons, child labor, etc.; the footage of consumer reactions is great. The controversial “bank” caused quite a stir in the media, prompting the banking regulatory agency to order the bank to be shut down. Hat tip to SIF member Michelle Chan, Friends of the Earth, for bringing to our attention.

The Role of Corporate Boards in Creating the Financial Crisis

"A corporate board is a bit like a Roach Motel: once people are invited in, they seldom choose to check out." Neil A. O’Hara's article, Asleep at the Switch?: Corporate Boards' Culpability in the 2008 Financial Crisis offers several ways boards contributed to the crisis, aside from widely discussed cronyism.

• Many directors act as advisors to the CEO, not as monitors.
• More directors are/were themselves CEOs, rather than monitors, like lawyers and accountants,
• Personal liability protections offered under the business judgment rule allow directors to get away with asking questions and depending on the CEO for answers, even though the answers may be false.
• CEOs still retain considerable influence over which "independent" directors nominees are chosen.
• The legal definition of "independence" doesn't preclude insiders.
• Too few directors see themselves primarily representing shareowners.
• Many directors don't know the business, especially collateralized debt obligations, credit default swaps, etc.
• Statistical estimates disguise the effect of worst-case scenarios by assigning a low probability to tail events.
• Quantification of risk can hide poorly grounded assumptions.
• Pay for performance generated speculative excess... upside but litte downside.
• Directors may have catered to mutual funds with short time horizons, instead of pension funds.
• "Me first," attitude pervades the culture.
• Directors focused too much on short-term shareowners, not employees, communities and other stakeholders.
• Failure to take a long-term perspective appears key.

Collective Stupidity Defense

Thanks to Broc Romanek for giving me a heads up on Kevin LaCroix's D&O Diary Blog -- Will Their "Collective Stupidity" Spare Subprime Officials from Liability? XL Capital CEO Michael McGavick invoked the defense that "being collectively stupid is not a basis for a lawsuit." However, LaCrioix talleys the numbers: "Clearly, the plaintiffs’ lawyers perceive what McGavick characterized as "collective stupidity" to be a litigation opportunity." His article provides a

Global Perspectives on Corporate Governance and CSR

Edited by Güler Aras and David Crowther, Global Perspectives on Corporate Governance and CSR is a vital exploration of issues around the possibility of developing theories and practice aimed at good corporate governance and good corporate behavior.

In the opening essays, the editors slice and dice the topics several different ways. They look at governance from the perspective of top down, consensusual, networks and markets. Eight principles are reviewed: transparency, rule of law, participation, responsiveness, equity, efficiency and effectiveness, sustainability, and accountability. Systems analyzed include Anglo-Saxon, Latin, and Ottoman models. Then they discuss the overlap with corporate social responsibility of concepts such as transparency, accountability, responsibility and fairness. The rules versus principles debate, the divorce between owners and managers, risk and rewards are weighed.

Moving on to CSR, they discuss roots in Robert Owen, stakeholder theory, the ever changing semiotic nature of assumed understanding, especially with regard to terms like sustainability. A typology is proposed, moving from window dressing to cost containment, stakeholder engagement, measurement/reporting, sustainability, transparency and finally to accountability, reflecting increased maturity not unlike Maslow's hierarchy of needs.

These variables, concerns and framework are then again parsed by country and culture, as understood in an increasingly global environment. Sustainability is discussed as a moving target. No longer merely concerned with the financial resources of the firm but all the physical resources of the planet. Good financial and environmental performance in the present is an investment in the future of the company. There is no dichotomy, since the concepts conflate into one concern. A global framework is in the making and diverse cultures each have something to offer.

The bulk of the book is then broken down into three parts, representing regional, local and then theoretical perspectives. We more from Europe to Japan, Latin America to Africa -- then on to evolution in developing countries, state enterprises, family firms and the use of technology in advancing corporate governance. One finding is similar reform efforts being undertaken in many countries aimed at increased investor protection, transparency, accountability and professional board work. Convergence is also seen in Japan, where the traditional stakeholder model may be evolving to more North American models. Similarly in Africa, a hybrid approach is developing that integrates western style models with pragmatic developmental needs, contributing to an economic democracy that may some day direct and control corporations for the common good.

The book concludes with chapters which attempt to integrate current knowledge into theory. Kurt Strasser looks at problems associated with layers of legally separate corporations, subsidiaries, and calls for a more holistic "enterprise" analysis to get around current legal formalities. Thomas Clarke and Alice Klettner support Robert Hinkley's 28 Words to Redefine Corporate Duties. Directors are to act in the best interests of the company.. "but not at the expense of the environment, human rights, the public health or safety, the communities in which the corporation operates or the dignity of its employees." Clarke and Klettner remind us:

The problem of material production has essentially been solved. The primary remaining global dilemmas are that overproduction and massive surpluses still coexist with desperate poverty and need, and that the resource base for industry is rapidly depleting and damaging, potentially irreparably, the eco-system. It is possible that confronting these dilemmas will force the rethinking of corporate objectives, structures, and activities that is necessary.

The editors wrap up the text nicely, expressing concern with the trajectory of accounting, where profit is brought forward before it is earned and liabilities can be ignored if they reduce current profitability. They reject Locke's notion that the whole purpose of society is to safeguard the rights of individuals. Instead, they embrace Tocqueville's argument that government should regulate individual transactions to safeguard against circumstances where the welfare of some is advanced at the expense of others. We are left to confront the central problem with Liberalism; "the mediation of rights between different individuals only works satisfactorily when the power of individuals is roughly equal."

As to corporate reporting, Aras and Crowther see it no longer focused on past accomplishments but on benefits to be accrued, not as a communication medium "but rather a mechanism for self promotion." GRI and AA1000 are discussed as important integrative reporting initiatives but critics would say "it is only under the Anglo-Saxon model of governance that there could ever be a need for CSR." The Cartesian dichotomy doesn't arise in Latin or Islamic models. Of course, the Anglo-Saxon model appears to be dominant, so integrative efforts are needed. The editors conclude that any such developing standard must be sufficiently flexible to "allow for the full extent of cultural variation throughout the world."

Given the state of inequality between not only individuals but countries, it is hard to see how such standards will be mediated. although this volume sets a high standard in the necessary task of exploring the issues needing resolution before corporate governance and CSR can be fully integrated.

No Justice, No Peace in PensionLand

The GAO's report, Private Pensions: Sponsors of 10 Underfunded Plans Paid Executives Approximately $350 million in Compensation Shortly Before Termination, found that 40 executives for 10 companies received approximately $350 million in pay and other compensation in the years leading up to the termination of their companies’ underfunded pension plans. GAO identified salaries, bonuses, and benefits provided to small groups of high-ranking executives at these companies during the 5 years leading up to the termination of their pension plans. For example, beyond the tens of millions in base salaries received, GAO found that executives also received millions of dollars in stock awards, income tax reimbursements, retention bonuses, severance packages, and supplemental executive-only retirement plans.

The Corporate Library Blog (I've got my pension but you can go sing for yours, 12/16/09) writes:

Now it would seem to me that any company with even a partially underfunded pension plan for its workers should immediately freeze any executive pension benefits until the plan is in the black, but that sounds like a really effective way to incentivize executives to fiddle the books in a massive way, so the oversight of such legislation would have to be incredibly effective.

On the other hand, most executive retirement packages – certainly defined benefit ones – are a complete waste of shareholder resources because once you are in a position to be eligible for such a plan, you are also in a position to be eligible for enough stock awards to fund your retirement without a pension.

Why do companies bother to keep SERPs? Bebchuk & Fried's Pay without Performance pointed out that while qualified pension plans (exempt from taxation) are limited to about $200,000 a year, supplemental executive retirement plans, known as SERPs are neither exempt nor limited. Yes, they are an inefficient way to compensate CEOs but they come with one great benefit - camouflage. “Neither the increase in value of the SERP plan before retirement nor the amount of payments after retirement appears in the compensation tables, the existence of SERPs, and the formulas under which payouts are made must be disclosed in the firm's SEC filings.”

While CEOs want to keep their owned defined benefit plans, they frequently want to outlaw them for public employees. As the Corporate Library points out, when the pension plans for their own employees go south, CEOs tend to ensure they still get theirs. Fat cats apparently have no shame. Neither shareowners or the public are really mobilized around the issue, even though many seem to have pitchforks at the ready.

By the way, The Corporate Library is offering 50% off their entire online store inventory, including research reports and company governance risk profiles until December 21st. Enter code HOLI50 when you review your shopping cart. Happy holidays.

The Activist Investor Conference

This looks like a good one. The program features leading-edge case studies:

• Dialectic Capital's Successful Proxy Campaign at California Micro Devices
• Shamrock Capital Advisors' Successful Proxy Campaign at Texas Industries
• Defense of Target Corp against Pershing Square Capital Management

Corporate managers, investors, proxy advisors and legal representatives from all sides will present a 360 degree view of activist investment strategies and their impact on corporate performance and returns. January 21 & 22 at The Westin Times Square, New York. More information.

Stress Testing Pension Funds

A survey of some of the largest and most influential institutional investors by MSCI Barra, a leading provider of investment decision support tools worldwide, identified stress testing as a critical risk tool. The most common stress tests were macroeconomic shocks (including shocks to currencies, commodities, interest rates, etc.) and market-wide asset class shocks. 73% of pension plans and 26% of asset managers who took part in the survey do not currently run stress tests bit the majority said they would put more focus on it in the future. (Institutional Investors Identify Stress Testing as a Key Risk Tool, BusinessWire, 12/14/09)

12 Tasks for Boards

In June 2008, King & Spalding and Tapestry Networks brought together a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies to create the Lead Director Network (the “LDN”). Based on insights afforded by meetings with board leaders and other corporate governance initiatives undertaken by King & Spalding. What Boards Should Be Doing Right Now highlights some of the important actions that public company boards should consider in an effort to address the new realities of corporate governance.

RiskMetrics Replay of 2010 Policies

This two-part webcast provide valuable insights into the key corporate governance issues facing investors and issuers in 2010. Part One, presented by Martha Carter and Patrick McGurn provides an overview of updates to RiskMetrics' benchmark proxy voting policies for 2010. Debra Sisti updates Canada's 2010 policies and issues.

Part Two involves a panel of leading institutional investors providing their perspectives on how they are approaching key corporate governance issues for the 2010 season.

Year End Donations

Many of us sit down about this time of year and make contributions to worthy tax-deductable nonprofits. One of those I included this year was ProxyDemocracy.org for their work in advancing the knowledge of retail shareowners in proxy voting and in helping users determine which funds are most aligned with their own values. Donating is easy. Simply go to RSF Social Finance, choose "Proxy Democracy" from the list, fill in the amount, indicate "I have not received goods or services for this donation," and hit the "Donate now" button. Then you'll be asked for your credit card information. Simple, and you'll be helping retail shareowners to vote more intelligently... that should make companies both more socially responsible and more profitable.

CalPERS Should Adopt Regulation on Placement Agents

James McRitchie, publisher of CorpGov.net and PERSWatch.net, filed comments in support of a request for determination by the Office of Administrative Law by Keith Paul Bishop dated September 23, 2009, under the provisions of California Code of Regulations, Title 1, Section 122, concerning policies adopted on May 11, 2009 and amended on November 16, 2009 by the California Public Employees’ Retirement System (CalPERS) outlining procedures to be followed “For Disclosure of Placement Agent Fees, Gifts, and Campaign Contributions.” (see California Regulatory Notice Register, 12/11/09, p. 2143)

While we entirely agree with the stated goal, “to help ensure that CalPERS investment decisions are made solely on the merits of the investment opportunity by individuals who owe a fiduciary duty to CalPERS,” we find it ironic that CalPERS has repeatedly failed to comply with the Administrative Procedure Act, even when adopting regulations governing its ethics and those with whom it contracts.

Both the legislative process and the APA offer important protections for public participation and oversight not available to Board adopted policies.

The Board’s frequent claim that their Constitutional authority exempts them from state laws may lead the Board down a slippery slope, which should be stopped before the consequences become costly. For example, a Sacramento Bee editorial, “Low road at PERS” (November 2, 1999), threatened reexamination of Proposition 162. The more frequently CalPERS is seen as abusing its authority, the more likely such a reexamination will occur, perhaps with unintended consequences.

"What the board needs to do is figure out what it is it’s trying to do and then write a regulation to do that," says recently elected soon to be board member J.J. Jelincic. "My belief is what they are trying to do is make the Sacramento Bee happy, and they are not going to do that." (CalPERS winner wants investment change, CalPensions, 12/12/09)

Just as I was posting this item, I received an e-mail from CalPERS with their response. The good news is they plan to go through the rulemaking process in 2010. The bad news is that they claim they "will not issue, use, enforce, or attempt to enforce" the policy dated May 11, 2009. Of course not, instead they'll enforce the amended underground regulation they issued on November 16, 2009. While I am delighted they now plan to go through the rulemaking process, it is disappointing that they continue to violate the law by utilizing underground regulations.

The response from CaPERS appears to hope OAL will dismiss Mr. Bishop's request for determination, since they will not enforce the May policy. As I indicated in my comments, "failure to address subsequent amendments would defeat the purpose of Government Code section 11340.5, since an agency could easily keep a step ahead of determinations by simply revising its underground regulations." If OAL were to dismiss Mr. Bishop's request, requiring him to refile naming the November policy, the whole regulatory scheme of California would be placed in jeopardy.

CalSTRS adopted regulations on placement agents three years ago. CalPERS should stop dragging its feet. As they move forward, they should consider AFSCME's recent publication, Enhancing Public Retiree Pension Plan Security: Best Practice Polices for Trustees and Pension Systems. For example, the AFSCME report proposes banning current and former pension trustees and staff from providing placement agent services at any system where they were previously employed. "When vendors gain access and have inside knowledge because of their placement agent's relationships within any given pension system, investment decisions are not made on purely fiduciary grounds," said AFSCME President Gerald W. McEntee. "This lifetime ban would protect the fiduciary integrity of the system."

Wall Street Reform Act

The House passed the Wall Street Reform and Consumer Protection Act of 2009 in a 223-202 vote. The bill provides “say on pay,” independent compensation committees and proxy access. The best analysis I've seen so far is from Weil, Gotshal & Manges LLP. Now we wait for the Senate and to reconcile. TheRacetotheBottom also has great coverage scattered on its blog.

SEC Reopens Comment Period for Proxy Access

The SEC announced that it is re-opening the public comment period for its shareholder director nomination proposal to seek views on additional data and related analyses received by the Commission at or after the close of the original public comment period on August 17. Comments on the data and related analyses are due no later than 30 days after the publication of the Commission's release in the Federal Register. 12/14/09 press release.

Specifically, they seek comment on the the following materials:

• Report on Effects of Proposed SEC Rule 14a-11 on Efficiency, Competitiveness and Capital Formation, in Support of Comments by Business Roundtable, NERA Economic Consulting (submitted on August 17, 2009 by the Business Roundtable);
• Why Did Some Banks Perform Better During the Credit Crisis? A Cross-Country Study of the Impact of Governance and Regulation, Andrea Beltratti and Rene M. Stulz (submitted on September 11, 2009 by the Business Roundtable);
• The Limits of Private Ordering: Restrictions on Shareholders’ Ability to Initiate Governance Change and Distortions of the Shareholder Voting Process, The Corporate Library (submitted on November 18, 2009 by the Shareowner Education Network and the Council of Institutional Investors); and See Comment File No. S7-10-09, available at http://www.sec.gov/comments/s7-10-09/s71009.shtml.
• Supplemental analysis of share ownership and holding period patterns from Form 13F data by the Commission’s Division of Risk, Strategy, and Financial Innovation, dated November 24, 2009.

The Commission will consider final action 12/16/09 on its proposal to improve the disclosure of information that public companies provide to their shareholders in proxy statements on executive compensation, qualifications of directors and nominees, and other proxy disclosures. The Commission also will consider adopting proposed measures to strengthen safeguards of investor funds controlled by investment advisers. Meeting notice.

Say on Pay Survey Results

Gary Lutin, chairman of the Shareholder Forum, reports on a survey of the members, as well as reponding members CII and the New York Society of Security Analysts regarding criteria and information sources for voting on compensation related issues. Here's how concerns were ranked:

Relationship of pay to your criteria for corporate performance 89%
Process followed by board, including assurances of independence 79%
Provisions of employment agreements, including perks and parachutes 73%
Amount of compensation 71%
Conformance with guidelines defined by RiskMetrics/ISS or other proxy advisors 26%
Use of compensation consultant 25%

Sources of information were ranked as follows:

Company proxy statement and other SEC filings 81%
Management responses to questions 70%
Independent third party verification of board’s process 47%
Governance expert ratings and research 38%
Responses of board’s compensation consultant 31%
RiskMetrics/ISS or other proxy advisor voting recommendations 29%

More is forthcoming as this group continues to plug away at Say on Pay.

Risk Velocity

Compliance Week Columnists Stephen Davis and Jon Lukomnik raise an excellent point in Risk Velocity, the Unknown Dimension in ERM (12/8/09). For years, the twin pillars of risk management have been probability and impact. The missing dimension is risk velocity, how quickly one goes from onset of the risk to the impact.

They provide excellent examples and discuss the Internet's contribution. "Is there a mismatch between how quickly you escalate your awareness of and response to a risk and how quickly the risk turns into reality? That’s the start of the transition from risk measurement and risk anticipation to genuine risk management." They pose the formula: Risk-Management Effectiveness = Agility x Resiliency.

Readers may also want to review Risk Management and Corporate Governance by Richard Anderson & Associates, posted on the OECD website. They reviewed Corporate Governance in the United Kingdom, the United States of America and France in the banking sector. They conclude: "the balance between risk-taking (the life blood of the free market) and risk avoidance is no longer functioning. Similarly, the balance between remuneration (one of the principal drivers of the performance culture in the banking sector) and ethical behaviours no longer operates appropriately."

Recommendations include appointment of a senior Chief Assurance Officer, appointment of full time directors whose main responsibility is to ensure sufficient attention is paid to the risk management, and boards should commission independent governance audits.

On December 10, 2009, the Northern California Chapter of the NACD presented a lunch-time program at the California Chamber of Commerce Offices in Sacramento. Panelists included Anne Sheehan, Director of Corporate Governance at CalSTRS and Richard Koppes. Rich will be retiring from Jones Day but will continue as the administrative officer of the National Association of Public Pension Attorneys, coordinator of Stanford's Institutional Investors' Forum and Fiduciary College, and on the boards of directors of Valeant Pharmaceuticals, Investor Responsibility Research Center Institute, and the National Association of Corporate Directors. Both were recently appointed to the Directorship 100 Hall of Fame. Both were recently appointed to the Directorship 100 Hall of Fame. They discussed the NACD Key Agreed Principles as part of their presentation. See our full coverage of this exciting event.

Board Member's Kerstetter Stumbles

TK Kerstetter is the president and CEO of Board Member Inc. a privately held publishing, database, research, and conference company focused on corporate board issues and governance trends. Corporate Board Member is sent to all corporate directors of public companies on the NASDAQ, NYSE Euronext, and NYSE Amex stock exchanges. Usually, the publication contains excellent advice. A rare exception is Kerstetter's Director Qualification Disclosure Will Prove Lame. (The Board Blog, 12/9/09)

Kerstetter argues the SEC's recent proposal (File No. S7-13-09) to require disclosure of board and nominee experience and qualifications is "just another burden to America’s public companies and another deterrent to any private or foreign company wanting to list in the ole USA... the pendulum has swung too far on this proposal." The proposed rules will lead to "mass overanalysis of each director on the merits of his or her proxy qualifications bio, which could lead to additional criticism of the nomination process or even to board ineptitude lawsuits."

According to Kerstetter, there is no correlation between who is a great director and "how meaty their bio looks or how accomplished they might be in their profession." "Any corporate secretary, well-versed securities or proxy lawyer, proxy solicitor expert, or good public relations guru will be able to make a director bio or qualifications paragraph look fairly impressive." In short, Kerstetter appears to think if a director has been nominated or renominated by the board, they must be the best available candidate. Kerstetter is living in the past, when Soviet style elections presented a single list of candidates that would be elected even if they only got one vote each.

Strength and resiliency in nature come from diversity. That fact is increasingly recognized by boards and investors. Let's take a quick review of just a few comments to the SEC on the proposal Kerstetter finds so bothersome:

• CalPERS: "It is valuable if a company puts forward their case to support why a nominee is qualified to serve on the company’s board and how their skill-sets, experience and background complement the team and thereby contribute to the board’s effectiveness... boards will also benefit from input from a diverse team which can challenge the “group think” which undermines the ability to challenge and innovate... Shareowners need to understand how the board evaluates its own performance, and where responsibility lies for carrying this out and ensuring progress on measures for improvement.
• Florida SBA: "We find a discussion of why and how a certain member would be important to the board to be a welcome addition. Extending the disclosure to any public boards served in the past five years... However, we encourage the Commission to consider a longer disclosure period or no time limits for certain criminal offenses such as fraud.
• Calvert: "We encourage the Commission to require companies to disclose whether they consider diversity in the nomination of director nominees. Such disclosure would give investors confidence that nominating committees are searching beyond the traditional circles to consider fresh and independent viewpoints."
• U.S. Chamber of Commerce: "We support the enhanced disclosures regarding director nominees contained in the Proposals.
• NACD: "Whether freshman or long-serving director, we believe that experience and education should be reported so that those shareholders making judgments on a director candidate’s capability to serve are adequately informed."
• CII: "Recent governance trends among large U.S. companies, such as electing directors by a majority of votes cast and declassifying boards, have made director elections more meaningful... the disclosures... should identify an individual’s specific skill set, such as manufacturing or public relations expertise, any relevant experiences or accomplishments in that area of expertise and how those skills would benefit the company. We believe that this more fulsome disclosure, on an annual basis, would help investors determine whether a particular individual and the board’s composition overall are appropriate for the company... Recent studies suggest there is a direct correlation between diversity and corporate financial performance."

We are undergoing a soft revolution in governance, with corporations becoming more responsible to their shareowners. Boards are beginning to ask their large institutional investors for their input on board nominees. Many may be doing so simply to learn of concerns. However, as such communication opens up, companies learn. If they fail repeatedly to take advice, they run the risk of a challenge that might start with a withhold campaign and then escalate to proxy access and even a contest for control. On the other hand, companies that work to establish relational investors who pass on good ideas are likely to generate more wealth.

A recent survey of by Corporate Board Member and PricewaterhouseCoopers found that "58% of the survey respondents think investors should be able to communicate with the board at any time, a big increase over the 37% who felt that way in 2008. Even more impressive, 82% say shareholders should be able to ask the board questions at the annual meeting, versus 52% last year." (The Buck Moves Into the Boardroom, Corporate Board Member, Fourth Quarter, 2009)

Lowell W. Robinson (a director with International Wire Group and the Jones Apparel Group) was quoted in the same issue saying, "I still cling to the belief that if you don't like a company, sell your stock; otherwise, trust management." He's a director elected by shareowners, yet his loyalties are obviously more to management than to shareowners.

I like T. Boone Pickens Jr's response to this kind of arrogant perspective. “Most of the time management’s attitude toward shareholders is ‘If you don’t like the way we run things, sell your stock.’” “That’s like the gardener telling the estate owner, ‘If you don’t like the way I take care of your property, sell it and move out.’ That’s not the way the real world works.”

Mr. Kerstetter appears to be in the camp of directors like Mr. Robinson, who feel no obligation to appeal to and represent their own shareowners. Unless there is evidence that demonstrates their statements to be temporary aberrations, I'd vote them both off the island if given a chance.

2009 Proxy Season Reviewed by Green Money Journal

Record numbers of shareowner resolutions were filed in the wake of what Laura Berry, the Executive Director of the Interfaith Center on Corporate Responsibility, described as "The catastrophic collapse in governance" in 2008. Few of the advisory resolutions on corporate governance filled by ICCR members received less than 40% of shareowners' votes this year, said Berry. Socially Responsible Investing: What is Possible in These Times? (fall issue) provides a good overview of victories during this last season. More people are investing in their values and corporations realize ethical breaches can drive them into bankruptcy.

Rosenfeld's Letter to the SEC on Strategic Planning

William L. Rosenfeld, Director, Strategic Initiatives Investors Against Genocide wrote a letter to the SEC for consideration in developing their strategic plan. I think many who are working on proxy "plumbing" or "mechanics" issues will also find it useful. Read the November 13th letter.

I'll just touch on a few key highlights to perk your interest.

1. Require Prompt Consideration of Proposals by Mutual Funds - Regulations should require mutual funds, who often don't hold annual shareowner meetings, promptly consider shareowner proposals either through a shareholder meeting or alternate process.
2. Level the Playing Field on Shareholder Proposals - Eliminate the "vote with management" option; Standardize procedures and costs for accessing shareholder lists and consider alternatives such as an SEC supported web sites where material could be posted; Require audits of voting and outreach procedures.
3. Additional disclosures, such as a record of individual trustee votes on shareholder issues
4. Clarification of Responsibilities for Intermediaries. Broadridge and others shouldn't be able to circumvent Rule 14a-4(a)(3) of the Securities Exchange Act of 1934 (requiring clear and impartial representation of shareholder proposals).
5. Companies shouldn't be allowed to end voting without reaching a quorum on selected issues before the shareholders, allowing them to encourage voting only on issues favored by management.
6. Apply Restrictions Consistently. For example, Executive Order 13412 prohibits American oil companies from doing business with Sudan. However, there is no restriction against American mutual funds directing billions of dollars of American capital to Chinese and other oil companies that support Khartoum and help fund the genocide in Darfur.
7. The SEC should consider a "blue ribbon panel" to evaluate the merits of the SEC working with other government agencies to maintain a list of problem companies and suspending or limiting privileges of companies complicit in genocide from markets under U.S. jurisdiction.

Each of these recommendations deserves consideration by the SEC. Several should be taken up with proxy "plumbing" or "mechanics" issues.

For example, #2 and #4 above are similar to our petition on "blank votes." Rule 14a-4(b)(1) requires proxies to include boldface type where discretionary authority to change blank votes is granted. Similar to their argument with regard to Rule 14a-4(a)(3), Broadridge claims they do not have to comply with these "proxy" requirements when using a "voter information form."

We don't agree with the existence of such a legal loophole but would go further by amending the rule to count blank votes as abstentions. See petition File 4-583, at http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line. We look forward to the SEC's expected concept release on "proxy plumbing" issues and hope readers will consider raising the issues outlined by William Rosenfeld at that time and at every other opportunity until they are addressed.

Lemonjuice.biz

Lemonjuice.biz joins a growing list of important new web-based resources for shareowners. It provides financial information and commentary on corporate governance and shareholder meetings at US listed companies. Readers will find their database of 2009 voting results and best practices guide especially valuable resources.

Their slogan, “sed quis comprimet ipsos custodes?” or “but who will squeeze [or pressure] the watchers?” is an off take on "quis custodiet ipsos custodes” or “who will watch the watchers?" This question, iconic to corporate governance, was coined by Roman satirist Juvenal, who doubted the wisdom of hiring guardians for their wives. The same question was posed centuries earlier by Plato in his Socratic dialogues. The guardian class would be told a "noble lie." The noble lie will assure them that they are better than those they serve and instill them with a distaste for power or privilege; they will rule because they believe it right, not because they desire it.

According to Lemonjuice.biz's Alexander Krakovsky's, history proves this has never worked. "Ever since the founding of the US Securities and Exchange Commission, the government has been imposing ever-mounting regulations in order to watch the watchers of US public companies. However, without the vigilance of the owners and with mounting regulations, listed companies will become nothing more than extensions of the national bureaucracy."

Lemonjuice.biz aims to give shareowners a good set of tools to help them do their own monitoring. They focus on the issues that shareowners need to decide by providing analysis of voting, best practices and governance changes. The site awards companies "corporate governance lemons." The fewer lemons, the better the company is governed. Their blog, entitled "hold the sugar," promises "acidic, scathing and hard to take" commentary "loaded with good things and just right for that fishy smell."

So, let's take Lemonjuice.biz for a test run. Let's say I'm a Kellogg shareowner activist, whidh I am. I am considering submitting a resolution to require annual election of directors. Checking the Lemonjuice.biz voting results database, we see that 135,875,382 shares were voted in favor of a similar resolution this year. 170,921,593 shares were voted against the resolution and there were 34,561,289 broker non-votes. Since broker votes were eliminated for shareowner resolutions, this must be shares that brokers did not vote, rather than non-votes that they did vote. Anyway, the information helps me to decide that it was a relatively close contest last year, so chances of passage in 2010 are relatively good.

Of course, chances would improve further if the SEC's proxy plumbing effort eliminates "blank votes." The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company's soliciting committee recommends. See my petition on this issue, File 4-583, at http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line. If the SEC hears from enough concerned shareowners on the issue, maybe it will be resolved by the 2011 proxy season.

According to the Lemonjuice.biz Best Practices section on Classified or Staggered Boards, "Boards should not be staggered, and directors should be up for reelection annually. We generally support resolutions to this effect. As an alternative, we support measures that allow shareholders to remove any director without cause before his/her term expires. Staggered board structure is usually a bad corporate governance practice because it prevents shareholders from unseating the board, thereby entrenching the management." The section goes on to cite CalPERS' policy, which supports annual election of directors. So, if I didn't already know that many institutional investors consider annual election of all directors a best practice, now I do.

All and all, Lemonjuice.biz is already providing some robust tools. After compiling all of the 2009 voting results and refining the key words, Lemonjuice.biz will scrape the rest of 10q’s and proxy statements and create a taxonomy of proposals. This way, if for example I want to find all the proposals to eliminate classified or staggered boards, I'll be able to pull them up and get the votes in a few clicks. This might help how I word my own resolution. For example, I might look to the highest vote getters for how to frame my resolution and to the low vote getters for what not to say. Of course, many other factors come into play regarding voting behavior, so I also need to take those into account.

Alexander Krakovsky tells me they will also scrape insider trading data from SEC filings and they are looking to Lemonjuice.biz users to help them determine what additional information is wanted, especially from SEC filings that can be displayed in a more useable format. Lemonjuice.biz is off to a great start. Be sure to check out their Blog as well and let me know what you think of this new resource.

I've Got Mine, Say Some Execs: Screw You

Ten large U.S. companies paid senior executives a total of $350 million in the few years prior to dropping traditional pension plans for employees. U.S. Rep. United Airlines, for example, missed nearly $1 billion in required pension contributions but awarded its top three executives more than $50 million in salary, bonuses, stock and supplemental retirement benefits, according to the GAO.

George Miller, who chairs the House Education and Labor Committee, is sponsoring one of three proposals to let struggling companies take a break from their required pension contributions while the economy improves. He is considering legislation to freeze executive compensation if a company's rank-and-file pension plan becomes significantly underfunded. "If the pension is getting deeper into trouble and the executives are getting richer, there's something wrong with that picture."

The Pension Benefit Guaranty Corporation's annual deficit nearly doubled to $22 billion in fiscal 2009 from $11.2 billion in fiscal 2008. (Companies drop pensions, pay execs $350 million: watchdog, Reuters, 11/19/09; As pensions dried up, four firms paid top execs $49.5M, USA Today, 11/19/09)

Vote TheCorporateCounsel.net Blog

We rely on TheCorporateCounsel.net and its Blog for alerting us to much of the latest practical guidance on legal issues involving corporate and securities regulation and corporate governance practices. The ABA holds an annual contest to determine the best legal blog. We need to give Broc Romanek and Dave Lynn at least some psychic income by helping them come in first. Corporate Governance, is it more important than a blog on patents? You bet! Let's push them over the top.

Three easy steps:

1. first register with ABAJournal.com
2. then log-in
3. and then vote for TheCorporateCounsel.net Blog here

Intel: Virtual Attention

One of the dangers of moving to a virtual shareowners meeting is generating attention from shareowners who believe virtual meetings are no substitute for the real thing. I personally have railed against them for years. As indicated previously, Intel announced they are shifting to a virtual annual meeting. Now they have our attention.

I am aware of three resolutions thus far being filed by individual investors at Intel who are Responsible Wealth - United for a Fair Economy members and active individual investors. They have been joined by co filers who are Walden clients. Not surprisingly, one of the resolutions asks that "Intel adopt a corporate governance policy affirming the continuation of in-person annual meetings in addition to internet access to the meeting, adjust its corporate practices accordingly, and publicize this policy to investors."

The resolution makes it clear, the filers strongly support "the use of new technologies to make annual meetings accessible to stakeholders who cannot attend in person" but "do not believe that Internet-only meetings should be substituted for traditional in-person annual meetings." The following are among additional reasons cited:

• Annual meetings are one of the few opportunities for top management and the Board to interact directly, face-to-face, with a cross section of their shareholders.
• The digital divide persists in the United States and not all shareholders have access to computers.
• Annual meetings provide for direct questions to be posed to the Chair of the Audit, Compensation or Governance Committees of the Board.
• While some corporations argue that eliminating the face-to-face annual meeting is a way to reduce costs and improve efficiency, we believe the investment in creating a physical space for shareholder meeting is money well spent.
• We believe Intel’s decision is a controversial one for a company with a positive reputation on corporate governance. This decision sets a precedent and creates a “slippery slope” that will encourage other companies that desire to insulate themselves from shareholders to follow suit. Imagine a company that wanted to downplay investor frustration over compensation policies or practices, or poor business decisions leading to substandard financial performance, or questionable governance or environmental records: “virtual” online meetings would be a perfect way to insulate themselves from shareholder interaction or to “spin” any opposition as insignificant.
• In addition, if there was a major crisis with a company or a merger being proposed, the last thing investors would want is a company’s refusal to hold an actual stockholder meeting.

A second resolution requests the Board of Directors to "initiate the appropriate process to include in the Company’s Corporate Governance guidelines and policies a written and detailed succession planning policy," including the following:

• The Board of Directors will review the plan annually;
• The Board will develop criteria for the CEO position reflecting the Company’s business strategy and using a formal assessment process to evaluate candidates;
• The Board will identify and develop internal candidates;
• The Board will begin non-emergency CEO succession planning at least 3 years before an expected transition and will maintain an emergency succession plan that is reviewed annually; and
• The Board will annually produce a report on its succession plan to shareholders omitting confidential information and produced at responsible expense.

The third resolution request that the Board of Directors Nominating and Governance Committee describe steps being taken and planned for the future to ensure Board diversity, including:

• Whether women and minority candidates are routinely sought as part of every Board search currently;
• Whether the Board strives to obtain diverse candidates by searching in traditional corporate environments, as well as government, academia, and non-profit organizations;
• What reasonable steps are being taken to ensure that minority candidates are in future pools from which Board nominees are chosen; and
• What future steps Intel plans to take to add minority representation to the Board.

Hopefully, Intel will take an initial misstep and use it to increase dialogue with shareowners. Each of these resolutions deserve support. For more information on these resolutions, please contact Mike Lapham of Responsible Wealth or Timothy Smith of Walden Asset Management.

How to Govern Corporations So They Serve the Public Good:
Wrong Title, Right Book

William Sun's excellent book is less on how to govern corporations to serve the public good than it is an analysis of corporate governance from the perspective of ontology, epistemology, and sociology of knowledge. Sun does an absolutely fascinating job of tracing the development of two pre-Socratic cosmologies that continue to shape modern thought. Heraclitus emphasized the primacy of a fluxing, changeable and emergent or processual world. Parmenides insisted on the permanent and unchangeable nature of reality... a homeostatic and entitative conception of reality.

Sun favors a processual perspective, since it allows us to understand corporate governance as is is socially constructed. By stripping away the semiotic mask, he reveals how much of what is known in shareowner and stakeholder models of corporate governance is based on political power.

Reading his book was a personal joy to me, since my mind was transported back to graduate school days as a student of Peter Berger during his all too brief tenure at Boston College. I found Berger and Luchmann's The Social Construction of Reality a liberating work, since it implied that reality could be reconstructed to diminish coercion and domination.

However, Berger and Luchmann excluded from their treatise on the sociology of knowledge epistemological problems which they felt "belong" to the discipline of philosophy. "The sociology of knowledge must first of all concern itself with what people 'know' as 'reality' in their everyday, non- or pre-theoretical lives..." In other words, they didn't seek to explore the possibility of obtaining a better approximation of the "truth," but rather a better explanation as to how commonsense knowledge is externalized, internalized and institutionalized.

The failure of Berger and Luchmann to weigh historical factors and their abandonment of ultimate concerns left no grounding or basis for analyzing coercion, long-term trends or future possibilities. Instead, through his body of work we are largely provided a description of how social reality constructed in the past is maintained in the present. The resulting static relativism limited Berger's emancipatory potential, since a critical theory must evaluate whether the naive realism of everyday life is a necessity due to biosocial needs or a mere justification of false consciousness, necessary to maintain the status quo.

Berger lays blame for society's ills largely on the state, which he sees as "devoid of personal meaning." One of his most liberating works, To Empower People, stresses the need for increasing the individual's political efficacy through the mediating structures of neighborhood, family, church and voluntary associations. The only institutions not viewed by Berger as political are businesses. Failure to include that sphere may serve Berger from the "trap of politicizing all of life" but it largely dooms his efforts to empower people to failure.

William Sun's offering suffers no such limitations. While the book speaks only indirectly to how corporations can be governed to better "serve the public good," implicit is that such positive changes will follow once people realize how the corporate governance we know as "real" was socially constructed and once we employ a processual framework of time, space and context, leading to reflexive dialogue.

Sun is under no delusions. He writes, "living in a processual reality, we cannot 'mirror' corporate governance practices accurately, and cannot construct corporate governance ideally." "To improve corporate governance we should not force-fit corporate reality into the established abstract templates... we need to turn away from the current dichotomized, entative and static way of theorising... We need to dive into the underlying living experiences and processes that comprise corporate practices to understand the internal impetuses and environmental dynamics that drive the processes and changes of corporate reality."

After leading the reader through an exceptional deconstruction of Cartesian dualism, Locke's empiricism, Kant's objective idealism, the fallacy of representationalism, the realities of shareholder and stakeholder perspectives, the myth of market and economic efficiency, and much more, Sun focuses on the value of a processual view of knowledge, borrowing from a bevy of resources, including Richard Rorty.

Rorty aimed for a "philosophy without mirrors," believing that what we need "is the ability to think about science in such a way that its being a 'value-based enterprise' occasions no surprise. All that hinders us from doing so is the ingrained notion that 'values' are 'inner' whereas 'facts' are 'outer.'" In his seminal work, Philosophy and the Mirror of Nature, Rorty wrote that "Hermeneutics is not 'another way of knowing' - 'understanding' as opposed to (predictive) 'explanation.' It is better seen as another way of coping."

If we see knowing not as having an essence, to be described by scientists or philosophers, but rather as a right, by current standards, to believe, then we are well on the way to seeing conversation and the ultimate context within which knowledge is to be understood. Out focus shifts from the relation between human beings and the objects of their inquiry to the relation between alternative standards of justification, and from there to the actual changes in those standards which make up intellectual history. (p. 389)

Likewise, Sun has a similar aim for what he terms the processual approach, which is "not a denial of substance; rather, it views substance as merely stabilized clusters or patterns of variable processes." "Processism tends to be ontologically realistic; yet, it is not a 'being' realism, but a 'becoming' realism." Those who rail against a "one-size fits all" approach to corporate governance will find a strong advocate for structures that contextually emerge, rather than are pre-designed.

The shareowner model may be waning, because as Sun notes, physical assets and financial resources used to be more important than human resources and social capital. In the stakeholder perspective public corporations must be aware of their social obligations, such as fairness, social justice and the protection of employees. Human-capital intensive firms are more like to move in the direction of the stakeholder model. Under a processual approach, political institutions, indeed all institutions, cannot take human nature as a given but must accept some responsibility for their involvement in its creation.

"Unlike the current theoretical models that rest their solutions on scientific measures and universal recipes, we suggest the explicit change of corporate governance to be initiated and triggered in the sense of collective construction and discourse formation." "The key factor in context-making is to find or create a more powerful 'attractor' to compete with the dominant 'attractor' and to shift the old one to the new one to create a new context." "Corporate governance and control must be realised through our collective representations - representations of our will, desire and sense-making, representation of a specific mode of thought and social convention, and the representation of social negotiation, selection endorsement and rationalism... in an ideal construction process, corporate governance is not seen as universally good, but as partial, selective and interested."

While Sun appears relatively certain that a processual approach will bring new insights and open dialogue, he is less certain about the criteria for judging governance, "all of which depend on the social construction of 'faith.'" Ultimately, he aims for "balanced and pluralistic thinking."

"Although the damage caused by corporate violations is far more serious than the individually perpetrated crime, it is regarded by the public as less of a crime." To get people to understand that requires a change in conciousness. Corporate governance is best understood in the context of capitalism, where Sun finds three dilemmas:

1. The conflict between self-interest and others' interest, or private interest and public interest. Capitalism presupposes the sacredness and inviolability of private property rights as its first principle. Other interests must be considered within that context.
2. The conflict between the economic interest and the social interest. All other possible principles and values such as justice, equity, humanity, and religion are subsumed to protecting capitalist interests. This rationality leads to its own contradiction and such notions as "the only responsibility of the corporation is to make profit."
3. The conflict between shareowner and manager interests. How capitalist interests are protected from management's manipulation is a serious concern of politicians, academics and corporate owners. Agency theory, will it hold back the coming pitchforks?

Perhaps Sun will shake up the world of corporate governance like Werner Karl Heisenberg shook up physics. But, as Robert Chia notes in the book's introduction, "despite the advent of quantum mechanics the assumption regarding the primacy of substance and entities over patterns and relationships remains pervasive and overwhelming." Our conceptions of reality take a long time to change. Unfortunately, time for central issues like corporate governance may be running out, given the moral and environmental challenges we face.

Step Into the WayBack Machine

December 2004 in CorpGov.net News.

"According to Korn/Ferry, a headhunting firm, almost twice as many directors of Fortune 1,000 firms refused a board position in 2004 as did in 2002, before Sarbanes-Oxley took full effect."

In a twelve month period, challenging the CEO's opinion on a strategic issue one fewer time, complimenting the CEO on his insight two more times, and doing one personal favor increased by 64% the likelihood of an appointment to a board where the CEO was already a director. (Suck Up and Move Up, Fast Company, 1/2005) The other pathway to the boardroom ought to be sucking up to shareholders through a record of proven performance.

The U.S. Chamber of Commerce, Business Roundtable and the National Association of Wholesaler-Distributors are lobbying the administration to get the SEC to ease enforcement of corporate-governance rules, the Wall Street Journal reported.

Stephen Davis, of Davis Global Advisors, indicated, it is time for shareowners to form “an investor-class version of MoveOn.org, the powerful, web-based mobiliser of grassroots political activism. Without it, director election reform is jammed at the SEC.”

December 1999 in CorpGov.net News.

California Treasurer Phil Angelides slapped a moratorium on state investments in tobacco securities, saying "the extraordinary and unprecedented barrage of litigation'' surrounding tobacco companies made them imprudent investments."

The average diversified mutual fund with 132 holdings does no better than funds holding 35 or less.

CalPERS claims they have gained $150 million per year through targeting activities. The System should take better advantage of its own activism by increasing its investment in a few of these firms before releasing the list and pursuing needed corporate governance changes.

Largest shareholder settlement in history at Cedant, $2.83 billion, arising from fake reporting of $500 million in 1998.

I can't think of a better present for these times than Kevin Keasey, Steve Thompson and Mike Wright's four volume Corporate Governance. This set, published in 1999, by Edward Elgar is a ready reference to classic writings in the field and is sure to be accessed frequently by owners, like this editor, who wake up in the middle of the night with corporate governance concerns.

CorpGov Bites

Web 2.0 and Corporate Accountability: Bill Baue, Marcy Murninghan, Jane Nelson. In July 2009, the Harvard Kennedy School's Corporate Social Responsibility Initiative launched a 6-month project on Web 2.0 and corporate accountability. This expert panel discusses the project's preliminary findings and which avenues look most promising for the future.

India’s review of corporate governance prompted by the Satyam scandal is now expected to result in the issue of corporate governance guidelines by the end of December, according to India’s Corporate Affairs Minister, Salman Khurshid. (India sees draft corporate governance code published, Manifest – The Proxy Voting Agency, 12/4/09) Report of the CII Task Force on Corporate Governance

The UK’s Financial Reporting Council has issued a series of proposal to reform the UK’s corporate governance regime. What was previously called “The Combined Code” now becomes ”The UK Corporate Governance Code” and, subject to consultation, will apply to all listed companies with a Premium Listing for financial years beginning on or after 29 June 2010, regardless of their country of incorporation. (FRC to reform UK governance code - new name, new emphasis, Manifest – The Proxy Voting Agency, 12/1/09) The main proposals for the new UK Governance Code are:

• Annual re-election of the chairman or of the whole board.
• New principles on the leadership of the chairman, the roles, skills and independence of the non-executive directors and their level of time commitment.
• Externally facilitated board evaluation reviews at least every three years and the chairman should hold regular development reviews with each director.
• New principles are proposed on the board’s responsibility for and handling of risk.
• Performance-related pay should be aligned to the long-term interests of the company and its policy on risk.

CalSTRS became the first US-based fund to endorse the Stewardship Code for institutional investors, becoming the first US-based fund to back the policy, which it called a “standard for good corporate governance.” The code was created by the British-based Institutional Shareholders’ Committee, and identifies best practices for institutional investors that choose to engage with the companies in which they invest. It also aims to enhance the quality of the dialogue of institutional investors with companies to help improve long-term returns to shareholders. Hats off to Manifest for bringing it to our attention. (press release, 12/4/09)

Whether you need to have your board members involved in shareowner engagement efforts depends on the answer to four questions: 1) who is the shareholder making the request, 2) what are the circumstances surrounding the engagement request (or need), 3) a determination as to whether director involvement will add value; and 4) which director or directors need to be involved. (On Shareholder Engagement: Directors Should Not Fear Reg. FD, Proxy & Governance Review, The Altman Group, 12/4/09)

I generally enjoy Matthew Rafat's reports from attending shareowner meetings. Notes from Accuray Annual Shareholder Meeting (2009) is no exception. Good questions and informative. I wish he would attend the meetings of all the companies in my portfolio. (Disclosure: CorpGov.net Publisher, James McRitchie, is a very small stake in Accuray.)

Technology is making it easier for small investors to be heard. WSJ is right that allowing shareowners to participate in quarterly earnings calls and annual meetings through the web is empowering but they fail to note virtual meetings are going to get pushback. Good coverage of Moxy Vote and ability to vote onsite, ShareOwners.org as a vehicle for petitioning Congress and use of blogs, such as those by Eric Jackson and The Corporate Library. (Small Investor, Bigger Voice, 12/3/09)

"This Week in the Boardroom," Corporate Board Member President & CEO, TK Kerstetter, sat down with Paul Weiss Partner, Stephen Lamb and Scott Cutler, executive vice president with NYSE Euronext, to discuss the recently announced updates to the RiskMetrics voting policy, and what directors should do to prepare for these changes.

Goldman Sachs Group Inc. has been meeting shareholders since mid-October to explain its compensation principles after setting aside $16.7 billion to pay employees in the first nine months of the year... Also discusses shareowner proposals. (Goldman Sachs Outlines Compensation Methods to Shareholders, Bloomberg.com, 12/3/09)

The disconnect between Wall Street profits and Main Street layoffs has created a hunger for new business structures, including democratic worker cooperatives fashioned after Mondragón. (This Import Might Preserve American Jobs, SolidarityEconomy.net, 12/3/09)

Boards crammed with government appointees have prompted the departure announcements of three CEOs in the past two months: Mr. Henderson, Kenneth D. Lewis at Bank of America Corp. and Alvaro de Molina at GMAC Financial Services. Joann Lublin investigates for WSJ in U.S.'s Role Expands in the Boardroom, 12/2/09.

Q&A With Charles Elson: Top Corporate Governance Issues for 2010, although from the responses, one has to wonder, who is actually being interviewed, since the Conference Board's blogger gives much more detailed responses to their own questions.

SunAmerica Focused Alpha Growth Fund ( FGF - news - people ) is trading at a 11% discount and is currently under attack by shareholder activist Phillip Goldstein of Bulldog Investors, who is requesting board seats to afford stockholders the opportunity to realize net asset value. Nearly 25% of the fund is owned by institutional shareholders that have a history of supporting corporate actions that permit shareholders to redeem their shares at or near net asset value. (Capturing Alpha With Closed-End Funds, Forbes, 12/2/09)

SVNACD has uploaded a podcast: How Technology Impacts the Boardroom, Lon Allan's Interview with Dan Siciliano, Associate Dean, Stanford Law School Faculty Director, Arthur and Toni Rembe Rock Center for Corporate Governance. If you are a director using a smart phone, you might want to take a listen to this very short piece. Also see my more extensive coverage on this SVNACD meeting.

Newground Initiates Fair Vote Campaign

Newground Social Investment has taken the first step toward a nationwide reform of vote-counting in shareholder elections, having just filed a new type of resolution at Plum Creek Timber (symbol: PCL). The resolution calls for the company to reform its bylaws so as to count votes fairly and transparently.

“We see this is a first step toward ensuring a fair and consistent standard for vote-counting in all shareholder elections -- something critical to every shareholder regardless of the issue that concerns them,” said Bruce Herbert, Chief Executive of Seattle-based Newground. “Management should not engage in number-games when they report on the votes cast by shareholders -- the company’s owners.”

Plum Creek Timber is incorporated in Delaware, where the default rule is that shareholders are entitled to decide matters by a majority of the votes cast FOR or AGAINST an item, unless the Company has specified a different threshold for approval.

Plum Creek ignores Delaware’s default standard, and instead applies a different threshold that deems a matter approved only if the number of shares voted FOR a proposal exceed the number of votes voted AGAINST -- plus abstentions, plus broker non-votes.

For example, a shareholder-sponsored “Say-on-pay” resolution filed at the 2009 annual general meeting received a 56.9% majority of the shares actually cast. However, it was reported to shareholders and the press as receiving only 31% support. This is because (as Plum Creek admits in its proxy) “An abstention or a broker non-vote, therefore, will have the same effect as a vote against the proposal.”

Comments Herbert: “the fact of the matter is that one who abstains has consciously decided NOT to support management’s position on that issue. Therefore, to arbitrarily declare an abstention as being in favor of management seems like a complete reversal of voter intent.” He adds: “Just as bad is counting broker non-votes in favor of management, because the broker is, in point of fact, prevented from voting at all on the issue at hand.”

Herbert concludes: “To turn abstentions and broker non-votes into votes in favor of management is preposterous and over-reaching. We will be very disappointed if Plum Creek tries to justify this very misleading practice, or tries to avoid correcting it.”

We urge support of Newground's initiative and resolution. The issue is similar to the blank votes petition where abstentions by retail shareowners who vote at least one item are counted as votes for management. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.

Green Century Pushes on BPA

FDA stalls in accepting independent research and advice from $26B investor group to limit use of BPA. Green Century Capital Management, Inc. (Green Century), investment advisor to the environmentally responsible Green Century Funds, urges the U.S. Food and Drug Administration to quickly regulate the use of the chemical bisphenol A (BPA). By missing its own November 30th deadline to announce a reassessment of BPA’s safety, the FDA fails in its job to protect citizens from exposure to chemicals such as BPA. BPA has been found in the urine of over 90% of Americans tested and has been linked to numerous health problems in humans and animals.

BPA is used in many consumer products, but most famously in the epoxy lining of cans and in polycarbonate plastic for food- and beverage-contact purposes. The chemical mimics estrogen in the body; the Journal of Human Reproduction reported this month that male workers with high exposure to BPA were several times more likely to experience sexual dysfunction. In addition, the Journal of the American Medical Association published the first-ever study of the chemical conducted on humans in September 2008 confirming previous reports linking BPA to the potential for causing heart disease, diabetes, and unusually high levels of particular liver enzymes.

The FDA’s failure to produce a decision on BPA’s safety today signifies the agency’s continued inability to recognize the magnitude of existing sound independent scientific research on the chemical and spur a large-scale transition to BPA-free alternatives for food- and beverage-contact purposes. To date, state and local governments and Canada have led by taking action to protect public health by banning or limiting the use of BPA for certain applications.

“As the manager of environmentally responsible mutual funds, Green Century strongly believes there are potentially significant financial and other risks associated with using harmful chemicals such as BPA,” said Emily Stone, Shareholder Advocate for Green Century. “The weight of federal regulation will boost the development of alternatives and provide companies an incentive to invest in the research, development, and deployment of new options. While we are encouraged that the FDA is using sound, independent science in its reassessment, we are concerned about the FDA’s continued failure to provide this imperative for companies to pursue alternatives. Smart companies will move ahead urgently with BPA-free alternatives both to protect the health of their consumers and of their bottom lines.”

Earlier this year, Green Century represented investors, investment advisory companies, foundations, and shareholder advocacy groups with a combined total of approximately $26 billion in assets under management in urging the FDA to re-evaluate the safety of BPA. As co-authors of the report Seeking Safer Packaging, Green Century joined As You Sow Foundation to evaluate food and beverage companies’ use of BPA and any alternatives. Most of the companies surveyed had significant room for improvement in phasing out the use of BPA. Green Century expects to see progress toward new alternatives now that companies can no longer rely on the agency’s claim that BPA is safe.

On a personal note, my wife and I have written to several companies requesting they discontinue use of BPA. Their typical response, "we're working on it." Let's keep the pressure on.

Guest Commentary From Glyn Holton: Emergency at Intel

Intel Corp. recently announced they will no longer hold annual shareholder meetings. Instead, they plan to host shareholder forums, or "virtual shareholder meetings." In 2000, Delaware enacted legislation allowing corporations to do exactly this. Arrogantly, that state's legislators granted shareholders no say in the matter, leaving the decision solely to the discretion of corporation's entrenched boards.

There is every reason to believe that, with strong safeguards, virtual shareholder meetings could enhance shareholder participation in meetings while protecting—even restoring—shareholder rights that have atrophied over the decades. However, no such safeguards are in place. Intel and other smaller corporations are taking a go-it-alone approach, forcing virtual shareholder meetings on unhappy shareholders. After Delaware changed its laws, the Council of Institutional Investors wrote the CEOs of all Delaware corporations asking them not to conduct virtual meetings. Unions have expressed concerns. Walden Asset Management has encouraged shareholders to write letters to Intel.

Here are just a few scenarios illustrating how virtual meetings will deprive shareholders:

1. A well known shareholder activist plans to ask some pointed questions at the shareholder meeting, but his connection to the meeting somehow fails. He is left wondering if he was targeted or if there truly was an honest technical problem.
2. A shareholder wants to challenge the chair's conduct of the meeting with a point of order. She is within her rights to do so and may interrupt the chair for this purpose, but she finds that the electronic forum software won't allow her to do so ..... one more shareholder right lost.
3. A shareholder wants to make a floor amendment, but the software doesn't allow that either.
4. The meeting software provides no means of group communication, such as applause of booing, so shareholders come away from meetings with no sense of how other shareholders felt.
5. Corporate executives decide to pre-record their comments for a virtual shareholder meeting, including answers to pre-selected "shareholder questions." The executives then don't bother logging in during the actual "meeting."

Most annual meetings are heavily scripted. The chance for real interaction often comes in informal encounters before and after the formal meeting. Those opportunities will also be gone with virtual meetings.

Shareholders have been discussing what might be an appropriate response to Intel's move, but there are few attractive options. The SEC will not intervene to preempt a Delaware law. We could launch a withhold vote campaign against the directors of Intel and other corporations that host electronic-only meetings. That would entail participating in—and thereby accepting as legitimate—the virtual meetings.

We reject Delaware's law in the same way abolitionists rejected the Supreme Court's Dred Scott decision in 1857. A corporation that doesn't hold shareholder meetings is dead in the same way that a human being that doesn't breathe is dead. Putting up a website and calling it a "meeting" doesn't change that.

This is a crisis because the problem is going to spread. Working with Jim McRitchie of CorpGov.net and other interested parties, the United States Proxy Exchange (USPX) is exploring whether to launch a withhold proxy campaign against Intel and other corporations that adopt electronic-only meetings. Under such a campaign, shareholders would refuse to participate in those "meetings" on the grounds that they are illegitimate. Shareholders would withhold their proxies. If enough did so, offending corporations would fail to achieve quorum. Because retail brokers will vote "routine" matters, such as management sponsored resolutions, it won't be enough for investors to not return their proxy materials. They will have to explicitly ask their broker to withhold a proxy on their behalf.

If we decide to proceed with a withhold proxy campaign, we will implement a web portal through which institutional and retail shareholders may join the campaign and coordinate their activities. At this early stage, please e-mail Glyn Holton to express support or ask questions. We will then keep you informed of developments.

Note from CorpGov.net publisher: See also virtual meetings Virtual Shareholder Meetings by Elizabeth Boros. The USPX aims to be a chamber of commerce, representing the legitimate interests of shareholders and is in the process of getting 501(c)(6) status with the Internal Revenue Code. The board set dues at $9 a month. Membership benefits include advocacy, web-based resources, and a magazine to be launched this Spring. Step up to the plate and e-mail Glyn Holton to become a member.

Support Petition to Keep Blank Votes Blank

Coverage continues to roll out on our petition to the SEC, which would amend a rule that allows blank proxy votes to go to management. See The SEC and Investor Suffrage, Dollars and Sense, 5/22; You Can Correct an Outrage, Motley Fool, 5/29/09; Don’t Let Companies Change Shareholders’ Blank Votes, Harvard Law School Forum on Corporate Governance and Financial Regulation, 6/2/09; Blank Votes Turn Magically to Management, SVNACD; The Problem of Blank Votes, theRacetotheBottom, 5/26/09. Mentioned by the Council of Institutional Investors in their May 14th Corporate Governance Alert, in Global Proxy Watch and Shareholder Activism: Activists Ask SEC to Eliminate Voting Bias in the July edition of Kennedy's Investor Relations Newsletter. Please read our petition and send your supporting comments to the SEC. (see submitted comments) Latest mention is Voting and Corporate Governance: Having a Say, Oxford University Press Blog (7/16/09). Thanks to Chris Mallin. Voice your opinion by sending an e-mail to rule-comments@sec.gov with File 4-583 in the subject line.

Recently, the SEC held a hearing on proxy access. By a three to two vote, Commissioners voted for proxy access. Democracy in corporate governance will dramatically improve with our right to nominate and elect directors, even if limited to 25% of the board. Directors may actually begin to feel dependent on the will of shareowners.

While waiting to see the actual language of the rule proposal, please take a few minutes to read and submit comments on a rulemaking petition that a group of ten filed with the SEC on Friday, May 15th, to amend Rule 14a-4(b)(1). The petition seeks to correct a problem brought to our attention by John Chevedden. See petition File 4-583 http://www.sec.gov/rules/petitions.shtml. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.

The problem is that when retail shareowners vote but leave items on their proxy blank, those items are routinely voted by their bank or broker as the subject company's soliciting committee recommends. Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, we have filed suggested amendments to take away that discretionary authority to change blank votes, or non-votes, as they might be termed. We believe that when voting fields are left blank on the proxy by the shareowner, they should be counted as abstentions.

This problem is not the same as "broker voting," which has already been repealed on "non-routine" matters and, we hope, will soon be repealed for so-called "routine" matters, such as the election of directors. For example, even though "broker voting" has been repealed for shareowner resolutions, if a shareowner votes one item on their proxy and leaves shareowner resolutions blank, unvoted, those blank votes are routinely changed to be voted as recommended by the company's soliciting committee.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. You can see blank votes that are changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to "broker voting."

Just as broker votes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don't want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that it may fall short of what the SEC requires. Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority "provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case." (my emphasis)

Broadridge says that shareowners using ProxyVote are communicating "voting instructions" to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to "forms of proxy," not the "voting instruction form," there is no violation. However, subdivision (1) refers to the "person solicited" and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope they move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions. While the petition is being considered for action, we hope Broadridge will modify its system to clearly indicate in red bold-face type how votes will be cast for each item where a blank vote will be changed.

A few months ago, The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox... Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, are:

• John Chevedden, Rule 14a-8 proposal proponent since 1996
• Glyn Holton, Executive Director, United States Proxy Exchange
• Mark Latham, Ph.D., VoterMedia.org
• Eric M. Jackson, Ph.D., Managing Member, Ironfire Capital LLC
• James P. Hawley, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Williams, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary's College of California
• Andrew Eggers, President, Proxy Democracy
• Bradley Coleman and Erez Maharshak, Proxy Democracy

Again, please submit comments on the petition to rule-comments@sec.gov with File 4-583 in the subject line. (posted 5/20/09; link http://www.corpgov.net/news/news.html#BlankVotes)

News from 2009: July, June, May, April, March, February, January,

News from 2008: December, November, October, September, August, July, June, May, April, March, February, January

There's plenty of news stored in Archives. The news may be slightly older but, frankly, many of the issues covered are still current... going back to 1995. Thankfully, we have made progress on many issues and 2009 should yield a victory for proxy access.

with the Corporate Governance NETwork

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. Feel free to use any of these publicity shots without seeking permission.