Tag Archives | Broadridge

Investor Forums

forumInside Investor Relations (IR) had an important article on July 30th, On the Way to the Investor Forum that raised the question: do companies really want to encourage their shareholders to chat about them in online forums? Wouldn’t it create a lot of work for investor relations officers (IROs) “who are responsible for monitoring these online groups, responding to any misinformation posted on them, dealing with legal and other consequences?” Continue Reading →

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2013 Proxy Season Review

ProxyAccessSteven Hall Partners published a list of all the failed “say on pay” votes this season to date. 56 companies  failed with an average 60% ‘Against’ vote.

  • Two additional company received less than 50% ‘For’ but considered the vote a win because ‘For’ votes outnumbered ‘Against’ votes due to abstentions. I say they’re crazy. They failed.
  • Nine companies have failed previous votes
    • Abercrombie & Fitch Co. failed in 2012
    • Big Lots, Inc. failed in 2012
    • Cogent Communications failed in 2011
    • Comstock Resources failed in 2012
    • Freeport McMoran Copper & Gold, Inc. failed in 2011
    • Gentiva Health Services failed in 2012
    • Three companies have failed all three of their say on pay votes (2011, 2012 & 2013)
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Quick Reads in Corporate Governance

Time to Move Down the Food Chain With Proxy Proposals

How does director voting look so far this year? Eighty percent of directors up for election received over 90% shareholder support. And nine of ten received at least 80% support. Directors of large-cap companies had the highest rate of support, averaging 95% approval. Small cap and Micro-cap directors had the lowest affirmative rates, with 76% voting “for.” Only a very small number of individual directors (less than 2%) failed to receive majority shareholder support.  (From ProxyPulse, a Broadridge PwC Initiative. Much more at the site.) Continue Reading →

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Proxy sites dump one-click vote button on SEC concerns

That was the blaring headline in Ross Kerber’s article for Reuters yesterday. Unfortunately, they didn’t dump one-click voting; they renamed it.

The real change was almost entirely for appearances. We no longer have a “Vote with the Board’s Recommendations” button. Instead, we have a “Submit” button. What happens when you hit that button and don’t fill out anything else? All your votes go to the board recommended boxes. There is no change in what actually happens. If there are 20 items, it still takes one click to vote with the board, 21 to vote against the board. Continue Reading →

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Biased Ballots: Oshkosh Vote Questioned – Take Action

I found another case of corporate elections where ballot measures failed to be identified ”clearly and impartially.” This time at Oshkosh ($OSK). Should we be surprised? Isn’t it time you took a minute out of your day to send a message to the SEC asking for an end to such abuses?

Broadridge claims:

When it comes to proxy ballots, regulations are complex and mailing deadlines are tight. Broadridge helps fulfill regulatory responsibilities efficiently and economically. Broadridge handles the entire process on-line and in real time, from coordination with third-party entities to ordering, inventory maintenance, mailing, tracking and vote tabulation. Continue Reading →

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Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime

Malcolm Gladwell’s book The Tipping Point: How Little Things Can Make a Big Difference discusses the “Broken Window theory.

If a window is broken and left unrepaired, people walking by will conclude that no one cares and no one is in charge. Soon, more windows will be broken, and a sense of anarchy will spread.

In the following post I argue that relatively minor problems, like how items left blank on a proxy are counted and how Broadridge labels shareowner proposals, sends a signal. Just like an abundance of graffiti tells you gangs are in charge, switching blank votes to management and relabeling shareowner proposals to gibberish tells you that shareowners are indifferent and that corporate managers have a clear invitation to more serious crime. I ask readers to take a simple action at the end of the post that, like fixing broken windows, could lead to the end of much more serious abuses.  Continue Reading →

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UNFI Vote: Have We Turned the Corner on Annual Elections?

J. McRitchie, UNFI Shareowner

My proposal to declassify the board at United Natural Foods, Inc. ($UNFI) passed by an overwhelming margin of 87.89%:

  • 38,086,048 for
  • 5,248,963 against

See their 8-K filing. Text (pdf) of proposal and opposition. Of course, the margin would have been even higher without insider holdings and blank votes going to management. Have we turned the corner on declassification measures to the point where companies might as well throw-in the towel and declassify when faced with such proposals? Continue Reading →

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UNFI Locked Out ShareOwners but We Voted to Declassify the Board: Company Now Seeks Feedback on Meeting Format

I attended a virtual-only meeting of United Natural Foods, Inc. yesterday and was pleased that a majority of shares were voted in favor of my proposal to declassify the board. That, combined with a move to majority vote requirements for directors a few years ago, helps move UNFI ($UNFI) into the center of the pack with regard to corporate governance. However, I am very disappointed with the lockout style annual meeting. They said they are open to change. Of course, that may depend on shareowners providing feedback. I hope you will join me in requesting changes. I tell you how at the end of this post and I make it a painless cut and paste exercise.   Continue Reading →

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Turkey’s e-GEM Beats Broadridge at Shareowner Communication

Turkey became the first country to require issuers to offer electronic proxy voting with the 1 October inauguration of a voting platform from MKK called e-GEM. The system will stream annual general meetings (AGMs) real time and let shareowners communicate with each other, vote before the meeting, and even change their vote as an annual meeting occurs. Other markets have e-voting but do not require it of all listed companies. Expect other markets to keep an eye on this development.  (Corporate Governance Roundup: New Rules in Canada, Switzerland, Continue Reading →

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Boards, Plumbing, Broadridge & footnoted*

The Changing Profile of Board Recruitment, in the November/December issue of The Corporate Board by Bonnie W Gwin of Heidrick & Struggles, discusses a continued risk aversion among the leadership of the Fortune 500.

Companies seeking to fill directors’ chairs with only current or former CEOs will find it nearly impossible to increase diversity on the board. This may create a conundrum for corporations who want to do both.

Companies are torn between the safety and reliability of veteran leadership but also Continue Reading →

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Will UNFI Go Virtual-Only Again? Not if Shareowners Just Say No

Ever since ownership and management diverged, owners have met with those to whom they entrust their business. They do so at least annually to learn how the business is doing, to communicate, and to exercise their rights as owners. Last year United Natural Foods, one of the companies in my portfolio, announced they were breaking from this tradition of meeting face to face with owners. Instead, they held a virtual-only meeting on December 16, 2010. Will they do it again? Not if shareowners protest. We expect an announcement in late October or early November.

Four centuries ago, Isaac Le Maire’s submitted the first recorded expression of shareowner advocacy at a publicly traded corporation. The corporation was the Dutch East India Company. His concerns are familiar:

How badly the company’s assets are being managed, and how every day needless and unnecessary expenses are being made, of great interest Continue Reading →

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Don't Let Them Get Away With Stealing Elections

Glyn Holton’s How To Steal a Corporate Election informs us of recent outrages on how elections are tipped in favor of entrenched managers and boards. If you’ve taken the time to read his post, I urge you to take another five minutes to help remedy the situation.

To address the situation at American Tower Corporation (AMT) send e-mails to the Office of Chief Counsel at shareholderproposals@sec.gov and the Chairman at chairmanoffice@sec.gov. I also recommend you fill out the complaint form, since this will go to the Division of Enforcement, the office that could take action. I recommend you write something like the following (subject line: American Tower Corporation – Violation of Rule 14a-4(a)(3)):

American Tower Corporation (AMT) is utilizing a Voter Information Form (VIF), which includes Item 04. While it appears shareowners are being asked to approve the idea of say-on-pay votes (now required by Dodd-Frank), they are actually being asked to approve a say-on-pay vote.

SEC Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially  each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the Continue Reading →

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CEOs Should Get Out Vote Among Employees Says Daly

In remarks before the National Press Club, the CEO of Broadridge, the nation’s largest shareholder communications company, called on all CEOs to encourage individual shareholders, including employee shareholders, to vote their proxies.

In 2010, just one in 20 individual retail investors voiced their opinions about the  companies they invested in by exercising their fundamental shareholder right. That compares to recent historical levels four to five times as high. Public companies need to understand the seriousness of this issue and act to reverse this troubling decline to get each of their individual investors — and all individual investors generally — engaged with their companies.

Richard J. Daly went on to explain that as an initial step in an overall strategy to increase individual shareholder voting, he is calling on CEOs of American businesses to

join with us in launching a nationwide effort to encourage their employees  — numbering in the tens of millions  — to exercise a fundamental shareholder right  — and need  — to vote their proxy ballots, whether  it be proxies relating to their employer or proxies relating to other companies in which they invest

As part of the effort, he is contacting the chief executives of America’s top 1,000 public companies to encourage them to motivate their employee shareholders to vote their shares.  Broadridge will inform shareholders —- within the constraints of regulatory boundaries —- that they have the ability to take action online, eliminate the paper, have all information stored in any format they want, have access to it anywhere they want and vote at any time they want, even on such new devices as Android™ phones and the iPad®.

A relatively small increase in voting participation by employees could meaningfully increase individual investor voting participation from 5% per year to 20% or more per year. Companies that can distinguish their investors’ opinions from others’ will more easily have the strength and confidence to stay on course and create value. There is no greater show of support than the ballot, or in this case, the proxy.

While I certainly agree with Daly that steps need to be taken to ensure more retail shareowners vote, I didn’t like the thrust of his remarks, which appeared to assume that more retail votes would mean more votes for management… or am I reading too much in when he says:

Better to hear from actual owners — whose interests are likely aligned with the company — than from outsiders whose agendas may be in conflict with shareholders’ long-term interests.

Additionally, it would have been nice if he would have emphasized the usefulness of sites that help inform shareowners on the issues.

If it is a public relations move that Daly is after, he might recommend that companies take a page from Prudential Financial. They’re rewarding their voting shareowners with totebags or by planting a tree. Last year, the company got an additional 68,000 shareowners to vote, mailed 120,000 bags and planted more than 112,000 trees.

This year, Prudential added information in its proxy materials on sustainability, corporate citizenship and shareowner engagement. Shareowners who cast their proxies online can view the directors’ bios and the supporting statements for shareowner proposals. More importantly, Prudential’s board supported a shareowner proposal from John Chevedden to eliminate the company’s supermajority voting provision.

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The Annual Meeting: From Gloss to Dialogue

Directors & Boards ran an important series of articles in its 1st quarter 2011 magazine on Fixing the Annual Meeting. Some excellent ideas are put forward, especially if we parse out the thoughtful from the conventional. (Link through the Shareholderforum to a compilation of most of the articles cited below from Directors & Boards and also reference their extensive review of electronic meetings.)

One of the most dramatic ideas, central to any real attempt to actually make annual meetings worthwhile, is the major survey finding by David Shaw, publishing Director of Directors & Boards. 90% of shareowners responded that annual meetings are “very important” or “somewhat important.” Contrast that with 78% of public company directors, who responded that annual meetings are “somewhat important” or “not very important” or “not at all important.”

Until directors recognize the importance of annual meetings to the shareowners they are supposed to represent and take their related duties seriously, the schism is likely to remain or grow.

Let’s look at the advice given by authors in this focus issue, starting with Continue Reading →

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Broadridge Smokes Their Own Dope

The rudimentary software Broadridge offers corporations for running virtual annual meetings disenfranchises shareowners. This was on display when Symantec Corp. hosted a virtual-only annual meeting with the software in September. It was again on display yesterday.

There is an old saying that cautions “never smoke your own dope.” Broadridge didn’t heed that advice yesterday when they held their own annual meeting as a virtual-only meeting using their own software. The result was more technical problems, more disenfranchisement and more promises to “look into the problem”.

First, let me caution that, if you ever attend a Broadridge-hosted virtual meeting for the first time, don’t try to log in five minutes before the meeting starts. You will never make it. There is a two-step process that has you first create an account with Broadridge and then sign-in to the virtual meeting. Just reading the lengthy terms of agreement will take twenty minutes.

Shareowner L. Jacobs granted me a proxy to attend yesterday’s meeting on her behalf. Usually, a grant of proxy is documented with a formal letter, which one presents for inspection before entering an annual meeting. Broadridge’s web interface afforded no means to present my credentials. I dutifully held mine up to the forward facing camera on my computer monitor. At least I could say I tried.

The next challenge was a declaration on the Broadridge website:

In order to participate, you must be validated stockholder of Broadridge Financial Solutions, Inc.. [note to Broadridge, yes you have a typo.]

The site said nothing about attending as a proxy. It provided no means to sign on as a proxy. Ever mindful that rights not exercised are rights lost, I navigated the log-in as best I could, ultimately signing on as if I were Jacobs.

Here is the screen I saw next. Take a good look at it, because it is all I saw for the next hour:

The minutes ticked by. Was the meeting delayed? Anxiousness about whether the interface would work gradually turned to a sickening realization that it was NOT working. This is how disenfranchisement happens. No one tells you “You are disenfranchised”. It unfolds indirectly. A polling place never opens, for reasons not explained. Or you show up to vote, but your name is not on the voter list. Or you try to log onto a virtual annual meeting, but the interface doesn’t work.

Did Broadride even know there were problems? Were they delaying the meeting while problems were fixed? I felt alone. If a tree falls in the woods where no one can hear, does it make a sound?

I couldn’t access the meeting with either my Safari or Firefox browsers. Both browsers displayed the same blank “Loading Presentation” screen. Refreshing either browser did not help.

I got on the phone and spent the next fifteen minutes talking to three different people at two different Broadridge numbers, trying to fix the problem. I don’t want to get anyone in trouble, so I won’t mention names. One person I spoke to didn’t know if the meeting was in progress. She checked and confirmed it was. Another told me “They are having a problem at the moment, so it is not your computer. It is a problem with the system itself … there are a lot of people having problems with it right now.” The conversation that followed was troubling:

Glyn – “Do we know when it will be fixed?”

Support person: “No. They are working on it, but they haven’t said when.”

Glyn: “Oh …”

Support person: “There are a lot of people that are having problems with it right now.”

Glyn: “Is there any way to let people know when the meeting will be held?”

Support person: “The meeting is still going on. It is just having technical difficulty.”

Glyn: “The meeting is going on?!”

Support person: “… yes.”

Glyn: “They are conducting the meeting while people are not being able to participate! Is that correct?”

Support person: “Uh … hold on.”

I tried dialing the phone number for shareowners to call in questions to the meeting. I provided Jacobs’ control number and stated I was acting as her proxy. The question & answer session was already in progress, and I could hear over my phone the chair answering a question. He was saying something about investors entrusting Broadridge to provide “mission critical services”. It would have been funny, except he was right. Investors have no say in the matter. We are forced — by Wall Street, by the corporations we invest in, and by the SEC — to rely on Broadridge for mission critical services.

When it was my turn to speak, I asked if the chair was aware people were having difficulty logging in. He said he wasn’t aware of the problem. I asked my question while he had people look into the matter. After answering my question, he announced that four people had reported problems to technical support, and three had been resolved. That sounded different from what the technical support person had told me. Basically, he was saying I was the only person who couldn’t log on.

The chair went on to answer more questions, and my phone line went dead. I was once again cut off from the meeting. I called technical support again. I spoke to a different person who told me the Broadridge software only supported certain versions of Windows Explorer and Firefox. I was using Safari and Firefox on a Mac. Perhaps the software didn’t support browsers on a Mac, but I thought it unlikely. If the problem was with the browsers, I would have expected each browser to fail in its own unique way. The fact that both browsers displayed identical “Loading Presentation” screens suggested they were working fine, and that the problem really was with the Broadridge system.

On the other hand, if Broadridge knowingly does not support Safari — which most Mac owners use — that is shocking. There was no warning on the virtual meeting website. Is Broadridge providing “mission critical services”, or are they keeping up appearances? A situation is emerging with Broadridge’s virtual annual meetings that is similar to that with Broadridg’s proxy services. Both are “mission critical”, but there is a lack of transparency. Anecdotal evidence suggests the “proxy plumbing system” is a shambles, but there is no transparency. Anecdotal evidence suggests virtual-only annual meetings are a shambles, but there is no transparency.

Broadridge has a reputation problem. This is what I tried to point out in the question I called into the meeting yesterday. They publicly take no stance on whether corporations should offer hybrid or virtual-only meetings. But through their actions and leadership on the issue, they promote virtual-only meetings. After all, they could have avoided controversy and held a hybrid annual meeting.

There are some 13,000 annual meetings in the United States annually. Providing technology for conducting these as hybrid meetings could be a wonderful new market for Broadridge. Rather than seize this opportunity, they are floundering in the controversy over virtual-only annual meetings. As long as that controversy continues, many shareowners and corporations will resist their technology. Broadridge should do what makes business sense and what is ethically right. They should facilitate only hybrid meetings, at least until the technology is advanced enough that shareowners trust it. Until such a time, shareowners need to stand together and oppose virtual-only annual meetings. The alternative is disenfranchisement.

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Q&A on Client Directed Voting

Historically, most retail shareowners have tossed their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. “Client directed voting” (CDV), a term coined by Stephen Norman is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture much of the broker-votes cast in their favor that evaporated with recent reforms.

The SEC has indicated that CDV will, among other “proxy plumbing” matters, be the subject of a forthcoming concept release. Therefore, it is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate management entrenchment or their framework can further the interests of shareowners. My intention with this Q&A is to help readers understand some of the surrounding issues and be better prepared to judge proposals.

Since Stephen Norman coined the phrase in 2006, the concept of CDV is generally attributed to him and his work with NYSE’s Proxy Working Group.  On October 24, 2006, the NYSE filed a proposed rule change with the SEC to eliminate all broker voting on the election of directors. Two months later in December 2006, Steve Norman presented a proposal called Client Directed Voting at an investor communications conference.  The main feature of CDV is that it allows  shareowners to instruct their broker how to vote in the event they fail to return a proxy and it severely limits their default voting options.

Recent posts on the Harvard Law School Forum on Corporate Governance and Financial Regulation by John Wilcox (Fixing the Problems with Client Directed Voting, March 5, 2010) and Frank G. Zarb, Jr. and John Endean (Restoring Balance in Proxy Voting: The Case For “Client Directed Voting,” February 14, 2010) have helped to expand and popularize the concept beyond Norman’s initial concept. See also: CDV vs FAVE: More Proxy Voting Options,  2/17/2010 and Comparison of “Proxy Plumbing” Recommendations, 11/8/09.

Mark Latham, a member or the SEC’s Investor Advisory Committee (SECIAC), actually proposed something similar at least as far back as 2000 (see The Internet Will Drive Corporate Monitoring and other papers at http://www.votermedia.org/publications) and his system provides more of an open framework, instead of leaning to management. Tbis post builds on his work, especially the Q&A he recently posted on the subject. My main contribution is to simply highlight some relatively small differences and to call out some additional concerns.

See Latham’s recent post Client Directed Voting Q&A on the VoterMedia.org Publications page at http://www.votermedia.org/publications. His post provides more online references as well as an interesting introduction to frame the topic. Here, I simply dive into frequently asked questions. The questions and Mark Latham’s responses are in black. My responses are in dark red. Caution: Where my response significantly differs from his, you won’t necessarily know, without comparing this post to Latham’s paper.

1. What do you view as the most significant merits and drawbacks of CDV?

Merits of the Open Proposal:

Quality of voting is more important than quantity of voting (voter turnout). The Open Proposal will increase both the quality and the quantity of voting by both retail and institutional investors. But I think its most significant impact will be to increase the quality of voting by both individuals and institutions. This will happen because of the implicit competition among various voting opinion sources, and their evolving reputations in the eyes of retail investors. Opinion sources will include institutional investors, retail investors, bloggers, activists and professional proxy voting advisors funded by possible new mechanisms discussed later in this questionnaire.

Retail investors are the principals in the principal-agent system of corporate governance. We are the beneficial owners of all equities – in the U.S., 25 to 30 percent via direct purchases, and 70 to 75 percent via our ownership of shares in mutual funds, pension funds and other intermediaries. (By “share” of a pension fund, I mean the fraction of the fund’s assets that funds a person’s expected future benefits.) The agents in our corporate governance system include CEOs, boards of directors, institutional investors, proxy advisory firms, compensation consultants etc. The Open Proposal will improve the accountability of all these agents to the principals, by empowering retail investors with better information and voting tools.

Drawbacks: The Limited Proposal has the substantial drawback of severely limiting retail investors’ choices for standing instructions on voting. The Centralized Proposal likewise has the drawback of limiting our choices to only the decisions shared by institutional investors. The Open Proposal has no drawbacks that I can think of.

The key issue is to let shareowners control where their electronic ballots are delivered, just as there is no question they can control where hardcopy ballots are delivered. This simple requirement would give third party content providers an opportunity to compete and improve content.

2. In your view, how viable a solution is CDV to increase retail participation in proxy voting in the short term? How long do you think it would take before CDV materially increased retail participation rates?

Once the Open Proposal is implemented by more and more retail brokers, I expect the quality of all voting and the quantity of retail voting to increase materially within 2 years. The increase in quality is more important, but I expect our retail voting rate to increase steadily and substantially in the long term, eventually surpassing 70%.

Any implementation schedule would be heavily influenced the need for fees to be delivered to third-party providers and the need for a requirement that brokers must follow client instructions to deliver ballots electronically to third-party platforms. I’ve had personal experience with a broker reluctant to deliver proxies according to my instructions.

3. What other complementary reforms would you view as essential to ensure the success of any CDV approach that were to be implemented?

We should fund various competing sources of proxy voting advice that would be available free to all investors. We should also fund some infrastructure for sharing voting opinions. Funds should be allocated among competing providers by retail investor vote. Sources of funds are discussed in my responses to later questions below.

Retail Shareholder Participation

1. In your view, would CDV be more likely to cause retail shareholders to engage with or disengage from proxy voting? Why? Do you think that either of the Limited Proposal or Centralized Proposal would be more likely to engage retail shareholder participation? Why?

I don’t think the Limited Proposal would engage retail participation significantly. A wider range of voting choices is needed for that, so the Centralized Proposal would engage more retail participation, and the Open Proposal would engage the most retail participation.

The Open Proposal will cause retail shareowners to engage with proxy voting because it offers several new and powerful ways for us to do so. Most will just choose a voting feed and instruct our brokers to implement it for our shares. That is powerful because it takes little time, yet can implement intelligent voting based on reputations of the voting feeds – reputations that will become conveniently available in the financial media, just as the reputations of car makers and computer makers are widely available.

Many third-party platforms or voting feeds will be designed around “issues,” rather than harder to understand policies and procedures. That will naturally appeal to a broader base of retail shareowners.

A small but important percentage of retail shareowners will get more involved in helping to determine those reputations of voting feeds. They will compare feed quality by such means as creating focus lists at ProxyDemocracy – see for example http://proxydemocracy.org/fund_owners/focus_lists/25.

Additionally, institutional investors will begin to discuss their votes with each other more frequently, as well as with beneficial owners. Both are already happening, mostly as a result of votes disclosed at ProxyDemocracy. I’ve personally initiated such dialogues with several funds and have increasingly been met with a favorable response.

2. Assume there are three groups of retail shareholders: (i) those who participate in proxy voting currently, (ii) those who would participate but find the process too time consuming and onerous and (iii) those who are unlikely to ever participate in proxy voting. (a) In your view, how many retail shareholders would switch from category (ii) to category (i) if CDV were implemented? Would it make a difference in your view if the Limited Proposal or Centralized Proposal were implemented?

My rough guesses for long term participation rates: Limited Proposal: 25% increase, with most votes going automatically to management. Centralized Proposal: 50% participation. Open Proposal: 70% participation. Of course, these numbers depend on the promotion, regulation and disclosure of whatever CDV system is implemented. Engagement requires either a fiduciary obligation, which we won’t have for retail shareowners, the perception of value in the process (which may take a while) or passion around relevant issues. Of the three, passion around relevant issues will be the easiest to ignite.

(b) In your view, would CDV have a meaningful impact on the level of category (iii) investors?

Yes – the Open Proposal in particular will significantly reduce category (iii). Most shareowners are passionate about at least some specific issues. Once engaged, they are likely to engage further.

3. In your view, would implementation of CDV increase retail shareholder engagement with the annual meeting process? Why or why not?

Yes. The most important part of the AGM is voting, so in my view engagement with voting is one type of engagement with the annual meeting process, even if the shareowner doesn’t physically attend the meeting. (See answer under #1 above). Director elections will be more closely watched, once shareowners gain a sense of empowerment.

If brokers are required to deliver proxies as directed by their clients, another whole model could emerge around proxy assignments. Proxies assigned to organizations or individuals, for example, could give AGMs a new meaning. See http://contingencyanalysis.com/home/papers/suffrage.pdf.

In the 1940s and 1950s thousands of shareowners frequently showed up for shareowner meetings because they sometimes actually deliberated issues and some of those in attendance held proxies from others. Lewis Gilbert, for example, was often given unsolicited proxies, which he used to negotiate motions at meetings.

We are a long way removed from those days. Voting is important, but having a say in setting the agenda on what will be voted on is even better. If a significant number of proxies are assigned or even if shareowners routinely follow specific voting advisors or institutions, leading voices can actually begin to influence how agendas for annual meetings are set.

4. Do you think a CDV arrangement that called for individualized marked proxy cards, as contemplated under the Limited Proposal, would encourage or discourage retail shareholder engagement in the proxy process?

The Limited Proposal would take us at least part way back to broker votes. In the absence of meaningful choices, most shareowners will defer to management. Although that would result in votes, I don’t see it resulting in “engagement.” It might be a plus for shareowners to be able to pull up a pre-filled ballot to show them this is how they are about to vote, according to registered preferences.

However, I wouldn’t ask them to affirm every single pre-filled ballot. That could be a deal breaker for people with stock in lots of different companies or who would just rather spend their time on other activities. Under an Open Proposal, feeds will offer the ability for retail shareowners to essentially build a “voting policy” just as institutional voters are able to do. That model will increase participation and the quality of the vote.

5. In your view, would CDV encourage sufficiently informed retail shareholder voting or would it effectively discourage retail investors from reading the proxy statement and understanding the particular proposals in the context of a company’s particular circumstances? What criteria do you use in determining whether retail shareholder voting is sufficiently informed? Does your answer differ as between the Limited Proposal and Centralized Proposal?

In my view, the Open Proposal will encourage sufficiently informed retail shareowner voting. In order for retail voting to be sufficiently informed, it is not necessary for all retail shareowners to read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. Most retail shareowners won’t read proxy statements.

Open Proposal CDV enables retail shareowners to implement a specialization strategy similar to that of institutional investors. Most fund managers do not read the proxy statement and understand the particular proposals in the context of a company’s particular circumstances. They have specialized staff for that, some in-house, some out-sourced. Likewise a few of us retail shareowners will read proxies, but most will not. Those who do not read them will be informed by those who do, and by the many other sources of voting opinions who read the proxies.

The criteria for determining sufficient information are in general too complex and subjective to describe concisely. But some features I would look for in an effective retail shareowner information system include:

(a) a wide range of voting opinion sources;

(b) open access for any new opinion sources to publish their opinions;

(c) open access for shareowners to choose any opinion source for our standing instructions on voting;

(d) sufficient funding for professional voting opinion sources that compete for funding allocated by retail shareowner vote.

Thus the Limited Proposal would not inform shareowners sufficiently; the Centralized Proposal would be better; and the Open Proposal would be best in facilitating the ability of retail shareowners to align with groups they trust and that share their values.

6. What investor education measures would you recommend to ensure investors were sufficiently informed about CDV? Who should undertake those and bear the cost?

I would recommend an ongoing competition open to any providers of investor education, who would compete for funding allocated by retail investor vote. This could be limited to education about voting issues (informing about CDV, providing voting opinions, organizing voting opinion data feeds, discussing reputations etc.), or voting could be included in a broader retail investor education competition. For more explanation, please see http://votermedia.wordpress.com/2010/01/23/voter-funded-investor-education-proposal/ .

This would benefit us retail investors, so we should pay for it. Since the benefit is shared broadly, it should not be paid by retail investors one at a time, but rather by funds that we own collectively – corporate funds. (See my answer to General question #1 above – “Retail investors are the beneficial owners of all equities.”) There are several possible ways of arranging this. One example is the “Proxy Advisor” proposal at votermedia.org/proposals. In the near term, the agents in our corporate governance system may try to prevent us from using our funds to empower ourselves this way, so a helping hand from regulators may be needed to get it started. Public funds earmarked for retail investor education and advocacy could be used for the first such initiatives.

Implementation and Ongoing Administration

1. Should retail shareholders have to renew their agreement with their brokers with respect to standing voting instructions annually or on some other basis? Why? Is your conclusion affected by the lower incidence of retail voting following the introduction of “notice and access” (i.e., even asking shareholders to take the time to access the proxy statement online resulted in a significant drop in participation)?

Yes, it’s reasonable to require retail shareowners to renew their standing instructions annually. This renewal should only require a simple mouse-click, once the investor has logged in to the broker’s website and gone to the standing instructions page. The renewal could be done at any time, and be valid for one year from the last time the investor clicked to renew. It also affirms the channel of communication… the e-mail address is still valid.

The quality and reputation of voting feeds will change over time, so retail investors should review their choice of feed at least annually.

No, the “notice and access” participation dropoff may not be relevant here, since it occurred in a system without CDV. CDV is likely to fundamentally change retail investor attitudes and behavior regarding proxy voting.

2. Should the renewal process be an affirmative one – that is, the arrangement would drop away, absent shareholder action to renew his / her voting preferences? Does the fact of a rapidly changing governance landscape affect your decision? Why or why not?

My answer to the previous question covers this question also.

3. How should CDV address director slates, in contested and uncontested elections?

I don’t think director slates in contested and uncontested elections would make any difference to the implementation of CDV. All such cases can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed.

4. Which matters should be eligible for inclusion in a CDV arrangement (e.g., only uncontested matters)? How would those matters be defined (e.g., shareholder proposals are almost always “contested” by management and the board)? How should the fact of significant variation among proposals on a given matter, particularly in light of a company’s particular circumstances, affect the decision about whether a matter is appropriate for treatment within a CDV arrangement?

Like my answer to #3 above: All matters should be eligible for inclusion in a CDV arrangement. All can be handled the same way, with the retail shareowner voting as per standing instructions to use a specified voting feed. Competition among voting feeds will encourage those who create them to constantly try to improve their voting quality and reputation. One improvement is to adapt their analysis and voting decisions to the significant variation among proposals on a given matter.

5. If only selected matters are eligible for inclusion in a CDV arrangement, will CDV materially improve the retail investor’s engagement in the annual meeting process or the administration of proxy voting, given that there could be other matters on the proxy card as to which the shareholder would have to vote?

Limiting CDV to selected matters only would lessen the benefits of CDV, so I don’t recommend such limits. It would be better not to implement any CDV that severely limits voting options, since once such a system is enacted it would be difficult to amend, given that those who would benefit from such limitations will be in an even stronger position to fight opening up the process.

6. Should preferences be indicated on a portfolio or per stock basis?

Preferences should be indicated on a portfolio basis. That is simplest for retail investors and for brokers when they offer CDV to clients. Changing preferences stock-by-stock can be handled by those who create the voting feeds. So brokers need not build systems for stock-by-stock customization of standing instructions.

With the Open Proposal, anyone can create a voting feed, just as anyone now can create a blog. One way to create a feed is to remix other feeds, just as blogs often post or link to material from other blogs. A remixed feed can select different source feeds for different stocks or different industries or different categories of voting matters (director elections vs shareowner proposals etc.). In the article “The Internet Will Drive Corporate Monitoring” I called remixed feeds “meta- advisors”.

7. The Limited Proposal is constructed such that retail investors could provide standing voting instructions to their brokers in their brokerage agreements. If standing voting instructions were indicated on a portfolio basis, should the instructions cover only those companies in which a retail investor owns shares at the time the brokerage agreement is signed or all subsequent purchases of stock as well? If instead preferences were indicated on a per stock basis, when would retail investors indicate their preferences with respect to stocks purchased after the investor’s brokerage agreement was signed? At the time of purchase or some other time?

Standing voting instructions on a portfolio basis should cover all subsequent purchases of stock in that portfolio.

8. What choices should a retail shareholder have when deciding its standing voting instructions? (a) Only those from the Limited Proposal, namely (i) vote against management, (ii) vote for management, (iii) abstain on all matters, and (iv) vote proportionally with the firm’s other clients’ instructed votes? (b) Vote in accordance with the brokerage firm’s published guidelines? (c) Various institutional investor voting guidelines? (d) Proxy advisory firm guidelines? What do you see as the pros and cons in providing each of these choices to shareholders (e.g., insufficient number of choices, information overload, likely absence of action when too many choices)? Are there other choices that are appropriate?

Because we retail investors are principals not agents, there are few reasons to regulate how we vote our stock. One valid reason is to prevent vote-selling. The tried-and-true way to prevent vote- selling is to keep voting decisions confidential, as we do in democracies. Only when an agent is voting other people’s stock do we require vote disclosure, even though that opens the door to vote-selling.

Therefore retail shareowners should be able to vote any way we choose, subject only to a prohibition on selling our votes. So I recommend the Open Proposal, where we can choose any voting feed. The potential information overload problem can be handled well enough by the market for public reputation. Most retail investors will only pay attention to perhaps the top ten best known voting feeds. A small minority of retail investors, along with writers in the financial media, will be the opinion leaders helping to determine public reputations, and thus which of the hundreds of voting feeds deserve to become the best known.

9. The Limited Proposal, as originally conceived, calls for the default choice to be proportional voting with the brokerage firm’s other instructed votes. Do you agree or disagree with this default choice and, if the latter, what should the default choice be (e.g., no vote)?

This question arises for all three CDV proposals discussed here: what about investors who don’t give standing instructions, or whose instructions have lapsed after one year with no renewal? The default choice should either be whatever the shareowner selects or it should be a “no” vote, just like if a voter fails to mark an item on the proxy, that item should be left blank.

Counting a blank vote as anything else would make mounting campaigns to deny companies a quorum much more difficult. Neither brokers nor anyone else should be permitted to vote on any ballot item in the absence of voter instructions (i.e., all items should be considered non-routine matters in NYSE rules). This is one reason why the Limited Proposal is such a poor choice. It would be better not to have CDV at all than it would be to go with the Limited Proposal. Again, once adopted, it will be hard to change because those who benefit from severely limiting options will have a vested interested in continuing to limit the voice of shareowners.

10. What administrative steps would brokers have to take to implement CDV? What step is most likely to provide an obstacle for CDV (e.g., individualized marked proxy cards, having information from companies about proposals to be voted on a timely basis)? How would broker obligations affect the company’s own obligations under Rule 14a-8 (e.g., would those obligations have to be accelerated)?

Brokers would have to create a page on their website for retail investors to indicate which voting feed they want to use for standing instructions. Brokers would have to store their clients’ instructions and transmit them to Broadridge (or other service provider). I don’t think individualized marked proxy cards are necessary, but could be provided if an investor requests them. Broadridge could handle the details of getting the voting decisions from the selected voting feeds, matching them with client shareholdings, and offering electronic and paper-based ways for investors to override their feed-based instructions if desired. I don’t think broker obligations would affect the company’s own obligations under Rule 14a-8.

Brokers/banks, transfer agents should be capable of passing through or delivering proxy votes to all valid electronic platforms. If that is the case, they don’t need to do much more than be aware and make their clients aware of the options.

11. In your view, would brokers in fact increase their engagement with retail investors about matters subject to a vote at a company’s next annual meeting? Would liability considerations affect your conclusion? Should brokers who do engage be exempt from the solicitation rules?

I don’t think it would be the brokers’ role to increase engagement with retail investors on voting matters, unless a broker wants to develop a reputation as a voting “brand.” (see Proxy Voting Brand Competition at http://votermedia.org/publications) There will be plenty of engagement in the public shared realm, for example via sites like moxyvote.com. Brokers could just link to such sites from their client web interface.

12. Should brokers be able to delegate responsibility for fulfilling their obligations under a CDV approach such as that contemplated by the Limited Proposal (i.e., filling out individualized proxy cards, maintaining lists of customer standing voting instructions, etc.) to a third party agent? Are there any obligations brokers should not be able to delegate to an agent?

I’ve addressed most of these issues in my response to question #10 above. Brokers should not be forced to take on CDV responsibilities. Other third-party firms will do a better job. The key is to ensure that brokers or their agents deliver ballots to wherever the shareowner directs.

13. What level of responsibility and liability should be attached to intermediaries for properly completing a proxy card for CDV, if that feature were adopted as part of a CDV arrangement? If brokers are able to delegate such responsibilities to a third party agent, what liability, if any, should attach to the agent?

I have no particular view on this, beyond the obvious general principle that there must be enough responsibility to make the overall CDV system work. I’m not sure which design will best balance cost, integrity and ease of use.

14. Should a clear audit trail and related reporting be required elements of CDV? Who would bear responsibility for assuring the quality of the audit trail and producing related reports? Who should receive the reports in the first instance (e.g., only the company and the tabulation agent)?

Same answer as for #13 above.

15. What costs would you foresee in implementation of CDV? Who should bear those costs? If the costs should be shared, how should that decision be made? Why should companies wish to pay for CDV, given that they may view CDV as a reductionist approach to complex issues of governance (i.e., indirect subsidies by smaller companies with fewer issues or larger institutional ownership, as compared to larger companies that attract greater attention and have potentially larger retail ownership)?

Cost categories include: (a) creating voting opinion feeds; (b) system development for brokers; (c) vote processing by Broadridge and similar service providers.

If the SEC publicly encourages the development of CDV, many organizations are likely to build the necessary systems voluntarily at their own cost. Voting opinion websites have already started appearing (ProxyDemocracy.org, TransparentDemocracy.org, MoxyVote.com). These can easily start sharing voting opinion feeds. To enhance their quality, public funds earmarked for retail investor education and advocacy could be allocated by investor vote among such competing providers of tools for CDV.

Once we have a broad choice of publicly available voting feeds, it will not be expensive for brokers and Broadridge to adapt their existing proxy vote systems to use the feeds. Some adjustment to the existing system of issuer fees for vote processing will help shift payments from paper mailings to electronic submission via CDV standing instructions.

CDV will increase the quality of voting and decrease the quantity and costs of paper mailings. These benefits will outweigh the costs of building CDV systems. Standardized data tagging will likewise streamline the system and reduce costs in the long run, although it will require some up- front investment.

In your question “Why should companies wish to pay…?”, I’m not sure if you mean “Why should the owners of companies wish to pay…?” or “Why should senior employees of companies (e.g. CEOs) want companies to pay…?” So I’ll answer both questions: We owners of companies should wish to pay (with our companies’ funds) because for us, the benefits of better voting, increased accountability, better corporate governance, and resulting higher investment returns will outweigh the costs. Some employees (e.g. some CEOs) may not want companies to pay, because the increased accountability would reduce their power and influence over their own pay and tenure as CEOs.

NYSE rules require payment by issuers for the cost of voting electronically but issuers may not always be doing so. See NYSE Rules 450-460 pertaining to proxy distribution.  The Rules are actually written for “member organizations” (i.e., brokers) and specify what brokers or their agents (e.g., Broadridge) can charge for distribution and collection of proxy-related items.  The rules are very clear that Issuers are supposed to pay for all of the distribution (and collection) costs and that brokers can expect to collect from them. These rules should also apply to Issuers when shareowners choose to take delivery of proxies or to vote through sites like RiskMetrics, ProxyGovernance and MoxyVote.

The fees that Broadridge is charging to electronic voting platforms (RiskMetrics, ProxyGovernance, MoxyVote, etc.) should be paid by the issuers as part of the overall collection costs (like postage).  The electronic platforms, in this function, are merely an extension of the proxy distribution agent and it’s odd that fees are payable to Broadridge (beyond a nominal fee covering their costs).  It’s also notable that Broadridge charges on the order of 10X for electronic vote collection from these platforms than it is permitted to charge the issuers, from what I understand.

If Broadridge is offering a “value-added” service to these electronic platforms, where is the “baseline” service that costs less?  The answer is that one does not exist. Perhaps the value-added services revolve around the ability to turn blank vote into votes for management without following the rules that apply to proxies. (See my blog post, Jim Crow “Protections” for Retail Shareowners at http://corpgov.net/wordpress/?p=1459 and the petition I filed with the SEC for a rulemaking on “blank votes” at http://corpgov.net/files/2010/04/SECpetitonOnBlankVotes.pdf)

A key point here is also that fees are charged to electronic platforms on a “per ballot” basis (generally one fee per position per year).  Electronic platforms are generally passing along these costs to voters.  That becomes much more difficult, perhaps impossible, when trying to service retail shareowners with small position sizes.

This is, in effect, a system where the voter is paying to vote, like the old Jim Crow poll tax.  It also inhibits progress (i.e., the development of electronic platforms for retail shareowners) because voting through the mail and through the phone is free. Why should retail shareowners have to pay when voting online, which is inherently the least expensive method of voting? Why should services like MoxyVote have to front such expenses? Without a change, it is hard to see how they can ever turn a profit and it seems even less likely that nonprofits, such as ProxyDemocracy, would ever be able to offer users the option of voting on a ProxyDemocracy platform.

16. What ongoing costs would there be in the use of CDV? Who should bear those costs?

My answer to the previous question applies to this question also. The NYSE should consider forcing Broadridge to direct some of its “paper suppression fees” to firms like MoxyVote.com that should be sharing in this incentive, since shifting to electronic from paper voting saves money.

17. Do websites such as ProxyDemocracy.org, TransparentDemocracy.org or MoxyVote.com (or even a new database of institutional decisions) make CDV, or at least the need for tailored proxy cards, less necessary as a method?

These websites are the first steps toward Open CDV. For the sake of improved accountability, corporate governance and investment returns, we should build on these pioneering initiatives and develop a complete Open CDV system to empower all retail shareowners. I don’t think hard-copy proxy cards are important, but could be offered to those investors who request them. We should have online systems that let investors manually override their standing instructions. All CDV proposals include this feature. We can preserve the manual online voting systems we already have, as an option that each investor could use if and when desired. Ballots can land in electronic mailboxes of choice blank and can then be pre-filled based on the “voting policy” or “brand” loyalty program created by the user (i.e., just as institutional voters have been doing for years).

Centralized Proposal

In this section, I try to answer the questions in two contexts – for the Centralized Proposal and for the Open Proposal (which I also call Open CDV).

1. In your view, would institutional investors be willing to provide their voting decisions in advance of a meeting? Are there obstacles to institutional investors’ providing this information (e.g., confidentiality considerations, considerations relating to proprietary investing strategies or investments)? (Note that some mutual funds do this now.)

If predisclosing their voting decisions is voluntary, then some institutional investors would do so and some would not. One reason could be to maintain confidentiality of their voting decisions, for example to avoid improper influence on them from corporate management. Another may be to avoid revealing their holdings (and thus proprietary investing strategies) at that moment.

In the Open Proposal which I favor, it’s not a problem if many institutional investors don’t predisclose their votes.

There is already a healthy base with Florida SBA, CalSTRS and CalPERS  covering most companies. In addition, there will be plenty of other sources of voting advice besides institutional investors, many of which will be focused on a limited number of issues. Some can already be seen at MoxyVote.com.

2. In your view, is it feasible to receive institutional investor voting decisions sufficiently in advance of an annual meeting to input into a database as contemplated in the Centralized Proposal? What operational concerns might you have?

Yes, with automated networked systems, timeliness should not be a problem. This would be less of a concern with the Open Proposal, since its numerous sources of voting advice can be used as fallbacks in case some voting decision sources are too late or missing. MoxyVote.com has already built its system that way, where users specify a priority list of decision sources, and the highest priority one with a decision available is used.

A fundamental operational issue is data standardization across all users in this shared networked system. The SEC Investor Advisory Committee’s Proxy Voting Transparency proposal, passed unanimously on February 22, 2010, advocated standardized data tagging that should resolve this issue. Additionally, I understand that on electronic voting platforms, the vote doesn’t necessarily get submitted until very near the final deadline. However, if votes are simply being filled out according to the guidance of third-parties, votes can be compiled and cast very quickly.

3. Should retail investors be given notice when new institutional investors add their voting decisions to the database after a retail investor has provided its standing voting instructions? What sort of notice should be provided? Who should be responsible for providing the notice?

CDV will induce an active public discussion in the financial media about the reputation of various sources of voting opinions. Most of us retail investors will not need to pay attention to every new source of opinions. Most of us will pay attention to the opinion leaders in this public discussion, who will let us know, for example, their top ten recommended and/or popular opinion sources, and their general characteristics – e.g. degree of emphasis on financial vs environmental vs social/political considerations. It will be like brand reputation for makers of complex products like cars or computers.

So no, there is no need for notice to be sent to retail investors when new institutional investors add their voting decisions but investors should be able to seek and find such information easily and should be able to subscribe to a news feed like google, alerting them to new participants. The new providers have every incentive to get the word out. Again, this issue is less of a concern in the Open Proposal, with its greater breadth of available voting opinion sources. Annual review and/or confirmation will help those who do not pay attention to keep up more than they otherwise might.

4. Would you allow any institutional investor who wanted its voting decisions to be in the database to be included? Why or why not? If not, what criteria should be used to decide which voting decisions would be available? Should there be an ownership threshold? If so, what threshold would you recommend? Should they be paid a license fee?

Likewise, these kinds of concerns are a good illustration of why the Open Proposal is better than the Centralized Proposal. In the Open Proposal, anyone can publish a voting feed for free, just as anyone can now publish a blog for free. There is no centralized database of blogs; there is just a data standard, which we should soon have for proxy votes.

5. Should a CDV database of voting decisions provide background about the nature of the contributing institutional investors, so that retail investors could place the voting decisions in context (e.g., determine whether the institutional investor likely has a bias)? If an institutional investor’s voting guidelines or decisions are reported, should it be required to provide context for the guidelines or decisions (e.g., conflict of interest disclosure)? If so, what contextual information would be appropriate? Should liability attach to that information?

An unregulated public market for reputation of voting opinion sources can probably handle most of these issues well enough, especially in the Open Proposal where it is easy for new entrants to compete by building better reputations for serving retail investor interests. Additional disclosures, especially regarding potential conflicts of interest, should be encouraged but not required until we see abuses that may make such requirements advantageous. Normal contract law should cover liability requirements.

6. In your view, should a proxy advisory firm’s guidelines on voting various measures be included in a database of voting decisions? Why or why not? Would your view change if the SEC regulated proxy advisory firms?

If I answer in the context of the Centralized Proposal, I would favor making it as much like the Open Proposal as possible: free voluntary access by all who want to participate, as providers of voting decisions and receivers of voting decisions. If a proxy advisory firm wants to publish its guidelines and/or its specific voting recommendations, they should be allowed to do so, as at least some do now. The Open Proposal does not depend on a centralized database, so the inclusion question does not arise. My views here do not depend on SEC regulation of advisory firms.

7. How easy or difficult would it be to develop the technology for the voting decision database and proxy-voting platform contemplated in the Centralized Proposal?

Not difficult. ProxyDemocracy and Moxy Vote have already built much of this, on a very low budget. Both systems can be readily enhanced if additional data standardization is adopted by the SEC and if cost reimbursement is forthcoming from issuers. See discussion by MoxyVote.com at http://www.sec.gov/comments/s7-22-09/s72209-8.pdf.

8. Who should bear the costs of maintaining any database of voting decisions? Who would determine what fees could be charged for use of the database? Should CDV be premised on retail investor willingness to pay for access to the database (as is the case for existing proxy advisory firms)?

Voting systems are a collective benefit to all shareowners of a company. So it does not make sense to make each individual voter pay to be able to vote. That’s why democracies don’t charge their citizens a fee to use a polling booth when there is an election. Citizens pay for election administration costs as a group, not one by one.

Likewise the information systems to enable intelligent voting are a collective benefit, and should be paid collectively, not one user at a time. To encourage competition among information providers, collective funds (i.e. corporate funds) should be allocated among them by the voters. Thus retail shareowners should allocate at least some of the CDV infrastructure funds by vote. This could pay for professional proxy voting advice that could then be shared freely. It could also pay for some infrastructure, such as free shared databases if they are needed. There is a large cost differential between delivering proxies by U.S. mail and through the internet. This cost savings should be used to pay the costs of Open CDV.

Institutional Investor Perspective

1. Why should institutional investors care about CDV? Isn’t this a retail shareholder issue?

Building reputations will build followers; institutions successful in creating “brands” will gain following and influence. As mentioned above, CDV will create a new public debate about the quality of institutional investor voting. Institutions are voting on behalf of retail shareowners now. So this retail issue is also an institutional issue.

2. If a database of institutional investor voting decisions were made available as contemplated under the Centralized Proposal, would other, smaller, institutional investors make use of this database?

Under either the Centralized Proposal or the Open Proposal, I expect that many smaller institutional investors would make use of the voting opinions available. Proxy advisory services may try to curtail disclosure by larger institutional investors in order to maintain their business and avoid disseminating research for free to smaller institutional investors but I expect they will have a difficult case, since many of these larger institutions subscribe to multiple services and have their own staff. They will be able to argue and show that disclosure of their votes is not giving the proxy advisory services they paid for directly to smaller institutions, since their final votes will often differ.

Management Perspective

1. In your view, would corporate managements generally be willing to support CDV as a means to increase retail shareholder participation or does the diversity of issues facing public companies in light of their particular circumstances make it less likely that they would favor participation over informed participation? Do you think CDV would be more or less likely to promote a “one size fits all” approach to governance and other issues?

Some corporate managements would be willing to support CDV as a means to increase retail shareholder participation. Other corporate managements may oppose CDV (especially the Open Proposal) because it will reduce their power while empowering the firm’s beneficial owners.

Some managers and entrenched directors may prefer participation by “sheep” in a relatively constrained environment where a few sizes fit all. However, an Open CDV system would encourage management to participate in these platforms as well. Management and existing boards want the ability to communicate with shareowners. Open CDV systems could provide the platform in a space of higher trust.

It will enable more informed voting by networking and sharing the information available. This is similar to the way institutional investors vote stock, where typically a staff of specialists make the voting decisions on behalf of fund managers and beneficial owners.

One key difference with CDV however, especially under the Open Proposal, will be that we beneficial owners will have the power to choose among competing sources of voting opinions. We will also have more opportunity to contribute to the voting opinions and the reputation assessment of opinion sources. Open CDV will increase informed participation by retail investors in the voting decisions of stock we beneficially own through institutional investors. At a minimum, we will be able to express more informed opinions about how institutions are voting our stock.

Open CDV would be less likely to promote a “one size fits all” approach to governance and other issues, since it offers maximum competition among sources of voting opinions. Competition will enhance voting quality, and “one size fits all” is a low quality approach which will thus be used less and less.

For example, when I find conflicting votes between CalPERS and another advance discloser, I often go with CalPERS because they most frequently provide a reason for their vote. As this becomes more popular, more care will be put into the reasons disclosed.  Canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following.

2. In your view, would you expect that solicitation expenditures would decline, increase or stay the same if CDV were implemented? Why?

I expect that that solicitation expenditures will decline under Open CDV, especially in terms of just getting participation. Solicitation will be replaced by and/or migrate to elements of the CDV system, which will be supported by collective funds, becoming free or low cost to all users. Solicitation will focus on convincing the CDV opinion leaders and large funds of the relative merits of each possible voting decision, just as solicitation now gives emphasis to convincing proxy advisory firms.


1. Are other approaches that are comparable to CDV more desirable?

a. Creating a system of “public” proxy advisory firms to increase public availability of professional voting advice?

This would be a valuable adjunct to CDV. Even under the Open Proposal where anyone can contribute voting opinions to the public, I expect we will still need professional voting advice. Widespread sharing of free advice via the internet is likely to undermine the business model of existing proxy advisory firms (PAFs), just as free sharing of news is now undermining business models of the mainstream media. So to raise the overall quality of voting, a system of “public” PAFs makes sense. That was the reason for the title of my article “The Internet Will Drive Corporate Monitoring”. “The Internet” was a reference to internet-based CDV, and “Corporate Monitoring” was a reference to public PAFs and enhancements thereof.

For such a system to work, it is important for the public PAFs to be chosen by shareowner vote, to give PAFs a strong incentive to serve the owners’ interests. They should be paid from the shareowners’ corporate funds. The SEC should encourage the development of PAFs by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples at http://www.corpmon.com/corporations/proposals.html that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented.

b. Changing the pop-up on proxyvote.com to allow for other choices besides voting for management?

This too would work best as an adjunct to CDV. A potential difficulty with the pop-up approach is, which choices should be offered? With Open CDV, there will be potentially hundreds of choices – too many for a pop-up. But the proxyvote.com pop-up could show the choices being selected by those retail investors who are using the full CDV system by rank and another alphabetically.

c. Allowing shareholders to “plug in” to a voting feed or electronic voting platform (e.g., by requiring companies to permit shareholders to direct the proxy card or VIF to the desired platform)?

Voting feeds and electronic voting platforms like Moxy Vote are not “comparable” to CDV. They are CDV – ways for clients to direct voting by giving standing instructions. I think the best design for CDV is the Open Proposal with voting feeds. It is scary to me that CDV systems that don’t allow shareowners to dictate where their electronic proxy ballots are to be delivered are actually being contemplated. NYSE rules already allow the shareowner to control delivery to a physical address, why would this not extend to electronic mailboxes?

2. Would you be in favor of additional regulation to facilitate the creation of public voting databases, such as data-tagging of proxy and vote filings and further relaxation of solicitation rules?

I would be in favor of data tagging mandates. They are a mild and inexpensive form of regulation, just a transparency requirement. In the long run, Open CDV will make it feasible to reduce many other more expensive and intrusive forms of regulation, that try to limit abuses by the agents in our corporate governance system. It is cheaper and more effective to empower the principals with a better information system.

I also favor relaxation of solicitation rules. That would be less regulation, not “additional regulation”. Certainly, it would be good to have clarification that making voting decisions known in advance of AGMs does not constitute solicitation.

Further Comments

The development and implementation of Open CDV seem to me both desirable and inevitable. The SEC Investor Advisory Committee has created momentum toward data standards (like XBRL) for proxy votes. General principles of free speech would support allowing anyone with an opinion on any proxy voting issue to share that opinion with others, such as in a voting feed published on the internet. When a range of well informed voting feeds become available, some brokers will start offering CDV, and retail clients at other brokers will start demanding it too. In “The Internet Will Drive Corporate Monitoring”, I described the inevitability this way: “Would you outlaw software that makes voting easy? Would you outlaw advice?”

Not only will CDV improve our corporate governance system, but “public” voting advisors will make agents more accountable to principals in corporations and in democracies. We will have competitive markets for shared information. Voting advisors that compete for public funds allocated by citizen vote in democracies are called “Voter Funded Media” or VFM. They make political leaders and bureaucrats more accountable to citizens.

The VFM system has been developed and tested at the University of British Columbia for the past four years – see “Global Voter Media Platform” at votermedia.org/publications. Its success provides a live illustration of how a new competitive voter information system can influence the older less competitive system, even when the older system has far more funding. If the new system is more closely aligned with the principals’ interests, it will put competitive pressure on the old system.

The established campus newspaper, The Ubyssey, receives an annual fee of $5 from each student, totalling over $200,000 per year. In the new VFM system, blogs compete for slices of an award pool averaging less than $10,000 per year for the past four years. Not surprisingly, the bloggers appreciate this support, even though they have to compete hard for a piece of it. The voting system does not guarantee positive shares for all; many receive nothing – see votermedia.org/communities/82-ubc-ams. Perhaps more surprising however, is the reaction of The Ubyssey’s Coordinating Editor Justin McElroy [Video interview, 2010-04-30]:

…the established media, the one that students are giving their money to, and are more or less bound to giving, you know, that media wasn’t doing its job, and so competition is always good. It ensures that people do their best, and try to break the stories first, and get that information out there. And from a simple standpoint of, does it ensure that The Ubyssey does a better job meeting the needs of students and getting stories out there, VFMs ensure that, because it provides accountability to us, simply because if a story’s out there by a VFM that’s better than ours before us, you know, we have egg on our face. So, we’re paid way more money, we have way more resources…

…the fundamental questions of whether, does VFM work for students? I think yes. Does it increase campus discussion and student engagement? I think absolutely. Does it ensure that established media, you know, does a better job? Yeah. Are students and is this campus better off because of that? Well, absolutely.

The new equilibrium is one of cooperative competition. The Ubyssey now cooperates with VFMs on joint news media productions. These media competitors often link to each other. Student journalists comment on their competitors’ news stories, and sometimes leave one media group to join a competing media group.

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Update on Virtual Shareowner Meetings

As they have done for the past few years, Intel Corp. hosted a hybrid shareowner meeting today, allowing shareowners to attend in person or via the Internet. This meeting was important because Intel had planned to make it a virtual meeting, hosted exclusively on the Internet. A strong reaction from shareowners prompted Intel to back down for this year, but this may be just a one-year reprieve. As the same technology used for today’s hybrid meeting would be used for an exclusively virtual meeting, we had today a glimpse of what a virtual Intel meeting might be like. (see Intel Virtual Mtg Out for 2010 But Exploring Future with USPX)

Broadridge provided the technology, and the meeting was hosted on a Broadridge website. Shareowners accessed the meeting using the same 12-digit control numbers they use to vote shares on-line through Broadridge’s proxyvote.com website. Since it is unclear how a competing technology provider might authenticate sharewoners, Broadridge is poised to monopolize the market for virtual—and even hybrid—shareowner meetings.

In the days leading up to the Intel meeting, shareowners were welcome to post questions to an “Investor Network” website that is in beta testing by Broadridge. Many questions were posted and Intel staff answered a number of them on that same website prior to the meeting. Intel represents that questions posed over the Internet during the meeting, if not answered during the meeting, will be answered on that website. The process appears manual. I tested the system by posting a question during the meeting. It was not answered during the meeting, and an hour after the meeting, it had not appeared on the Investor Network website.

The meeting itself was a typical shareowners meeting. It lasted just 40 minutes, with the chair and CEO fielding questions while the polls were open. It was professionally run and actually one of the better shareowner meetings I have recently participated in. Despite the availability of access via the Internet, about twenty-five shareowners attended in person. Many corporations that don’t offer Internet access fail to get that number.

Questions from the audience were mostly interesting. Two individuals praised the hybrid format while arguing that an all-virtual meeting would not be good for shareowners. In response, chair Jane Shaw said no plans have been finalized as to whether Intel will go all-virtual in 2011 “or beyond.” She declined to endorse criticisms of an all-virtual format, which suggests there is still interest in going all-virtual.

As feared, Broadridge’s technology largely reduces shareowners to a spectator role. I routinely speak out at shareowner meetings, sometimes to ask questions, but also to address procedural errors by the chair, which are common. No such opportunity existed with Intel’s meeting today. You can shout at your computer screen, but it won’t do any good. The user interface is dominated by a small video of the meeting. There are links to the proxy materials, meeting rules and a few other documentations. You can click on a button to fill in your ballot at any time during the meeting up until the polls close. There is also a small window for typing in a question. The brevity of the meeting and the fact that the chair appeared to read Internet questions from a sheet of paper suggest that Internet questions were pre-selected from questions submitted in advance of the meeting. In summary, there appears to have been no means for shareowners participating via the web to participate during the meeting. Other than filling out the ballot, our role was entirely passive. Neither before, during nor after the meeting was there any mechanism for shareowner-to-shareowner communication.

Needless to say, there will need to be improvement before shareowners can support corporations in hosting all-virtual meetings. The United States Proxy Exchange (USPX) is spearheading shareowners’ response to the opportunities and risks virtual or hybrid meetings pose. We will be hosting a deliberative conference this November in Boston at which shareowners will set guidelines for the conduct of virtual meetings. Intel has already committed to participate in that conference, and I invite all institutional and retail shareowners to join us as well. Details about the conference will be announced in a few weeks. To receive that announcement, please e-mail me at mailto:mail@glynholton.com.

(Publisher’s note: Thanks to Glyn Holton for this guest commentary and for his good work at the USPX. Guest posts on substantive corporate governance issues are always welcome. Contact James McRitchie.)

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Ramblings on Votes, the Power of CorpGov.net, TCL and Jim Crow for Retail Shareowners

I see from Alcoa’s 8-K filing, that William Steiner’s proposal to end supermajority requirements won 68%. Last year, a similar proposal won 73% but this year management put their own proposals on the proxy, so some just voted for their proposals to end supermajority requirements in three areas. Management’s highest proposal won 736,143,769 votes, with 20,319,646 opposed and 4, 344, 531 abstentions. I understand that’s 74% of stock outstanding, so the measures still failed to meet the 80% supermajority threshold required for change.

With 74% favoring, and 2% opposing, it is yet another frustrating exercise in futility by shareowners. Since management placed proposals on the proxy, they look like they’re being cooperative. However, how much was real and how much was just for show? Did they make any real effort to solicit proxies to overturn supermajority requirements? My guess is that it was minimal, if any.

I see from the 8-K filing by Kellogg that my proposal to end supermajority requirements won about 46% of the vote, despite opposition from the Kellogg Foundation, which owns about 23% of shares. At least with the new filing requirements, we’re getting results a lot quicker.

At Bank of America, shareholders passed a resolution by John Chevedden that would give shareholders the right to call a special meeting as long as owners of at least 10% of shares vote in favor of it, down from the current 20-25% requirement (unclear in Fortune article). (Bank shareholders fight back — and win, Fortune, 4/29/10)

I reviewed Dawn Following Darkness: An Outcome-Oriented Model for Corporate Governance by Martin B. Robins on April 22 in Require Affirmative Proof in Specified Circumstances of “Too Big to Fail Companies” in Order to Meet the Business Judgment Rule. I may be going out on a limb but I think that publicity was all that was needed to push the paper onto the list of SSRN top downloads. Now, if we can only influence proxy voters as much as we influence SSRN readers, we’ll have a huge impact on corporate governance.

Ric Marshall and Cheri Gaudet, of The Corporate Library, put on a great webinar yesterday, “Director Elections 2010: A Shareowner’s Guide.” Ric was able to demonstrate their tools using some well know examples of outrageous disclosures. If you missed it, you may be able to catch the recorded version on-demand, assuming it is available to those who didn’t register.  It was especially interesting to see how TCL flags directors for various issues such as overboarding, lack of full independence, involvement in corporate failures, compensation and for several other reasons. Want to know which directors have lucrative compensation contracts with management? TCL has the tools to get you their in seconds. Check out Director Flags – Highlighting Shareholder Concerns. You can also request a free trial to Board Analyst to try out the Director Highlights feature.

John Chevedden brought to my attention what appears to be draconian bylaw provisions that call for a whole bunch of hoops to be jumped through for raising issues at shareowner meetings.  Some companies appear to be trying to discourage shareowner proposals by telling proponents that in order to file a rule 14a-8 proposal they have to jump through the same hoops as hedge funds. See item 4 in this example from H&R Block but note the language near the end  that says rights of Rule 14(a)-8 aren’t impacted. Comments on what this is all about?

And speaking of John Chevedden, he e-mailed me with yet another way retail shareowners get the shaft when voting through a voter information form (VIF) from Broadridge. I’ve written extensively on the “blank vote” issue and even filed a rulemaking petition with the SEC. Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. However, VIFs typically include a practically microscopic footnote. Chevedden point out that after you cast your preliminary vote, it is easier to see how your blanks will be voted; and he provided this example from Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared. Gotcha! I revised my post, Jim Crow “Protections” for Retail Shareowners, to include this additional information.

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Jim Crow "Protections" for Retail Shareowners

A strange revolution, or perhaps a counter-revolution against management excesses, is under way, a quiet and orderly one of small capitalists, determined to win democracy and fair treatment from the tycoons they pay to manage American business. — Lewis D. Gilbert, Dividends and Democracy, 1956

John Chevedden sent me an e-mail over the weekend, attaching two examples of the prejudice shown by on-line voting using a voter information form (VIF) from Prudential. The fact that the example is from Prudential is immaterial… it could be from just about any company in the US. The current system of VIFs that go out to retail investors not only makes me wonder if the revolution that Gilbert spoke of ever occurred, it also hearkens back to days when women could only influence their vote through men, blacks had to take a literacy test or pay a poll tax and earlier, when voting was restricted to men of property. From Chevedden’s e-mail:

  • By pushing one button a shareowner can vote as recommended by management. A fair ballot would also allow a shareowner to push one button to vote against management’s recommendations.
  • The ballot adds language to the shareowner’s proposal that only “if properly presented at the meeting” will the vote count. However, the same provision applies to management proposals and the VIF provides no such warning. By including the language only on shareowner proposals, the VIF tells the voter that he or she is potentially wasting their vote because there is the likelihood that all votes on the shareowner proposal will be thrown out if the shareowner fails to have the proposal presented.  It is another way saying that the proponent is irresponsible because of the likelihood they will fail to present their proposal.

Of course, I’ve already enumerated several other defaults in the VIF system.

  • Actual proxies must include a bold-face warning if blank votes will be turned into votes for management. VIFs typically include a practically microscopic footnote. Then after you cast your preliminary vote, it is easier to see how your blanks will be voted; see this example at Mattel. Of course, if you do notice how your blanks have changed and you try to go back to fill in the blanks, you are punished because the system then requires you to vote all over again. The votes you want to remain valid have all disappeared.
  • Actual proxy ballot titles have to clear and impartial. VIFs, are apparently drafted by management and might be edited by Broadridge without any requirement that they be either clear or impartial.
  • Actual proxy ballot titles have to actually state the nature of the item being voted. VIFs can simply refer retail investors back to the actual text, buried in a different document, the proxy.
  • While each failure of VIFs to meet the legal requirements of proxies acts as an impediment to fair voting, the combination of factors has a multiplicative, rather than additive effect. For example, if the VIF includes no summary but merely refers the retail shareowner to the proxy, shareowners are less likely to bother voting that item. If they see the warning that their vote may not count, because the item many not be presented at the meeting, they are again less likely to vote that item. If they don’t vote the item, their blank vote will be changed to a vote in favor of management’s recommendation.

Why are most votes cast using proxies that have to meet various legal requirements to ensure fair elections but when it comes to retail shareowners, the SEC appears to be unconcerned with issues such as clarity and fairness?

Most retail shareowners are not sophisticated investors. Laws require that the majority of investors in a hedge fund be accredited. That is, they must earn a minimum amount of money annually and have a net worth of more than $1 million, along with a significant amount of investment knowledge.

I don’t always agree that small investors should be discriminated against, denied the ability to invest in  hedge funds. However, at least I understand the logic of protecting the “little guy” against potentially unrecoverable risk. Someone thinks it is for their own good.

Yet, as much as I try, I can’t understand how it can possibly be in the best interest of retail shareowners that VIFs don’t have to meet the legal requirements of actual proxies. Voting with a VIF feels a little too much like landowners “consulting” with their peasants, slaves or wives and then casting ballots “on their behalf.” Is it “for our own good?”

I previously discussed specific cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when I posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration. See also “Corrected” Ballot at Altrea Tips Votes to Management.

Where is the Wall Street Journal, New York Times, Huffington Post or even the Motley Fool on this issue? There must be more people concerned with Jim Crow laws for retail shareowners.  VIFs and legal proxies are not equal. I urge readers to bring this discrimination to the attention of the SEC’s Investor Advisory Committee through use of their online comment form and to Chairman Mary Schapiro via e-mail.

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"Corrected" Ballot at Altrea Tips Votes to Management

The latest development in the case of unfair ballots favoring management at Altrea is that Broadridge has now “corrected” the language on their voter information form (VIF) for the shareowner proposal to eliminate supermajority voting requirements. However, the “correction” fails to accurately portray the proposal at all, and simply places yet another hurdle in the path of shareowners.  In fact, the new language highlights the issue of what happens to blank votes and, once again, calls into question why VIFs are, according to Broadridge, exempt from the rules that apply to proxies… although, at least with the corrected VIF, Broadridge included an explanatory letter and the full text of the proposal.

I see two primary issues. First, the rules that apply to proxies should also apply to VIFs.  If VIFs go out to about 1/3 of the total number of shareowners and the rules don’t apply to them, then the SEC appears to sanction the treatment of these shareowners as second class citizens, in comparison to those who receive actual proxies.  (I don’t know the actual proportion going out as VIFs, but 1/3 seems like a reasonable guess.)

Under Broadride’s interpretation, VIF’s don’t have to be clear and impartial and they don’t have to warn about turning blank votes into votes for management. I’m told that Broadridge “tries” to summarize the issues but if that can’t be done easily, they put a general statement on the VIF, referring the shareowner to the proxy materials.  Of course, most retail shareowners don’t read the VIF… even fewer read the proxy materials. I have asked the SEC for clarification on whether or not proxy rules apply to VIFs.

Second, if the SEC finds their rules do apply to VIFs, that takes care of the issue of the “clear and impartial.” Additionally, at least more voters would be alerted to the fact that blank votes will be counted as votes in favor of the position taken by the company’s soliciting committee because warnings will have to be in bold-type, instead of in micro-type footnotes.

However, I would argue that Rule 14a-4(b)(1) still needs to be changed.  Just as the SEC finally agreed to abolish the practice of “broker voting,” because a non-vote isn’t necessarily a vote for management, the SEC should also amend 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee.

I previously discussed other cases when I filed a petition with the SEC last year to stop blank votes from turning into votes for management and when posted Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

For those of you who are new to the issues, let me briefly illustrate them with the current case of the shareowner proposal at Altera.  SEC Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.” Broadridge claims they don’t have to follow the rules required for proxies because they use a Voter Information Form (VIF), not a legal proxy.

John Chevedden submitted a proposal to Altera, asking them to end supermajority voting requirements. His resolved language read as follows:

Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.

Broadridge “made a mistake” and represented the proposal on the VIF, which most retail shareowners got, as follows:


In an April 1, 2010, letter to the SEC and Altera, Chevedden complained that voting would not be accurate with such a description of his resolution. On April 2nd, I posted an article entitled Abusive Practices Continue as VIFs Tilt Voting in Favor of Management and urged readers to bring this abusive practice to the attention of the SEC’s Investor Advisory Committee through use of their online comment form.

On April 9th, I heard from Timothy Smith of Walden Asset Management that Broadridge had acknowledged the error was sending out a corrected VIF.  I was able to confirm this with a Broadridge representative. However, later that day I received an e-mail from John Chevedden with the “corrected” ballot language that now appears on the new VIF. The ballot language now reads as follows:


I was told that Broadridge uses this general language when they can’t easily summarize a shareowner proposal. I would like to give Broadridge the benefit of the doubt and call the first translation an error, but it is hard to believe they couldn’t easily summarize the shareowner proposal even on their second attempt when it was brought to their attention how they had butchered the ballot statement for a proposal to eliminate supermajority requirements.

Anyone vaguely familiar with the issue could have easily summarized the proposal as “Eliminate supermajority voting provisions.” There have been dozens of submissions of this proposal, so it is hard to believe that Broadridge can’t figure out how to abbreviate the resolution for the VIF. Way back on 7/20/2007, the RiskMetrics Group Governance Blog posted an article entitled,  Strong Support for Defense Limits, which included the following:

Investor support remained high for proposals that ask companies to eliminate supermajority requirements to approve bylaw changes and other matters. These resolutions have averaged 67.2 percent across 21 meetings, about the same as the 2006 average of 67.8 percent.

Are we really to believe that Broadridge can’t easily figure out how to abbreviate a resolution to eliminate supermajority requirements… essentially the same resolution that has been submitted for years and years to dozens and dozens of companies… even after it has been brought to their attention that the resolution involves ending supermajority requirements?

Referring shareowners back to the proxy statement, as Broadridge has done in their “corrected” ballot, essentially disenfranchises shareowners. Most will conclude the opportunity cost of going to the proxy to read the language probably exceeds the expected benefit of an informed vote. Most will rationally remain uninformed and leave that item blank. Of course, if they do leave that item blank, the proxy will then be automatically changed and counted as a vote in favor of the position taken by the company’s soliciting committee… as a vote against the shareowner proposal.

Isn’t it interesting how the inability of Broadridge to “clearly and impartially” identify “each separate matter intended to be acted upon,” as required by SEC Rule 14a-4(a)(3) for proxies, seems to work in management’s favor? Broadridge has seen proposals to end supermajority requirements over and over again for years, but they are still not sure how to abbreviate such proposals for the VIF.

Their inability to understand a simple straight-forward proposal means many more shareowners will leave that item blank. Since Rule 14a-4(b)(1) allows blanks to be filled in as recommending by the company’s proxy soliciting committee, Broadridge’s apparent ineptitude works in favor of management.  And isn’t it becoming difficult to believe these errors are truly simple mistakes?

The SEC should rule that all requirements for proxy statements, such as Rule 14a-4(a)(3), also apply to VIFs. Additionally, the SEC should move to amend Rule 14a-4(b)(1) so that blank votes are counted as blank votes, not as votes in favor of the position taken by the company’s soliciting committee. Let’s put an end to what essentially amounts to rigged voting in corporate elections.

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Abusive Practices Continue as VIFs Tilt Voting in Favor of Management

SEC Rule 14a-4(a)(3) states the proxy “shall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.”

Broadridge claims they don’t have to follow the rules required for proxies because they use a Voter Information Form (VIF), not a legal proxy. Broadridge can apparently reference a shareholder proposal however they want, or perhaps it would be more accurate to say however the issuer wants. The SEC doesn’t appear to be either aware or concerned that retail shareowners getting VIFs, not proxies, have no idea what they are voting for or against without referencing back to the Definitive Proxy Statement. With only about 20% of retail shareowners voting (5% under e-proxy), it is likely that many who do choose to vote do so based only on the ballot description.

John Chevedden is attempting to bring this concern once again to the SEC’s attention, using his proposal at Altera as an example. (See his CheveddenToSECreAltera4-1-2010.  For additional background on this issue, see previous post Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.)

Here’s how Broadridge/Altera represent the proposal on the VIF, which most retail shareowners get:


What the…?  That’s not a statement; it is nothing but gobbledygook. Here’s how Chevedden’s actual resolved statement reads:

Shareholders request that our board take the steps necessary so that each shareholder voting requirement in our charter and bylaws, that calls for a greater than simple majority vote, be changed to a majority of the votes cast for and against the proposal in compliance with applicable laws. This includes each 80% supermajority provision in our charter and bylaws.

Of course, this and many other issues could be corrected if we moved to direct registration of all shares. However, in the meantime the SEC should simply rule that all requirements for proxy statements, such as Rule 14a-4(a)(3), also apply to VIFs.  I urge readers to bring this abusive practice to the attention of the SEC’s Investor Advisory Committee through use of their online comment form and to Chairman Mary Schapiro.

Comment: Sarah Wilson, of Manifest, made their subscribers aware of this issue (And another good reason for a proxy system overhaul, 4/3/2010) and also noted that voting problems are worldwide. Invisible democracy hits Italian board slate (4/2/2010), discusses the case of Generali, where the vote deadline is the same day as the publication of the director lists.

The award for the worst voting deadline of the year so far… (4/2/2010), where Australian-listed Qbe Insurance Group has a 32 day deadline. This contrasts with Manifest’s 15 year practice of allowing proxies submitted electronically as close as 2 days before the vote cut-off so that more informed voting decisions could be made. If you can transfer large sums of money around the work in seconds, why can voting be executed closer to the meeting date. Manifest argues, “Voting rights are legally no different to buying and selling rights. In that regard fund managers are obliged to seek best execution on behalf of their clients.”

I understand that in both cases the local market deadlines in those markets is 48 hours… the problems may lie with Broadridge. How can you have a vote deadline in the past!? Haw Broadridge become too much of a world-wide monopoly.

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Proxy Reform

Chris Kentouris takes up the issue of Who Pays for Proxy Reform? at Securities Industry News (1/12/2010) “In one corner is the New York-based Broadridge Financial, which is only too eager to tout the efficiencies of the current system in which it holds a virtual monopoly. It’s actually the world’s largest distributor of proxy materials for broker dealers and banks on behalf of beneficial shareholders. On the other corner are the Washington, D.C.-based Shareholder Communications Coalition (SCC) representing issuers and transfer agents, and The Altman Group, a proxy solicitation firm in New York. They say plumbing in the proxy industry is in major need of overhauling.”

Giving corporate management direct access to shareowners registered in street name “goes hand in hand with giving them a say in who will mail or electronically distributes their proxy materials and counts up their votes.” SCC wants issuers to have unfettered access. The Altman Group wants issuers to have access to objecting beneficial owners during a limited number of times a year, like when proxies go out.

For a more thorough comparison of proposals, see my Comparison of “Proxy Plumbing” Recommendations.

Companies have always been able to communicate with shareowners. The layers they have to go through just add expense that ultimately reduce shareowner earnings… although I’m reluctant to endorse any system that puts corporations fully in charge of their own elections.

As indicated in Co-Filers Wanted on Petition to Eliminate Street Name Registration, the United States Proxy Exchange and CorpGov.net are working on “proxy plumbing” reforms that result in more communication between shareowners. We need to look at safeguards, such as “do not call” lists, so that shareowners themselves decide who can contact them directly outside annual elections and proxy contests. There are many details to work out.

Personally, my major concern is that those under “street name registration” only hold “security entitlements,” not real shares. SEC laws and regulations are written to protect shareholders, not those with security entitlements.

Therefore, Broadridge and others are interpreting requirements that apply to proxies as not applicable to their “voter information forms.” Counting blank votes for management, with only a microtype warning on the ProxyVote screen and summarizing resolutions so voters can’t even guess the subject are abuses that would end with a system of direct registration and the use of actual proxies.

These are issues left unaddressed by SCC or the Altman Group. Let’s hope the SEC gives them full attention.

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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.

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Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration

According to Investors Against Genocide, proxies issued directly by American Funds met the SEC standard (Rule 14a-4(a)(3) of the Securities Exchange Act of 1934) by clearly indicating the vote was about not investing in companies that substantially contribute to genocide. However, according to American Funds, 50 – 60% of its shareholders hold their shares in "street name" and receive proxy materials through Broadridge Financial Solutions. Voting instructions issued by Broadridge to those American Funds shareholders simply referenced “a shareholder proposal described in the proxy statement.” Each of the other seven questions were clearly described in Broadridge’s voting instructions. Broadridge’s online voting instructions were similarly vague.

Given that the voting process encourages shareholders to vote with management across the board, and genocide was not clearly flagged to voters as an issue, many shareholders did not know that they had an opportunity to vote on a matter of important social significance. The specifics are more fully described in a letter from Eric Cohen, Chairperson of Investors Against Genocide, to the SEC. More coverage of the issue at Mutual fund activists claim more voting problems, Reuters, 11/23/09. An American Funds spokesman says the most support at any of the funds where ballots were counted Tuesday was about 12 percent. (‘Genocide-free’ measure rejected at American Funds, AP, 11/24/09)

I suspect Broadridge claims they don’t have to follow the rules required for proxies because they use a voter information form (VIF), not a proxy. This is the same logic they gave for turning blank votes into votes for management (See petition to the SEC. Send comments to rule-comments@sec.gov with File 4-583 in the subject line.)

By that logic, based on technicalities, none of us are shareowners either. Almost all shares are owned by Cede & Co., a subsidiary of the Depository Trust & Clearing Corporation (DTCC). For many companies, Cede & Co. is the only shareowner of record. Cede gives participants an "omnibus proxy," that they in turn issue to their customers. Or their customers use the VIF to request voter instructions. We don’t actually buy and sell shares, we buy and sell claims against the accounts of "immobilized" shares held by DTCC and Cede. This method of clearing settlements was imposed by the 1975 Securities Acts Amendments.

It was supposed to be a temporary measure. Brokers were in a panic because they didn’t have the backroom staff necessary to clear the exchange of registered certificates. In response, the markets shortened the trading day and closed on Wednesdays. Still, over a hundred brokerage firms went bankrupt or sold out. The 1975 Act ended the physical movement of securities certificates and the panic. Stocks were "immobilized" at Cede and we began trading something more akin to poker chips, as Glyn Holton characterizes it. The "immobilized" system was supposed to be temporary, until a direct registration system could be developed around "uncertified" or "dematerialized" shares. Legal changes were needed in many states and computer systems needed to gear up and integrate.

That has all happened but too many business earn money off the current system. It has become entrenched because everyone now depends on intermediaries like brokers, banks and Broadridge. Of course, brokers and banks don’t want a direct registration system because they are the only ones who know who owns what at ground level. They have all the names and names are worth money. What we have been stuck with is a system that can’t accurately count ballots because it can’t audit back to the beneficial owner, only to the bank or broker, whom we are supposed to trust to reconcile the voting… and they can do it either before or after the fact.

As a result, there is lots of "empty voting." I imagine it also facilitates tax evasion, although I haven’t seen much written about that. Since voting happens through many layers, the system is overly complex. Rules, like the one cited by Investors Against Genocide with regard to proxy requirements and the issue I petitioned the SEC on (blank votes going to management, instead of being counted as abstentions), are easily circumvented.

A growing number of us think a direct registration system, where all shareowners hold their stock directly, will solve many of these issues. The company will know who their shareowners are. Shareowners would all potentially know each other and be able to communicate directly with each other. Transparency; it is good for the market and is good for knowing who supports or opposes policies, such as those that support or fight genocide.

I’m participating with a group coordinated by Glyn Holton, of the U.S. Proxy Exchange and the Investor Suffrage Movement. We are putting together comments to the SEC advocating direct, rather than "street name," registration, which we hope they will consider as they take up "proxy plumbing/mechanics" issues." We would love to have you join us in this effort. If interested, send me an e-mail.

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CalSTRS Breaking Ground with Broadridge and ProxyDemocracy

Yes, the huge California teachers fund is moving into a beautiful new headquarters building along the Sacramento River on June 22, but more importantly they are also taken what Gary Lutin, of the Shareholder Forum, says is "a major step in the development of a clearinghouse for shareholder voting recommendations."

CalSTRS has become the first institutional investor to pre-disclose their voting decisions through Broadridge’s ProxyEdge® integrated vote recommendation service. This will now allow other institutional investors with voting policies similar to CalSTRS to compare and align their votes with them.

ProxyEdge is Broadridge’s suite of electronic voting services that help simplify the management of institutional proxies by providing access to third-party recommendations and/or pre-disclosure of third-party vote decisions. ProxyEdge allows institutions to manage, track, reconcile and report proxy voting through electronic delivery of ballots, online voting, and integrated reporting and record keeping to help institutions satisfy their SEC requirements.

MaryEllen Andersen, Vice President, Issuer & Institutional Relations at Broadridge, says, "By pre-disclosing votes via ProxyEdge, institutional investors which have voting policies similar to CalSTRS are able to weigh their proxy decisions against those of CalSTRS, enabling greater voting consistency among like-minded investors." (CalSTRS Turns to Broadridge for Electronic Voting Proxy Services, Earth Times, 5/27/09)

In addition, and much more important to retail shareowners, CalSTRS has joined an exclusive group of nine respected institutional investors whose votes are announced in advance on Proxy Democracy. CalSTRS will make its votes known before the annual meetings
of its more than 3,800 holdings in North America. Last year CalSTRS cast more
than 47,000 individual proxy votes.

"CalSTRS has called for greater transparency from its portfolio companies and we intend to lead
the way with comprehensive disclosure of our votes,” said Anne Sheehan, CalSTRS director of
corporate governance. “Information is vital for shareholders to make informed decisions about
the companies they own and CalSTRS intends to let fellow shareholders, as well as management,
know how we intend to vote." "Announcing our votes in advance will open the door to engagement with more of our
companies. This discussion will bear fruit in better corporate governance practices," Sheehan
said. CalSTRS will also archive its votes starting from 2007 on

CalSTRS was already among the leaders in corporate governance. This move should accelerate that position as it will enable other funds look to see how CalSTRS is voting before they cast their own votes. I’m sure none will simple copy CalSTRS but their recorded votes may give them pause and should lead to more dialogue among institutional investors about their reasons for voting. The nine funds now listed on ProxyDemocracy are beginning to change how retail shareowners vote.

In other news, CalSTRS will discuss their policies regarding placement agents at an upcoming June 3 board meeting. See a letter from Nicholas Bienstock, a managing partner at New York-based private real estate firm Savanna Investment Management LLC included in the agenda. (Find it here; search for ‘placement agents’ to get to the exact link.) Although their existing policy is stricter than most, CalPERS is looking to enhance disclosure requirements. (Placement Agent Furor: The (Smaller) GP Strikes Back, WSJ
Private Equity Beat, 5/26/09) (posted 5/27/09)

Previously, CalSTRS asked 300 of its portfolio companies to develop
comprehensive executive compensation policies and to allow
shareowners advisory votes on those policies. (CalSTRS Guidelines Offer Substance on Executive Pay, press release, 5/5/09) The CalSTRS principles offer companies a five-part approach that calls for:

  • A clear overarching philosophy that aligns the interests of shareholders and management
  • A well designed, comprehensive compensation policy that takes a detailed look at all of its components Transparency through a plain-English description of a well-crafted compensation plan
  • Accountability through a responsible compensation committee
  • A compensation committee comprised of independent directors using only independent advisors and consultants
Continue Reading ·

Support Petition to Keep Blank Votes Blank

This morning, 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:

Again, please submit comments on the petition to rule-comments@sec.gov with File 4-583 in the subject line.

Continue Reading ·

July 2008

ESG Gaining Acceptance

Since 2005, KLD has studied the S&P 100’s sustainability reporting practices for the Sustainable Investment Research Analyst Network, a working group of the Social Investment Forum. The 2008 Sustainability Report Comparison reveals encouraging news. Of the 100 largest U.S. publicly-traded companies, 86 maintain corporate sustainability websites and 49 produced sustainability reports in 2007. These numbers represent significant progress over the past three years.

Now, Watson Wyatt says ESG to be one of six major investment trends in next five years. (Responsible Investor, 7/31/08) The rise of integrating environmental, social and governance issues into investing will be predicated on four major trends:

  • demand for big institutional funds to apply responsible investing principles,
  • sustainability and climate change as mainstream or specialized propositions,
  • the impact of politically motivated activism, and
  • responsible investment becoming more personalized through defined contribution pensions saving.

CalPERS: The Opposite

The Opposite” was a famous Seinfeld situation comedy episode where George Costanza decides that every decision he has ever made has been wrong and resolves to do the complete opposite of his normal instincts. He suddenly begins to experience good luck — getting a girlfriend, moving out of his parents’ house, and even landing a job with the New York Yankees. Maybe CalPERS should use the same tactic with regard to its own governance.

When it comes to advising corporations, CalPERS emphasizes transparency, getting input from shareowners and a wide variety of good governance measures. (As I began to write this, I got a press release from CalPERS on improving governance at La-Z-Boy.) I applaud these efforts, which have been widely credited with moving directors to action and increasing shareowner value. Yet, when it comes to their own governance, perhaps CalPERS should adopt the strategy of doing the opposite of what Board members want to do instinctively.

I’ve tangled with CalPERS over many internal governance issues, as documented at PersWatch.net. The latest involves AB 2940, scheduled for hearing in California’s Senate Appropriations Committee. The bill, authored by Kevin de Leon and sponsored by the New America Foundation, would set up a low-cost IRA option administered by CalPERS. The Program would facilitate the ability of millions of Californians to save for retirement, reduce future dependency on taxpayers, increase California’s tax base, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate our defined benefit plans.

The trouble is, as a condition of neutrality, CalPERS asked the author to amend the bill to permanently exempt the Board from contracting and rulemaking laws with respect to the Program. Unfortunately, de Leon was forced to accept those changes if he wanted to see his bill pass. In contrast to CalSTRS, which recently adopted regulations to guard against the appearance of “pay to play” on investment decisions, the proposed new law would open the CalPERS Board to the increased likelihood of such dishonest behavior.

In my letter of opposition for an otherwise excellent bill, I wrote, “One major ‘pay to play’ scandal involving a large sole-source contract could put the whole System in jeopardy, making CalPERS politically vulnerable. Additionally, what moral authority would CalPERS have in advising corporations to be transparent, if its own contracting procedures were suspect?” Additionally, “The language exempting the Board from the APA disenfranchises millions – ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program.”

For many years, CalPERS claimed California Constitution, article XVI, section 17, exempted the agency from the Administrative Procedure Act and other laws that apply to state agencies. That claim was thoroughly rejected by Connell v. CalPERS in appellate court. The APA offers an opportunity to comment and have those comments addressed in a legal framework that includes many protections for public involvement.

I understand the need to keep costs low, especially during start-up. I even suggested that initial contracts could be noncompetitively bid for up to two years and that initial rules could be adopted as permanent “emergency” regulations. However, any such exemptions should be temporary. These suggestions have been rejected by a Board that too often sees itself as above the law.

If successful, the new fund will quickly have assets in the millions, if not billions. Don’t sacrifice good governance for expediency. CalPERS Board members should consider a new mantra with regard to their own governance, “Do the opposite.”

CorpGov Bites

The final version of the AFL-CIO’s 2008 AFL-CIO Key Votes Survey scorecard is now available.

I’ve added implu to our growing list of Stakeholders. Find out about the comings and goings of corporate officers and directors. Plus, the site lists at least rudimentary contact information and sometimes you can even learn about their associations. Enter a list of companies or people and get automatic e-mail alerts.

A total of 70 federal securities class actions were filed during the first half of 2008, a roughly 17% increase from the total filings in the first six months of 2007. (Securities class actions increase in ’08, Investment News, 7/29/08)

Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’? finds they do. “Boards take a variety of value-enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value enhancing, post-campaign operating performance improvements are economically and statistically significantly higher in these sub-samples of target firms.”

Businesses must incorporate environmental, social and governance (ESG) factors into their management strategies, says Peter Kinder, President of KLD Research & Analytics, in Q&A with an Australian business reporter.

ResponsibleShopper.org (updated) ranks companies by industry from best to worst based on global research and campaign information regarding the impact of the largest corporations on human rights, social justice, environmental sustainability and more.

Gibson, Dunn & Crutcher LLP offer advice on “clawbacks” of executive compensation. What is your company doing in this area?

Subchapter S companies owned by their employees through ESOPs generate some 85,000 new jobs each year and create $14 billion in new savings for workers that otherwise would not have been earned. A study by Knoll and Freeman also found S ESOPs’ higher productivity, profitability, job stability and job growth collectively help ESOP companies amass $33 billion more in combined earnings than what they would earn if they were not ESOP-owned S corporations.


Sign-up online to gain free access. Articles in the Summer ‘08 issue include:

  • Non-Deal Roadshows: Latest Developments and Trends
  • Lessons Learned: How Funds Vote on Proxy Proposals
  • Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
  • How Blogging Can Enhance Your Investor Relationships (and Your Career)
  • My Ten Cents: The SEC’s Coming Guidance on IR Web Pages
  • SEC Staff Says “No” to Non-GAAP Financial Statements

Written to aid the corporate investor relations function, InvestorRelationships.com is also a valuable resources for shareowners. Broc Romanek is doing a great job on this new offering.


Broc also posted a podcast interview with another of our favorites. Andy Eggers discusses his website, ProxyDemocracy.org. Their discussions include:

  • Where did you get the idea for the site?
  • How long did it take to launch?
  • What features does ProxyDemocracy.org currently have?
  • Any plans to tweak things going forward?
  • What have been the biggest surprises in how the site is used so far?


Fraud Risk Guide

“Managing the Business Risk of Fraud: A Practical Guide” can be downloaded for free from the sponsoring organizations’ Web sites from sponsoring organizations – the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants (AICPA), and The Institute of Internal Auditors (IIA). Principles for establishing effective fraud risk management, regardless of the type or size of an organization, are outlined in the guide.

According to the ACFE’s 2006 Report to the Nation on Occupational Fraud, U.S. organizations lose an estimated 5 percent of their annual revenues due to fraud. When applied to the estimated 2006 GDP, those losses added up to approximately $653 billion. Organizations with anti-fraud programs – such as fraud hotlines, internal audit departments, and anti-fraud training – lost approximately half as much as those without such programs.

Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

  • Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
  • Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
  • Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
  • Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
  • Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

The new guidance provides a practical approach for companies committed to preserving stakeholder value. It can be used to assess or improve an organization’s fraud risk management program, or to develop an effective program where none exists.

We added a link to the paper from our small list of online articles, as well as a Team Performance Scorecard from Brown Governance for evaluating boards of directors. CorpGov.net depends on input from readers to bring these resources to our attention. Thanks to Scott McCallum, of IIA ,and Dan Swanson of Dan Swanson & Associates.

Say on Pay Denial

Support for an advisory “say on pay” continues to grow, if more slowly than expected, rising from 41% last year to 42% in 2008. Directorship, reporting the results of a Corporate Library study, notes that “say-on-pay proposals received majority support at a total of 15 companies in 2007 and 2008. But not all of those companies are rushing to put the advisory vote in place. In fact, only five of those companies, or roughly two-thirds, have adopted the vote.”

Vote results are lower this year at financial institutions, where CEOs have been replaced with lower compensation packages. (Companies Ignore ‘Say on Pay’ Votes, 7/23/08)

Look for shareowners to increase the pressure on companies that filed to implement resolutions that obtained a majority vote (MV) next year. Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals by Yonca Ertimur, Stephen Stubben and Fabrizio Ferri investigated board responses to advisory shareholder proposals between 1997 and 2004. The frequency of implementation of MV proposals almost doubled after 2002, from approximately 20% (1997-2002) to more than 40% (2003-2004), “consistent with an increase in the cost of ignoring MV resolutions in the post-Enron environment.” “Directors failing to implement majority-vote (MV) proposals are often the target of ‘vote-no’ campaigns and receive a ‘withhold vote’ recommendation by ISS. Firms ignoring MV proposals end up on CalPERS’ ‘focus list’, receive lower ratings from governance services and attract negative press coverage.”

Perhaps more striking is that “implementation of a MV shareholder proposal is associated with approximately a one-fifth reduction in the probability of director turnover at the targeted firm.” In short, the market rewards those companies that follow the advice of shareowners.

Time will tell at Citigroup, which just named new chairs to its audit and risk, nomination and governance, and personnel and compensation committees. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced chairs would be rotated.

But will rotations be enough, especially when two of the three received significant withhold votes at Citigroup’s annual meeting. AFSCME’s Richard Ferlauto says the union sees little value in rearranging committee chairs. “What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business,” Ferlauto told R&GW. (Citigroup Names New Board Committee Chairs, RiskMetrics Group, 7/25/08)

Congratulations Race to the Bottom

Once of our favorite sources of legal commentary, TheRacetotheBottom, has been chosen by the Library of Congress for inclusion in its historic collections of Internet materials related to “Legal Blawgs.”

Aim’s Race to the Bottom

Speaking of a race to the bottom, a study released by PwC found that while 77% of the Aim’s top 100 comply with some aspects of the Combined Code, just 3% chose to fully adopt it. A record 28 companies were suspended, raising doubts about the exchange’s voluntary approach to governance. (Junior index must aim higher to improve reputation, FT.com, 7/24/08)

New Election Rules at CalPERS

New election rules take effect on July 26, 2008, thanks to action taken by Corpgov.net publisher, James McRitchie. At McRitchie’s request, the Office of Administrative Law determined several CalPERS election rules were illegally adopted “underground regulations.” (see 2007 OAL Determination No. 1) The amended regulations clarify many election procedures and significantly reduce the risk of CalPERS members to identity theft.

Back to the top

Further information about the next three items and more at Corporate Watchdog Radio.

Get the Lead Out and Protect Genitals

More than your money is at risk. Independent laboratory testing initiated by the Campaign for Safe Cosmetics in 2007 found that two-thirds of 33 sample lipsticks from top brands contain lead. The Environmental Working Group’s six-month investigation into the health and safety assessments on more than 10,000 personal care products found major gaps in the regulatory safety net. A recent government-funded study by Dr. Shanna Swan links linking phthalate levels with feminized genitals in baby boys. Independent laboratory tests found phthalates in more than 70% of health and beauty products tested – including popular brands of shampoo, deodorant, hair mouse, face lotion and every single fragrance tested. Have I got your attention yet?

If you own shares in a company that makes personal care products or just don’t want to use poison products, check the growing (600) list of those that have pledged to not use chemicals that are known or strongly suspected of causing cancer, mutation or birth defects in their products and to implement substitution plans that replace hazardous materials with safer alternatives in every market they serve. Several major cosmetics companies, including OPI, Avon, Estee Lauder, L’Oreal, Revlon, Proctor & Gamble and Unilever have thus far refused to sign the Compact for Safe Cosmetics.

Take action for safe cosmeticsSign on to have Congress empower the FDA to ensure that cosmetic ingredients and products are safe before they reach store shelves. DisclosureThe publisher of CorpGov.net owns stock in Proctor & Gamble and has requested they join the Campaign for Safe Cosmetics. Please make similar appeals to the companies in your portfolio.

Unfortunately, P&G sent a canned response. “I’m sorry you heard a report that caused you to question the safety of our beauty care products. The claims you’ve heard are completely false. Consumer safety is always our first priority and all our products are tested extensively before going to the market. We stand firmly behind their safety. It’s important to know that cosmetic products sold in the U.S. are regulated by the Food, Drug, and Cosmetics Act. We comply with all legal requirements wherever our products are sold.” Of course this misses the point that current laws are totally inadequate. When I brought this to their attention, investor relations wrote back with an oops; “I can understand your concern and I’m sharing your comments with our Health and Safety Division.”

Chamber Attacks Resolution Process

Members of the U.S. Chamber of Commerce should be questioning use of their dues money for a study that is so deeply flawed it would be laughable, if the money to pay for the study wasn’t coming out of your pocket.

The study, Analysis of the Wealth Effects of Shareholder Proposals by Navigant Consulting, purports to make the following finding: “Taken as a whole, these results provide little evidence that shareholder proposals increase target firm value.” What is the basis of the study?

First, Navigant (under the pay and direction of the Chamber), reviewed the academic literature from about a decade ago and found mixed results. “There is little evidence of measurable improvements in (sort-term or long-term) stock market or (long-term) operating performance in target companies as a result of shareholder proposals.” However, “Certain types of proposals, especially those concerned with removing companies’ takeover defenses, appear to be supported by the market.” Updated findings would probably be different, since their is increasing recognition by shareowners and the market that social and environmental factors can have an economic impact on the firm. Thus, the support for resolutions, such those to address a company’s carbon footprint, have been increasing.

Second, Navigant examined five resolutions for short-term impact and another five resolutions for long-term impact. How did they select these resolutions? Were they randomly selected from all resolutions during a specified period? No, they were picked by the Chamber! This would be like a drug company selecting 10 patients out of thousands to represent the efficacy of their product for FDA review. Even if the resolutions had been randomly selected, the samples would have been too small to have any statistical significance. However, the fact that they were picked by the Chamber, which has for years advocated doing away with the resolution process, completely destroys the potential validity of findings.

Additionally, that portion of the study uses deeply flawed statistical modeling based on “abnormal returns.” The implication is that stock price is predictable. If the academics who invented the Fama-French three-factor model were actually able to predict price, they wouldn’t be working at universities. Instead, they would be reaping huge financial rewards in the stock market.

The study then goes on to look at the cost of the shareowner resolution process and cites an estimate by Bainbridge of $90.654 million, based on an “implied cost” of $87,000 per proposal and the assumption that corporations seek to exclude all proposals. The study fails to note that with e-proxy, costs are going down, sometimes dramatically. (Thanks to William Michael Cunningham of Creative Investment Research, Inc. for providing a copy of his meeting notes and his analysis of the Chamber’s study. This article draws heavily upon those notes but the opinions expressed are those of Corpgov.net publisher, James McRitchie.)

Businesses should ask their local and state chambers, which may be members of the US Chamber of Commerce, to seek new leadership at the federal level. Sure, shareowner resolutions and annual meetings are a bit of a pain in the ass and a circus, but they keep us in touch with what is coming. Social and environmental resolutions often seek to address “externalities,” the costs of business to society. Without such resolutions, shareowners would immediately seek regulations and legislation. The resolution process is an early warning system that allows us to gauge the popularity of a given issue. Often we can avoid regulations by working out less burdensome voluntary measures. Even when businesses fully adopt resolutions, the costs can be substantially less than complying with mandatory rules.

Tell your local chamber that the U.S. Chamber should spend its time and money on more important efforts. For example, they could push Congress to legislate higher margin requirements for speculators. That might lower the cost of oil. They could push for single-payer universal health insurance to put an end to our competitive disadvantage due to rising health care costs. They could also seriously address global climate change. Failure to resolve that issue will cost trillions of dollars and millions of lives. Fighting wildfires now takes nearly half of the U.S. Forest Service budget. That’s up from just 13% in 1991. Fighting shareowner resolutions pales in comparison.

About a million and a half people have already signed on to support Al Gore’s Challenge to Repower America. McCain said, “If the vice president says it’s doable, I believe it’s doable. Obama said, “I strongly agree with Vice President Gore that we cannot drill our way to energy independence, but must fast-track investments in renewable sources of energy like solar power, wind power and advanced biofuels, and those are the investments I will make as President.” Local chambers and the U.S. Chamber of Commerce should focus on fighting the real issues, not our own shareowners.

Improve Corporate Disclosure

A proposed accounting standard would require corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities. Investor input is critical on these issues, as the corporate lobby is expected to turn out in force to oppose expanded disclosure.

While the proposal is on the right track, it stops short of requiring full disclosure of risks that would impact investors, most notably long-term severe impact risks. The proposal may also allow corporate lawyers to routinely block disclosure of almost any information that they designate as prejudicial.

The proposed FAS 5 changes would be subject to three important exceptions and loopholes, which the Investor Environmental Health Network believes can be addressed by the following changes:

  • FASB should require a disclosure of “severe impact risks” deemed by the reporting company to be remotely possible and long term.
  • FASB should apply the new standard to asset impairments, not just legal liabilities.
  • FASB needs to eliminate or strictly limit this ”prejudicial” exception to avoid misuse.

Submit comments on the Exposure Draft entitled Disclosure of Certain Loss Contingencies to the Federal Accounting Standards Board (FASB) by August 8, 2008. Send them via email todirector@fasb.org. Put File Reference No. 1600-100 in the subject line. For more information, see the relevant FASB documents and IEHN’s Investor Alert and model letter and watch Sanford Lewis, Counsel to the Investor Environmental Health Network discuss the proposal.

CorpGov Bites

Eighty-six percent of companies on the Standard and Poor’s 100 Index have corporate sustainability websites, compared to 58 percent in 2005, according to the “2008 S&P 100 Sustainability Report Comparison” from the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum. (More S&P 100 Companies Reporting CSR Progress: Study, GreenBiz.com, 7/22/08)

ECOFACT has released a report listing the top ten most environmentally and socially criticized companies. The top ten companies were: Samsung, Total, Wal-Mart, China National Petroleum Corporation (CNPC), Shell, ExxonMobil, Citigroup, Nestlé, ArcelorMittal, and Chevron. The companies have been consistently and severely criticized by the world’s media and NGOs for issues including human rights abuses, severe environmental violations, corruption and bribery, and breaches of labor, health and safety standards. Rankings are based on the Reputational Risk Index (RRI), as measured by RepRisk in the first six months of this year. For a copy of the report, please contact Charlotte ManssonDisclosureThe publisher of CorpGov.net is happy to announce he owns none of these companies directly.

“Most big businesses now require directors to be elected by a majority of shareholders, giving board members incentive to court investor goodwill.” Joann S. Lublin, writing for WSJ (New Breed of Directors Reaches Out to Shareholders, 7/21/08) Lubin appears to credit this reform with the fact that more shareowner resolutions are being withdrawn. Think of how many resolutions would be withdrawn or would not even be submitted with a rise in proxy access.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. Boards are also meeting more frequently with investors. Yet, in reading RMG’sPreliminary U.S. Postseason Report, it appears many of those meeting may have been to simply cave on issues where they were likely to lose. For example, 47 of the 90 majority vote resolutions filed have been withdrawn by proponents because companies agreed to adopt their own bylaws. More than 72% of S&P 500 companies have adopted some form of a majority vote standard, according to Claudia Allen, a partner with the law firm Neal, Gerber & Eisenberg.

Highlights included the resignation of Mary Pugh, chair of the finance committee at Washington Mutual, after getting 49.9% opposition in a campaign by CtW. Overall support for “say on pay” advisory vote proposals increased marginally at U.S. companies. Other results:

  • Pay-for-performance proposals have averaged 27.4 percent support over nine meetings where results are known, as opposed to 29.5 percent support over 38 meetings last year.
  • Independent board chair proposals received record support this year–31.3 percent support over 20 meetings, 4.6 percentage points higher than last year, when they averaged 26.7 percent support over 43 meetings.
  • Resolutions asking firms to end staggered boards received slightly less support so far this year, with 60.2 percent average support at 16 meetings where results are known. This compares to 63.9 percent support over 38 meetings in 2007.
  • 2008 is on pace to shatter the all-time record for proxy challenges, although few contests have gone to a vote. Given the market meltdown, many boards have been willing to provide board representation to dissidents… including at Yahoo (Yahoo, Icahn Let Bygones Be Bygone, David Gaffen, WSJ, 7/21/08) and How I Spent My Weekend, The Ichan Report, 7/22/08)

Gretchen Morgenson’s Borrowers and Bankers: A Great Divide clarifies the current conventional wisdom. “Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.”

“Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?” (NYTimes, 7/20/08)

Over the weekend, Jane Bryant Quinn also brought our attention to the question or whether or not the Public Company Accounting Oversight Board, created by Sarbanes-Oxley, is constitutional. The challenge to PCAOB revolves around whether the president rather than the SEC should appoint board members. Because the law lacks a “severability” clause, if one of its provisions is found to be unconstitutional, the whole law may go down. (Lawsuit Threatens Sarbanes-Oxley Act, Washington Post, 7/20/08)

Investors are responding to the sharp falls on equity markets around the world by shifting from what are now being seen as vulnerable emerging markets to relatively safer developed ones. State Street says the flows it tracks amount to a “safety first” mood… MSCI’s emerging market index has lost 0.6% in the past week. The developed market index has gained 1.9%. (See America first? Investors suddenly fleeing emerging markets, Financial Week, 7/21/08) Perhaps a rush to relative corporate governance quality?

Mandatory Reimbursement Bylaw Could Breach Board’s Fiduciary Duty

The Delaware Supreme Court ruled that CA shouldn’t be forced to pay for dissident shareholders’ proxy fights and the SEC issued a no action letter. (decision)

Under a procedure established under Delaware law last year, the SEC asked the state’s Supreme Court to decide whether a bylaw proposal by AFSCME to CA, formerly Computer Associates, was “a proper subject” for shareholder action under state law. The bylaw would have required CA to reimburse a shareowner for proxy costs, including legal expenses, printings and mailings, if the shareowner unseats at least one CA director in a slate of candidates representing less than half the board.

The Court held that the bylaw was a proper subject for stockholder action. However, the Court also held that if adopted the bylaw would violate state law because “the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” (Del. Supreme Court rules for CA on shareholder issue, delawareonline, 7/18/08)

John Olson, a corporate-governance lawyer at Gibson, Dunn & Crutcher, is quoted in the WSJ saying, “The court is soundly affirming that shareholders have the right to propose bylaws relating to the process of electing directors. I think people will try to be creative in ways of using state law to get access to the corporate proxy.”

In the same article, Richard Ferlauto, director of pension investment policy for AFSCME, said discussions about shareholder election rights now focus on “the creation of an appropriate right of shareholder access at the federal level” through the SEC. (Delaware Court Rules for CA in Suit, 7/18/08)

With regard to the question of whether or not he AFSCME Proposal a proper subject for action by shareholders, the court wrote, in part:

The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election…That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action.

With regard to the question of whether adoption of the bylaw would cause CA to violate Delaware law, the court wrote, in part:

As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all. (footnotes omitted) (Supreme Court Decides SEC-presented Delaware Bylaw Issue, Francis G.X. Pileggi, Delaware Corporate and Commercial Litigation Blog, 7/17/08)

Getting into more of the details of the decision, analysis by Travis Laster, reported by Broc Romanek, explains that Section 109 gives stockholders the statutory right to adopt bylaws, which may contain “any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” However, Section 141(a) vests the power to manage the business and affairs of every corporation in the board of directors. Consistent with Delaware’s historic model of director-centric governance, the Supreme Court makes clear that Section 141(a) has primacy over Section 109.

An interesting discussion of implications and possible unintended consequences follows. For example, “A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis.” However, the court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year.” (CA v. AFSCME: The Delaware Supreme Court Giveth and the Supreme Court Taketh Away, TheCorporateCounsel.net Blog, 7/18/08)

AFSCME proposed a similar bylaw change at Dell. At the company’s annual meeting, management noted that a preliminary tally showed the proposal received 33.7% of the vote. A similar proposal last year garnered only 14% of shareholder votes. (Union loses proxy reimbursement battle, but may have won war, Financial Week, 7/18/08)

Much more commentary at Delaware Supreme Court Issues Opinion on Shareholder-adopted Bylaws(The Harvard Law School Corporate Governance Blog, 7/18/08), Delaware Supreme Court Rejects Reimbursement Proposal (Risk & Governance Blog) and in at least a 20 part series atTheRacetotheBottom.org.

If the SEC fails to adopt a proxy access rule this year, where will shareowners concerned with the lack of democracy in corporate elections turn in 2009? One possibility is to seek reincorporation in North Dakota. Such proposals bring up several issues that could be the subject of negotiations. Among the most significant features of North Dakota law are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

No Action Letters

The SEC posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October ’07). According to Broc Romanek, we should expect to see new 14a-8 no-action letters posted going forward – although not likely on a real-time basis during the proxy season. (Corp Fin Goes “Live” with Shareholder Proposal No-Action Letters, TheCorporateCounsel.net Blog, 7/17/08)

I wish they would have posted the letters using a database sortable by resolution type or searchable by word/phrase. If anyone dumps this data into a file and makes it available as a searchable database, please let me know. I’m sure it is available by paid subscription. I want to know if it is available for free. It would be a great resource for small shareowners and for a class I’ll be teaching in the fall.

What is Broadridge Thinking?

About 10 years ago Sona Shah and Kai Barret began filing complaints against their employer, ADP Wilco, now a subsidiary of Broadridge Financial Solutions, for discriminating against its employees based on their citizenship and immigration status. Amazingly, Wilco called its foreign recruitment program ‘Project Delhi Belly.’  Delly Belly is a derogatory slang term coined during the British occupation of India.  If an officer arrived in Delhi and had stomach problems it was called getting a ‘Delhi Belly.’  Why Wilco’s management thought this was an appropriate title for its recruitment of foreign programmers is anyone’s guess but it gives you some sense of their cultural sensitivity.

Their complaints went out to Immigration, Department of Labor, Department of Justice. Their campaign even led to Congressional testimonypress and blog coverage. They also filed with the EEOC and began the currently pending litigation.

The case progressed with usual ups and downs. Lawyers would come into the case attracted by positive publicity and press. Then when they saw how much work was involved they wouldd abandon their effort or seek to withdraw. In 2006 Shah attempted to settle the case but noticed her attorney may have committed fraud with both the settlement and the case.  Simultaneously, Wilco went through a corporate restructuring with Broadridge.

Four months ago Shah attempted a mutual discontinuance but Broadridge refuses. Instead, they continue to spend thousands of dollars on unnecessary legal expenses, with no apparent benefit to shareowners. The disputed settlement sought by Wilco/Broadridge basically pays Shah and her attorneys $100,000. Shah she says the settlement exposes her to tax consequences worse than if she had lost the case, so she opposes it.

Since it appeared that outside counsel seeks to continue the lawsuit simply to continue billing Broadridge, Shah wrote a letter to Broadridge’s CEO of her offer. When there was no response, she began contacting large shareowners, alleging that Broadridge was wasting money on a lawsuit she was willing to discontinue. (typical email) After several investors wrote to the company, Broadridge’s outside counsel then sought to enjoin Shah from communicating with Broadridge’s investors — a motion which the court summarily dismissed.

Investors should ask Broadridge why the company continues to waste potentially hundreds of thousands of dollars defending a lawsuit which the plaintiff is willing to discontinue. For further background information Google Sona Shah or Shah v. Wilco. See also Stipulation to Discontinue.

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Big Changes Coming

E.J. Dionne at Truthdig.com (The Death of Reaganomics) writes, “This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early ’80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What’s becoming the Panic of 2008 will mean an end to the latest Capital Rules era.” Markets need regulated.

Stephen Davis and Jon Lukomnik, writing for Compliance Week, argue “by late next year the United States may well see two things happen that most boardrooms today consider impossible.” The first is “say on pay,” since both Obama and McCain favor it. Votes on resolutions may be lagging public opinion. Mutual funds, pensions and insurance companies that dominate the vote are more tolerant than the public, whose own economic pain adds to the strain. Davis and Lukomnik call say-on-pay in 2009 “a no-brainer, as it shows them (politicians) to be sensitive to the issue without imposing arbitrary caps antithetical to U.S.-style capitalism.”

The second change they see coming is the non-executive chairman. GMI has found that only a bare majority—52%—of companies in its U.S. database now still combine the chairman and CEO roles. Three years ago the figure was 62%. According to Spencer Stuart, 35% of S&P 500 companies separated the posts last year, compared to a 16% in 1998. “The ‘Chairmen’s Forum‘ is to debut with an Oct. 7 session in New York, aiming to adopt best practices and explore collaboration on common issues. The forum stems from a project initiated by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, which will start off serving as secretariat to the group.” Stephen Davis is the project director. That change is expected to take a little more time. (Dreaming the Impossible Governance Dream, 7/8/2008)

Let Them Eat Bugs

Little to do with corporate governance, other than the growing disparity between rich and poor, but I couldn’t resist citing The Economist article with the above title (7/12/2008). “Bugs provide more nutrients than beef or fish, gram for gram.” Feed crops gobble up some 70% of agricultural land but crickets take up just a small space in the home.

E-Proxy Vote Bleak

Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop). (Broadridge’s “Near-Final” E-Proxy Stats for the Proxy Season, TheCorporateCounsel.net Blog, 7/14/2008)

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ICI Defends Mutual Fund Votes

With almost 30% US company shares and 90 million shareholders, how mutual funds vote is a matter of great public importance. That’s why many of us fought to have the SEC require disclosure of votes and policies several years ago. While ICI opposed the measure, they now claim to have embraced their new role and have recommended that Congress require that other fiduciaries also be required to make similar disclosures.

ICI President and CEO Paul Schott Stevens presented a comprehensive new study by the Institute on proxy votes cast by registered investment companies in an address, In the Shareholders’ Interest: Funds and Proxy Voting, at the American Enterprise Institute. Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders, examined more than 3.5 million proxy votes cast by funds in 160 of the largest fund families during the 12 months ending June 30, 2007. The study is the largest known examination of proxy votes cast by funds. Key Findings are as follows:

  • Funds play an important role in corporate governance. Proxy voting is one of several ways that funds promote stronger governance and better management, and in turn promote shareholder value. By law, funds must vote proxies in the best interests of funds and their shareholders.
  • Proxy proposals cover a wide range of governance and other issues. Proxy proposals can be initiated by company boards of directors (“management proposals”) or company shareholders (“shareholder proposals”). More than 80% of management proposals relate to election of company boards and ratification of company audit firms; most of the remainder concern fundamental changes that must be approved by company shareholders. Shareholder proposals cover a range of issues but tend to be sponsored by a small number of individuals and organizations. One-third of the more than 600 shareholder proposals that came to a vote in the year ending June 30, 2007, were sponsored by five individuals and three labor unions.
  • Funds and their advisers devote substantial resources to proxy voting. As part of this effort, they adopt and publish proxy voting guidelines. The guidelines of 35 of the largest fund families indicate that their funds generally support management or shareholder proposals that align the interests of company employees with those of shareholders or that bolster shareholders’ rights, including proposals to remove antitakeover devices such as poison pills or classified boards. Funds’ guidelines are often silent on, or indicate that funds will vote against, proposals on social and environmental issues.
  • Funds supported the majority of management proposals and voted in favor of shareholder proposals about 40% of the time, giving especially strong support to shareholder proposals calling for elimination of antitakeover provisions.
  • Funds’ votes are not outliers. In many areas funds’ votes mirrored the vote recommendations of proxy advisory firms.
  • Funds establish procedures to manage potential conflicts of interest in proxy voting. Academic research indicates that funds’ proxy votes are not influenced by the business interests of fund advisers. Funds’ votes are not swayed, for example, by their advisers’ management of 401(k) plans.

This report certainly represents a step in the right direction. Yet, ICI acknowledges that there are many funds “with broader investment purposes — including about 260 that pursue financial returns in tandem with social, environmental or other objectives, and whose advisers manage with these additional objectives in mind.” Unfortunately, it rationalizes most funds ignoring such issues because there goal is to “maximize financial returns.” Since they “do not have a mandate from their investors to engage portfolio companies on social, environmental or similar issues — valid as these may be,… they neither can nor should vote proxies simply on the basis of these considerations.”

However, many environmental and social issues have direct financial impact. Additionally, consider climate change. Even the wealthiest among us cannot escape the assaults of global warming and acidic oceans. As Robert Monks observes, “The primary thing that workers need for their retirement [is] money, but don’t workers also need a safe, clean, decent world in which to spend it. These ends are not economically exclusive…”

Environmental, social and governance (ESG) issues should be integrated into financial analysis. As Stephen Viederman notes, “There is no triple bottom line. There can only be a single bottom that offers positive social and financial returns against which all business decisions must be measured. Fiduciary duty… must give weight to how ESG factors, more broadly understood than at present, affect both risks and opportunities, now and in the future.”

A more fundamental criticism of the ICI’s methodology is that it only presents aggregated data. It reminds me of Robert Reich’s frequent quip that “basketball player, Shaquille O’Neal and I have an average height of over six feet.” By aggregating the data, voting patterns look normal.

More informative are reports at Fundvotes.com where, as its author Jackie Cook notes, “the most striking thing about the graphical representation of the data by fund family is the difference between fund groups’ voting profiles on various issues.”  “Most reports that criticize mutual funds’ proxy voting, including those mentioned in the ICI report) are more detailed with respect to who are the leaders and who are the laggards in particular areas of voting (for instance, why does one fund family support every board nominee at portfolio companies, whereas others support nominees less than 80% of the time, where the two might hold many of the same securities?), says Cook.  Not only does the ICI report fail to dissaggregate, it doesn’t even tell us which funds are included and which are not.

Unrelated to ICI’s report, but also of interest is a new Morningstar Inc. study which looks at how much managers invest in their own funds. The study looked at 6,000 issues and found that in 46% of the domestic stock funds surveyed, the manager hadn’t invested a dime. Nearly 60% of foreign stock funds reported no manager ownership, two-thirds of taxable bond funds have no managers with money in the fund, up to 70% of balanced funds have no manager cash and some 78% of muni bond funds have shareholder cash only. See table showing fund ownership. (No skin in the game, Chuck Jaffe, MarketWatch, 7/6/08)

Chuck Jaffe seems to believe the report shows Proxy voting (by funds is) more than a rubber stamp(Philiadelphia Inquirer, 7/13/08) However, he also notes that “At most large firms, fund managers still don’t sit on the proxy-voting committee. And so long as investors favor results to disclosures and returns to process – which is true in all funds except for those that pursue a social agenda – there will always be some lingering sense that fund firms don’t care that much about these issues. Further, there are no studies showing any kind of link between how funds vote their shares and how they perform.” Once those two threads are connected, we should see a lot more emphasis on voting. See also Shareholders’ Voices Hold Little Clout, mmexecutive.com, 7/14/08.

Lukomnik to Head IRRCi

The Investor Responsibility Research Center Institute for Corporate Responsibility (IRRCi) hired Jon Lukomnik as program director. Lukomnik will spearhead the Institute’s efforts to become the preeminent source of objective and relevant research examining the intersection of investments with environmental, social and governance issues.

“The Institute will encourage and support important research in the fields of corporate governance and corporate responsibility and will be a convener and coalescing force in this area of growing importance. Jon is the right person to lead us, and our board looks forward to working with him as he develops relationships with educational and other research organizations in these fields which are critically important in the securities markets and for the economy,” said Peter Clapman, Chair of the Institute.

“This is an opportunity of a lifetime – the chance to give back to the industry,” said Lukomnik. “If we do it right, the IRRC Institute will contribute to building the solid, independent research base which will affect how investors view and value corporations’ environmental, social and governance efforts for decades, even while allowing corporations to understand how to profit by being responsible. I envision the Institute as the go-to non-profit organization for such independent, objective research.”

Lukomnik is well-known globally for his corporate governance efforts over a quarter of a century. He is a founder and former Governor of the International Corporate Governance Network which now boasts 500 members representing some $15 trillion of assets under management, ex-chair of the executive committee of the Council of Institutional Investors, former Deputy Comptroller of New York City in charge of investing that City’s pension funds and treasury assets, a founder of GovernanceMetrics International, and co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Bargain price of less than $10 for hardcover edition) Lukomnik will also continue as Managing Partner of Sinclair Capital LLC, a strategic consultancy for the asset management industry.


In a CFA Institute survey of1,956 investment professionals, 11% said they had seen a credit rating agency change a bond grade in response to pressure from an issuer, underwriter or investor.

Many respondents felt the most harmful conflict of interest results from the payment structure under which rating agencies such as Moody’s Investors Service and Standard and Poor’s are paid by the same issuers whose securities they grade. (Investors cite rating agencies’ conflicts of interest, Financial Week, 7/8/08)

An SEC report found that none of the rating agencies examined had specific written comprehensive procedures for rating residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO). Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. (SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors) See also: Rating agencies in-depth, FT; SEC proposed rules.

Procedural Error in SEC Request to Delaware Court

J. Robert Brown argues that the decision by the Delaware Supreme Court to consider the certified question re AFSCME’s Proposed Bylaw at CA violates its own rule. No action letters represent requests for “informal” advice from the staff of the SEC.  The advice is not attributable to the Commission.

The petition provides that the answer ”will determine whether the Division will ultimately concur in CA’s view that it may exclude the AFSCME Proposal . . . “  (emphasis added).  In other words, it will be the staff that rules once the answer has been received, not the entire Commission. The fact that a no action letter is not a position of the Commission means that it can be easily disavowed (by the Commission or the staff) and cannot be challenged as a final action under the APA. Procedures matter. [As Predicted: The SEC and the Further Denial of Shareholder Access (Delaware Supreme Court and the Lack of Jurisdiction)(Part 4), theRacetotheBottom.org, 7/8/08)

TIAA-CREF Faces Pressure at Annual Meeting

Shareholders and advocacy groups will press TIAA-CREF officers on its investment in companies with socially irresponsible practices at its July 15 meeting. After years of pressure, TIAA-CREF agreed to become a shareholder activist on issues of social responsibility. Now it’s time for them to either put pressure on five industry leaders that consistently display egregious behavior or divest their stock, says the Make TIAA- CREF Ethical coalition, which includes Corporate Accountability International (formerly Infact), World Bank Bonds Boycott, Press for Change, Social Choice for Social Change, Canadian Committee To Combat Crimes Against Humanity (CCCCH) , Citizens Coalition (Frente Civico), Educating for Justice, National Community Reinvestment Coalition, Campaign to Stop Killer Coke/Corporate Campaign, Inc., Campaign for a Commercial-Free Childhood, and Sprawl-Busters. The Coalition urges that TIAA-CREF “reform them or dump them.”

  • Nike and Wal-Mart, condemned for selling products produced by overseas sweatshop labor;
  • Wal-Mart, widely criticized for its domestic labor practices, hurting local businesses, and promoting urban sprawl;
  • Philip Morris/Altria, responsible for Marlboro, the leading cigarette for youth;
  • Costco, which promotes police brutality in Mexico and the destruction of its cultural heritage and the environment;
  • Coke, with complicity in widespread labor, human rights and environmental abuses; exploits child labor and aggressively markets harmful products to children.
  • While TIAA-CREF did divest from harmful World Bank bonds, it should now pledge to buy “no more.”

According to coalition group representative Neil Wollman, a Senior Fellow at Bentley College in Massachusetts, TIAA-CREF claims that outside of their socially responsible fund, they cannot use non-financial criteria in their financial decisions. Yet, Wollman asks, “Would TIAA-CREF have invested in the production of Nazi gas chambers in World War II if it meant a healthy financial profit? It’s time for TIAA-CREF to answer that kind of question.” He adds, “Our coalition praises TIAA-CREF for changes over the years in its social responsibility practices often spurred by participant lobbying; but now they need to move on our companies of concern.” For further information, contact Neil Wollman, Ph.D., Senior Fellow (for the Make TIAA-CREF Ethical coalition): 260-568-0116. DisclosureThe publisher of CorpGov.net is a Costco shareowner.

Audit Committee Practices

TheCorporateCounsel.net recently conducted a survey and found that more than 90% review company earnings releases prior to their release to the media. Most hold a meeting by telephone a day or two prior to the release. (Survey Results: Audit Committees and Earnings Releases)

Sweeping Resoution at Hain

Congratulations to Kenneth Steiner and John Chevedden for creating and submitting what is certainly one of the most innovative and important resolutions of 2008. The SEC Rules on Shareholder Resolutions (Rule 14a-8) limit shareowners to one resolution per annual meeting. Yet, Steiner’s resolution to the Hain Celestial Group covers a lot of territory simply by asking Hain to reincorporate in North Dakota.

RMG/ISS blog points out that the United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively. At least we know such proposal aren’t likely to be excluded by “no action” requests.

As RMG/ISS report, there is some dispute as to the benefits to be gained by reincorporation. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.” But being based at the University of Delaware, Elson is hardly be viewed as unbiased.

William H. Clark, Jr., who served as president of the North Dakota Corporate Governance Council, which drafted the statute, of course, sees things differently. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.” (Reincorporation proposal seeks to address “major issues in corporate governance,” 7/2/08)

Regardless of the merits of incorporating in North Dakota, the proposal brings up several issues that could be the subject of negotiations. Among the most significant are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

See text of the law and discussion, The North Dakota Experiment, at Harvard Law School Corporate Governance Blog, 4/23/07, Expect to similar proposals at a great many companies next year.DisclosureThe publisher of CorpGov.net is a Hain Celestial Group shareowner and will be voting in favor of Steiner’s proposal.

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CorpGov Bits

Writing for FT, Kristin Gribben concludes Shareholder democracy is on hold (7/6/08) based on mid-year voting results, which show “say on pay” support has remained flat. However, since both Barack Obama and John McCain have said they support say on pay, why should shareowners exert much effort on such proposals this year? Yes, many are waiting to see what the next administration brings.

One out of every four working Americans (25%) describes their workplace as a dictatorship and only 34% believe their bosses react well to valid criticism, according to a new Workplace Democracy Association/Zogby Interactive survey. 80% of workers said they work better when they are given the freedom to decide how to best do their job. (Workplace Democracy Survey, Workplace Democracy Association and The WorldBlu Blog, 7/5/08) The revolution continues.

A socially responsible investment (SRI) global equity allocation could produce 40% lower CO2emissions than a conventional portfolio indexed to the MSCI World, according to a study by Pictet Asset Management (PAM). Such a portfolio also showed the positive impact on job creation for 2007, creating half again as many as compared to the benchmark increase.

There is growing recognition that proactive management of social and environmental issues by corporations will have a material impact on their long-term value. Pension funds should disclose the extent to which (if at all) LTRI issues are taken into account in investment-related decisions, including proxy voting policies, selection of investments, engagement with companies or regulators, and selection of investment managers. (Responsible investing requires full disclosureDavid Hess, P&I, 6/9/08)

Karthik Ramanna and Sugata Roychowdhury find that outsourcing firms donating to congressional candidates in closely watched races managed their earnings downwards in the two quarters immediately preceding the 2004 election, deflecting attention away from outsourcing and negative media. As expected, such candidates to do better in elections. Conclusion: Accounting Information (can be used) as Political Currency. Ah, another form of corruption. People are so creative.

A bill signed into law in June positions Vermont as a leader in incorporating so-called virtual firms — those without a physical headquarters, actual paper filings, and directors’ meetings (they’re all online.) The state will charge virtual companies the same amount — about $235 per year — that standard corporations pay when filing. (Vermont Wants to Be the “Delaware of the Net,” CFO.com, 6/30/08)

Dennis Johnson, Director of Corporate Governance, will be leaving CalPERS  to become Managing Director of Shamrock Activist Value Fund. He also intends on stepping down from the post as Chair of the Council of Institutional Investors Board of Directors. (press release, 7/2/08) It looks like 3 years is all we can hope for at CalPERS until they move to the private sector for higher pay.

CalPERS also reached an $895-million settlement of a class-action lawsuit brought against UnitedHealth Group, over its stock-option grant practices… probably the largest stock option backdating recovery to date.

The Delaware Supreme Court accepted questions from the SEC on AFSCME’s binding bylaw proposal seeking reimbursement for third-party solicitations at CA. Briefs are due July 7; oral argument is scheduled for July 9. (Delaware Supreme Court: CA/AFSCME Certification Accepted and Fast Tracked, TheCorporateCounsel.net Blog, 7/2/08)

It has now been more than 10 years since DOL wrote a letter to Calvert advising them that the fiduciary standards of ERISA didn’t preclude socially screened funds as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.” (Socially conscious investing blossoms with DOL’s blessing, Investment News, 6/23/08)

Preliminary 2008 AFL-CIO Key Votes Survey Preliminary Scorecard posted.

Former SEC chairman Arthur Levitt Jr. called on the SEC to immediately take up proxy access with “a significant, but not onerous, threshold amount of stock one must own to put forward a vote, a framework regarding disclosure and conflicts of interest, and rules that ensure that any changes to a board do not violate stock-exchange listing standards.” (How to Boost Shareholder Democracy, WSJ, 7/1/08)

Lipton and Democracy

In Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World?, Martin Lipton discusses the pressures that have been “pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization.”

Lipton cries out that “directors risk embarrassment for any misbehavior or other failures of their companies, however diligent they may have been.” Of course, since board minutes are not routinely made public, how can shareowners assign blame other than to responsible committees and their members? “Many active CEOs and other senior business people now restrict themselves to only one outside board…” leading to a situation “where few members are CEOs or former CEOs, and too few members are fully qualified to provide the best possible business and strategic advice.” Yes, shareowners want fully engaged directors with a variety of skills and perspectives, not primarily CEOs.

Of course, not all his criticisms are baseless. For example, he points to a recent study by Bhagat, Bolton and Romano that found “no consistent relation between governance indices and measures of corporate performance… the most effective governance institution appears to depend on context, and on firms’ specific circumstances.” Similarly, Robert Daines and Dave Larker found no correlation between the corporate governance ratings given by four services to various corporations. (Rating the Ratings: How Good Are Commercial Governance Ratings?, Daines, Gow and Larcker, 6/26/08)

The bottomline question for Lipton is, will the subprime and leveraged loan financial crisis sufficiently move us from “director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence.” I certainly hope so, and I’m sure shareowner-centric directors will also offer plenty of excellent advice.

When Berle and Means wrote The Modern Corporation, pointing out the separation between the ownership of property and the control of property, they didn’t blame performance failings on the greed of shareowners but on their passivity. They looked to the court as the ultimate arbitrator of the corporation’s legitimacy and viewed its ultimate purpose as maximizing not shareowner profits but the general interest of society. “The control groups… have placed the community in a position to demand that modern corporations serve not alone the owners or the control but all the society.” (p. 312, 1968, London: Transaction Publishers) As New Dealers, they believed political intervention was necessary to support market forces.

Managers and economists have sought for decades to avoid political regulations by overcoming the inherent inefficiencies of separate ownership and control by relying on and developing more efficient market forces. Through the pure economic model (PEM), financial markets take on the role of the entrepreneur, ensuring profit maximization by directing the flow of capital. However, markets behave more in line with crowds and mass movements, than as rationally efficient. Shareowners seek to exploit imperfect information.

Advocates of PEM have concentrated on designing mechanisms to reduce agency costs, by aligning CEO pay, for example, with stock price. However, PEM depends on all shareowners expecting the same maximized level of profit over the same time and different shareowners have different timeframes. PEM also underestimates the fragmentation of ownership and the consequences for corporate governance.

Lipton is right that costly regulatory checklists could kill the goose that lays the golden eggs, but the solution is not to return to a Fordist management dominated system that worked when corporations were conservative bureaucracies, politically counterbalanced by unionionized employees.

In a recent interview, Bob Monks describes some of his thoughts in returning from the 2008 ExxonMobil meeting. “Coming back from Dallas, I sat down and I began to write, ‘Shareholder Democracy, R-I-P’ which is inscribed on tombstones for Requiescat in Pace, or ‘Rest in Peace.’ Unhappily, the bold experiment that came out of the 1930s and some very idealistic people who tried to repair some of the damage of the Depression has now been thoroughly thwarted by people like Exxon, who view shareholder involvement as being at best a tax and at worst a crime.” (Bob Monks: ExxonMobil Exemplifies Corpocracy, SocialFunds, 6/30/08)

It would be a mistake, however, to think we have moved from a golden age of shareowner primacy. That only existed when corporations were owned, controlled and operated by families. The most interesting book I’ve seen in years on the evolution of the corporation is one that Bob knows well. His cover note says, in part, “The ideal of democratization of economic values, following de Toqueville, is a perilous voyage for which this book is a fine route map. Everyone can benefit from understanding the underlying precepts of tomorrow’s dialogue.”

Entrepreneurs and Democracy: A Political Theory of Corporate Governance by Pierre-Yves Gomez and Harry Korine identifies three “models of reference ” for corporate governance: the familial, managerial and public — each corresponding to distinct stages of evolution. The first stage began with the liberal thought of equal rights and the emergence of private property, which initiated enfranchisement of the entrepreneur. The second stage had roots in the separation of powers between owners and management. The third stage, emerging now, is typified by increasing representation and public debate, giving shareowners effective oversight of the corporation.

Gomez and Krine view the tension between individuals and the collective as opposing forces: that of the entrepreneur, a force necessary for directing and channeling the energies of individuals, and that of social fragmentation, a force that divides and balances individual interests, involving increased exercise of authority and control. Democracy, through institutions and processes, helps to establish equilibrium between these two forces. The governed view governance as legitimate only if there is balance between the directing force of the entrepreneur and the contrary force of fragmentation and independence.

“Management finds itself increasingly subordinated to the markets and has to take investors’ reaction into account to define and weigh decisions.” (p. 184) Shareholders have taken the entrepreneurial mantle and drive the market in two ways. “Investors” exercise the entrepreneurial force by allocating resources to the highest performers based on extrinsic comparisons. “Shareowners” seek to integrate active owners at specific firms based on their interpretation which also includes more intrinsic data. Contemporary corporate governance is characterized by the omnipresence of information, the de-privatization of the corporation, debate and the representation of different interests. Public opinion has become the counterweight to the entrepreneurial force of direction.

Under familial governance, business secrecy was paramount. Under managerial governance, we relied on the primacy of management expertise. Today, good governance depends on a mass of standardized information that allows easy comparison by the investing public of risks and opportunities. It depends both on relatively efficient markets to direct large capital flows and on actively involved shareowners to improve efficiencies at specific corporations.

Under the managerial form of governance that has been in dominant for most of Lipton’s brilliant career, the board is composed of experts and operates primarily to provide internal technical advice. Under public governance, the board is composed of outside directors, shareowner interest groups and even more broadly defined stakeholders to link the corporation to mass markets and society… functions increasingly important for companies operating in a global context.

Lipton’s clients would be better served if he helped them adapt to the process of democratic deliberation, rather than fighting a rear guard action. How can they evolve to a system of selecting board members nominated by and directly accountable to shareowners? How can they supplement the annual meeting with an assembly of elected shareowners who provide advice to management throughout the year? By inviting public discussion in areas heretofore regarded as the exclusive domain of management, companies deliberate matters of public concern in advance and are less vulnerable to the vagaries of market bubbles and crashes. Lipton can best help his clients avoid the imposition of overly burdensome regulations by advising them on how to build democratic mechanisms into the very structures and processes of corporations themselves.

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