Facebook Inc ($FB) is one of the stocks in my portfolio. Their annual meeting is coming up on 6/11/2013. ProxyDemocracy.org had collected no votes when I checked on 6/5/2013. I voted with management 9% of the time. View Proxy Statement. Senator Warren recently called on the exchanges to block companies with unequal voting structures from listing. Too bad that didn’t happen years ago.
Tag Archives | diversity
The Home Depot, Inc. (HD) is one of the stocks in my portfolio. Their annual meeting is coming up on 5/23/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 5/16/2013. I voted with management 81% of the time. View Proxy Statement. Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →
The provision would eliminate Internal Revenue Code section 404(k), an incentive for ESOP creation and operation that permits a C corporation to deduct the value of dividends paid on ESOP stock passed through to employees in cash, deductions used to pay the ESOP acquisition loan, or when the employee reinvests in more company stock in his/her ESOP account balance. Continue Reading →
Introduction by Professor Ronald J. Gilson, the Meyers Professor of Law and Business, Stanford Law School; Commentary of Lecture by Professor David F. Larcker, the James Irvin Miller Professor of Accounting, Stanford Graduate School of Business.
The corporation is one of the most important and remarkable institutions in the world. It affects all our lives continuously. It feeds, entertains, houses and, employs us. It generates vast amounts of revenue for those who own it and it invests a substantial proportion of the wealth that we possess. But the corporation is also the cause of immense problems and suffering, a source of poverty and pollution, and its failures are increasing. While governments are subject to repeated questioning and scrutiny, the corporation receives relatively little attention.
Professor Colin Mayer discuss his book, Firm Commitment: Why the corporation is failing us and how to restore trust in it, published by Oxford University Press in February 2013. He sets out how the corporation is failing us, why it is happening now, what are the consequences, and how we can re-establish the corporation as an institution that we value and trust. Continue Reading →
Abstract: How does gender-balance affect the working of boards of directors? I examine boards that have been required for two decades to be relatively gender-balanced: boards of business companies in which the Israeli government holds a substantial equity interest. I construct a novel database based on the detailed minutes of 402 board- and board-committee meetings of eleven such companies. I find that boards that had critical masses of at least three directors of each gender in attendance, and particularly of three women, were approximately twice as likely both to request further information and to take an initiative, compared to boards that did not have such critical masses. A 2SLS model confirms these results. Continue Reading →
The 400 largest companies headquartered in California, representing almost $3 trillion in shareholder value, still resemble a “boys’ club” with women filling fewer than 10 percent of top executive jobs, a University of California, Davis, study has found. Incremental gains have been pitiful, in my opinion.
The Graduate School of Management’s eighth annual UC Davis Study of California Women Business Leaders — a yearly benchmark for the Golden State’s lack of progress in promoting women business leaders – paints a dismal picture for women in leadership during fiscal year 2011-2012. Some of the best known among these top companies, or the California 400, have no women leaders. Continue Reading →
Watch the Bloomberg Businessweek discussion and get an update on the EU debate on female representation in boardrooms. Interview of experts also includes insights on women added value in Continue Reading →
Since the Cadbury Report was published in 1992 in the UK, there has been increasing emphasis not just by UK regulators but also by regulators from other countries, including the USA and Continental Europe, of the role of boards of directors in corporate governance. However, 20 years down the line it is still uncertain whether boards of directors are able to fulfill the important role they have been assigned by regulators. For example, the academic literature on the impact of board composition, in particular the proportion of outside, non-executive directors, is as yet inconclusive as very few studies have Continue Reading →
Sociologists Richard Zweigenhaft and G. William Domhoff began studying ascendance to the top corporate office 20 years ago and, while the population of CEOs is far from diverse, they report that they have been surprised to see as many women and minorities as they have. Today there are 80 white women, African Americans, Latinos, and Asian Americans at the head of Fortune 500companies. Continue Reading →
GMI Ratings released today its third study this year of gender diversity on corporate boards of directors. The current study provides a comprehensive quantitative state-by-state analysis of gender diversity on the boards of Russell 3000 companies headquartered in the 50 U.S. states. Continue Reading →
It has been months, maybe years, since we’ve slipped into the “wayback machine.” Here we go. Let’s have some fun. Continue Reading →
Equilar anchor Bonnie Day compares male and female compensation at the top, with key findings from the 2012 S&P 500 CEO Continue Reading →
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 →
Legal & General Investment Management (LGIM), one of Europe’s largest institutional asset managers and a major global investor managing £362 billion in assets for more than 3,000 clients, is trying to persuade headhunters to widen the pool of company directors by bringing in people without direct board experience.
“It’s not just about gender,” says Sacha Sadan, LGIM’s director of corporate Continue Reading →
Boards have become larger but controlling for other things, less independent (have fewer independent directors) after the crisis. Much of this seems to be the result of a “supply shock” in which independent directors have become more aware of the risks associated with board positions. In the three weeks of January 2009 after the Satyam fraud came to light, independent director exits soared to 109 from a monthly average of about 30 before the crisis. Over a longer horizon, independent director exits per year have risen by 20% in the post-Satyam period as compared to the three years before the crisis…
Executive director appointments have more than doubled in the post-Satyam period than before. Their proportion on boards has risen by 16%. (The drop in the number of independent directors in boardrooms bodes ill for corporate governance, FT, 8/20/2011)
Indian Boards should consider expanding their horizons, seeking directors from a much more diverse pool of creative professionals from outside their normal circles, including experts in social media, women and international candidates.
Three college degrees for every two earned by a man. 85% of purchasing decisions. Nearly 50% of the workforce. And yet, the tiniest of chips in the glass ceilings of boardrooms across corporate America with women holding just 18% of corporate board posts at S&P 100 companies. What’s wrong with this math?
Aditi Mohapatra, Senior Sustainability Analyst with Calvert Investments, McKinsey’s Women Matter study, which found companies with the highest share of women on executive committees outperformed those with all-male executive committees by 41% in terms of return on equity and 56% in operating results.
She goes on to note that Calvert has filed diversity proposals at 55 companies; 46 agreed to change Continue Reading →
CalSTRS withdrew all eight of its board diversity shareholder proposals filed during the 2011 proxy season after successfully engaging companies to consider diversity in director searches.
In recent years, the issues of board of director leadership and oversight roles have taken on increased significance to long-term investors, such as CalSTRS. Today’s economic challenges highlight the importance that board diversity plays in enhancing value and providing companies with a full range of fresh talent and experience. According to Anne Sheehan, CalSTRS Director of Corporate Governance:
We’ve advanced the ball in the name of board diversity and are committed in our conviction that corporate boards and their nominating committees consider diversity in the larger context of improving shareholder value. One lesson from the financial crisis was the role corporate board group-think played in fostering management short-term priorities that proved detrimental to sustainable value creation. We think improved board diversity will address that problem.
To assist boards in the enhancement of diversity on corporate boards and of shareholder value, CalSTRS and CalPERS launched the Diverse Director DataSource, known as “3D,” by announcing the selection of corporate governance vendor Governance Metrics International to develop and operate the DataSource. 3D is expected to go live later in July and begin accepting nominations from board candidates. The database will offer shareholders, companies and other organizations a valuable resource for identifying candidates.
The number of women being hired as non-executive directors to FTSE 100 companies is running at nearly double the rate it was before the Davies report, which threatened the introduction of fixed quotas.
Over the past six months, 23 per cent of all new non-executive board appointments have been filled by women, compared with just under 10 per cent for all of 2010, and the number of companies with no women on the board has fallen from 21 to 17. (Boards double number of women members, The Independent, 5/29/2011)
It looks like the possibility of legal mandates does have an impact, at least in the UK, and that quick action by boards may avoid legislation.
Checking the Summary Compensation Table, it appears CEO/Chair Francis S. Blake was paid about $10.5 million. Using the United States Proxy Exchange (USPX) released draft guidelines, I am voting against most pay packages over the median for large-caps of $9 million, including this one. I also voted against all members of the compensation committee: Brenneman, Codina and Hill.
I voted in favor of the proposal by Evelyn Y. Davis for cumulative voting. This right could become increasingly important is shareowners are ever given proxy access. I voted in favor of William Steiner’s proposal to allow special meetings to be called by 15% of the shares. I’ve introduced similar proposals and see this as simple good governance.
Similarly, I favor the proposal by Trillium Asset Management for a diversity report. Home Depot should take a leadership position on this important issue. I also favor the proposal from NorthStar Asset Management Funded Pension Plan to allow a shareowner vote on specified political expenses. After Citizens United, I think such votes at every company are warranted.
CalPERS and CalSTRS are working with an Advisory Panel of leading corporate governance experts to develop a new digital resource devoted to finding untapped diverse talent to serve on corporate boards.
The Diverse Director DataSource, known as “3D,” will offer shareowners, companies and other organizations a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a director’s seat.
“The Diverse Director DataSource is an important tool for finding untapped, experienced Continue Reading →
Diversity On Corporate Boards: When Difference Makes A Difference: The Arthur and Toni Rembe Rock Center for Corporate Governance at Stanford.
Speaker: The Honorable Luis Aguilar, Commissioner, United States Securities and Exchange Commission
Speaker: Joseph A. Grundfest, W. A. Franke Professor of Law and Business, Stanford Law School; Senior Faculty, Rock Center for Corporate Governance, Stanford University
Speaker: Mary B. Cranston, Senior Partner, Pillsbury Winthrop Shaw Pittman LLP
At this point, the attempt to translate corporate governance aspirations to law has failed. Bob Monks.
Women serving on corporate boards are far more likely than their male counterparts to favor increased boardroom diversity, new regulations for executive compensation, proxy access for shareowners and enhanced risk management, according to a new survey of corporate directors by Heidrick & Struggles, WomenCorporateDirector (WCD), and Dr. Boris Groysberg. (Survey: Men and Women Corporate Directors Disagree Sharply on Diversity and Governance, Business Ethics, 10/7/10)
It makes me wonder, Did they really survey male directors, or did they slip in a large number of cavemen just to make women look so much more intelligent? I’m not about to get a sex change, but once again my group is making me embarrassed. These guys probably also think Pluto is still a planet.
As if this news wasn’t bad enough for guy egos, another study examined stock performance of the 26 publicly traded companies headed by females on the Power Women 100 list and found that as a group they outperformed the overall market–companies dominated by male chief executives–by 28%, on average, and topped their respective industries by 15%. (Girls Rule, Forbes, 10/7/10)
What’s the best way to predict the future? Create it. Free USPX Training – Learn How to File Shareowner Proposals.
Conference Board Recommendations Due Soon
The Conference Board’s Commission on Public Trust and Private Enterprise made a relatively bold move last September when they called on companies to predisclose executive stock sales, expense stock options and have compensation consultants report to the board, instead of management.
On January 9th they are expected to issue governance recommendations. One widely reported suggestion is that companies consider splitting the role of chairman and CEO. Less known is that they may also suggest that companies allow shareholders to place board nominees in their proxy materials. I suspect the main controversy has been on what threshold should be required and how many such nominees will be allowed.
I suggest that readers contact members of the Commission to express support for an open corporate ballot. Carolyn Brancatoacts as the Commission’s director. Staff include Sigrid U. Esserand Donovan Hervig. Members include:
- Pete Peterson, chairman of the Blackstone Group
- Ralph Larsen, former CEO of Johnson & Johnson
- John Biggs, former CEO of TIAA-CREF
- John Bogle, founder of the Vanguard Group
- Andy Grove, chairman of Intel
- Charles A. Bowsher, former US Comptroller General
- Peter Gilbert, chief investment officer of State Employees’ Retirement System, Commonwealth of Pennsylvania
- Arthur Levitt, former SEC Chairman
- Lynn Paine, Professor, Harvard Business School
- Former Senator Warren Rudman, Paul, Weiss, Rifkind, Wharton & Garrison
- Paul A.Volcker, former Chairman of the Board of Governors, Federal Reserve System
If you’ve got better e-mail address for any of the above members, please forward them to email@example.com.
Execs Still Cashing In
The New York Times points out that 2002 hasn’t been a good year for Tenet Healthcare. The FBI raided one of its hospitals re unnecessary heart surgeries. Medicare began scrutinizing billing practices. It missed its profit projections, and the SEC opened an inquiry into a steep decline in its stock, which closed on Friday at $15.13, more than 60 percent below its level a year ago. CalPERS is also investigating.
Yet, CEO Jeffrey C. Barbakow cashed out company stock worth $111 million in January. Thomas B. Mackey, the chief operating officer, made $16.4 million in stock profits before resigning in November.
“Similar contrasts between executive pay and corporate performance are fueling much of the public anger with corporate America. Yet even with business under intense scrutiny in 2002, many executives and board members have continued to cash in the stock options they were awarded as part of their pay, making millions of dollars even while their companies lost much of their value.” (see Options Payday: Raking It In, Even as Stocks Sag, 12/29/02)
SEC Urged To Require Disclosure For Mutual Funds
House Financial Services Chairman Oxley and Capital Markets Subcommittee Chairman Richard Baker called on the SEC to require the disclosure of votes cast on behalf of mutual fund shareholders as well as the policies and procedures for proxy voting.
“In order to continue the efforts to restore confidence in public companies and financial institutions, and build on the Sarbanes-Oxley Act reforms, we strongly encourage the commission to take action that will require mutual funds and investment advisers to disclose both their proxy voting policies and procedures and their actual proxy votes,” Oxley and Baker wrote the SEC.
“Mutual funds belong to the shareholders who fund them, and those shareholders deserve to know how their voting rights are being used. Making mutual fund voting transparent will strengthen investor confidence by providing another powerful tool to promote corporate accountability and responsibility.”
Small Town Makes Statement
The elected officials of Porter Township, Pennsylvania, have passed a law declaring that corporations operating in that township may not claim civil and constitutional privileges. A unanimous vote cast on December 9, 2002, evolved out of long-time efforts by citizens and public officials to bar corporations from dumping toxic sludge on township lands. The new law declares that corporations allowed to do business within Porter Township possess none of the human rights that corporations have been wielding to overrule democratic processes and rule over communities. For details, contact the Community Environmental Legal Defense Fund (CELDF) in PA at 717.709.0457 or firstname.lastname@example.org, or contact the Program on Corporations, Law and Democracy (POCLAD) in MA at 508.398.1145 or email@example.com.
Selling “Bad” Companies Short
Karma Banque encourages protesters to short offending companies. The six-month old site offers a platform for activists to inform each other and organize boycotts against companies they perceive to be irresponsible. “Karma Banque is at the center of a new movement that combines the civil disobedience of Gandhi with the financial savvy of George Soros to change the economic and political landscape of the world!”
The Karma Banque index is made up of 10 stocks and is calculated by a combination of the ‘Boycott Profitability Ratio’– dividing the company’s current market cap by its trailing 12 months of gross sales — and the actual percentage of stocks held in short positions. The higher the BPR, the bigger the impact of activists’ short selling.
Microsoft currently takes prime position on the KbQ index, with a rating of 66, meaning it most merits a boycott and a short-sell, followed closely by 57 for Exxon.
India’s Chandra Panel Calls for Independent Boards
The Naresh Chandra Committee suggested an increased role for independent directors in listed companies and an overhaul of disciplinary procedures for accountants while fixing the responsibility of certification of audited accounts on Chief Executive Officers and Chief Financial Officers.
At least half of the board of listed compaynies should be comprised of independent directors. Also, audit committees should be entirely comprised of independent directors. CEOs and CFOs of all listed comapnies should certify correctness of the annual audited accounts. (Chandra panel for increased role for independent directors, OutlookIndia.com, 12/23/02 andReport on corporate governance reforms submitted, The Hindu, 12/23/02)
Fortune Magazine Points to Unintended Consequences
Goeffrey Colvin’s commentary, “Sarbanes & Co. Can’t Want This,” is on target. Recent efforts to fix the corporate governance crisis are too prescriptive.
Definitions of “independence” allow the CEO’s close friends but can exclude a large shareholder or a retiree who derives a significant portion of their income from being a board member. “Financial expert” has been defined to exclude Alan Greenspan or Warren Buffet but include low level auditors or accountants. Focusing on compliance to prescriptive standards will distract boards from creating wealth.
Corporations are still largely the private dominion of CEOs. Let’s keep government regulation to a minimum by giving shareholders the tools we need to protect our investments by balancing that power. The primary solution is simple; allow shareholders to nominate directors and to include those nominees in the corporate proxy.
The open ballot movement is gaining momentum. Les Greenberg, of Concerned Shareholders, and James McRitchie, editor of Corpgov.Net, filed SEC Rulemaking Petition File No. 4-461 on August 1st to allow shareholders to nominate directors who would be truly accountable to the owners of corporations and independent of management.
This was followed on September 24 by another SEC petition,File 4-465, by Deborah Pastor, Portfolio Manager of eRaider.com. On November 26th, AFSCME announced they will submit binding bylaws resolutions to require board candidates nominated by shareholders owning at least 3% of company stock to be included in corporate proxy materials.
The current SEC rule 14(8)(a) banning proposals on subjects related to the election of directors is absurd. There is nothing of more central concern to shareowners. We have every right and necessity to propose improvements to the election process.
Fortune could do its readers a service by focusing attention on these efforts to bring greater democracy to corporate elections and by encouraging its readers to e-mail positive comments to the SEC on Petition File No. 4-461 and similar efforts.
CalPERS Ups Stakes in Governance Fund
CalPERS approved a $100 million investment in a fund targeting underperforming companies in continental Europe, raising its stake in such corporate governance funds outside the United States to $700 million. The Hermes fund will seek to narrow the value gap of companies it invests in by improving their corporate governance, capital structure and senior management.
It Was a Very Good Year…for Cynics
Paul Krugman’s editorial (The Good Guys, 12/24/02) in the New York Times is instructive. He points to Time magazine’s persons of the year award to three whistle-blowers: Sherron Watkins of Enron, Cynthia Cooper of WorldCom and Coleen Rowley of the FBI.
“They deserve to be celebrated. After all, thanks to Ms. Watkins and Ms. Cooper, Jeff Skilling, Ken Lay and Bernie Ebbers have been indicted, and the politicians who did their bidding have been disgraced. Thanks to Ms. Rowley, incompetent officials at the F.B.I. and C.I.A. have been removed from their posts, and we’ve had a searching inquiry into what went wrong on Sept. 11.
Oh, I’m sorry. None of that actually happened. The bravery of the whistle-blowers was real enough, but Time seems to be celebrating what should have been, not what was.”
The whistle-blowers haven’t been rewarded, other than to be featured on the cover of Time. Krugman points out that Ms. Cooper and Ms. Rowley are personae non gratae in their organizations and one of the FBI officials cited by Ms. Rowley for blocking an investigation that might have averted Sept. 11th received a special presidential award.
Krugman draws a parallel with the English peasant rebellion of 1381 and concludes that in times of crisis those in power promise reform. Once the immediate danger has passed, such promises typically “became non-operational.”
One bright spot, Krugman observes, Eliot Spitzer, Times “crusader of the year.” While Spitzer’s settlement requires that investment banks pay for some independent stock research, “it probably won’t be enough to erase suspicions that analysis is slanted in favor of big customers.” The year 2002, he concludes, “was a very good year for cynics.”
Will 2003 be any better? I think it is obvious that we have made some progress, especially since 1381. We put plenty of irons in the fire in 2002, some of which are bound to pay off with increased pressures towards a more democratic capitalism. Let’s hope the darkest days are behind us.
Time Magazine has named Coleen Rowley, Cynthia Cooper, and Sherron Watkins as “Persons of the Year” “for believing – really believing – that the truth is one thing that must not be moved off the books, and for stepping in to make sure that it wasn’t.” Rowley, 48, wrote a letter to FBI Director Robert Mueller in May criticizing the agency for ignoring evidence before September 11, while Cooper, 38, a WorldCom internal auditor, alerted the company’s board in June to $3.8 billion in accounting irregularities, and Watkins, 43, sent memos in August 2001 warning Enron chairman Kenneth Lay that improper accounting could cause the company to collapse.
The new Sarbanes-Oxley Act, which requires CEOs and CFOs to vouch for the accuracy of their companies’ books, is just one sign of what Cooper calls “a corporate-governance revolution across the country.” “These were ordinary people who did not wait for higher authorities to do what needed to be done.”
CalPERS Posts Data
The California Public Employees Retirement System posted its private equity investment performance information. The data release was part of a settlement of lawsuit brought by the San Jose Mercury News. The private equity investments produced a net internal rate of return of 11.4% since March 1990.
Among private equity funds at least 5 years old, the top performers were:
- Information Technology Ventures, 90.1%;
- Conseco Capital Partners II, 89.6%;
- Doughty Hanson Fund II, 46.7%;
- Candover 1994 Fund, 43.2%;
- Blackstone Capital Partners II, 39.9%; and
- Media Communications Partners II, 39.2%.
The worst performers were:
- LM Capital Fund II, -59%;
- Kid Kamm Equity Partners, -46%; and
- INROADS Capital Partners, -28%.
The staff, working with the Institutional Limited Partners Association, plans to propose new standards at the CalPERS investment committee meeting on March 17.
Citigroup will take a fourth-quarter charge of about $1.5 billion, or 29 cents a share, to cover loan losses and costs to settle claims that securities firms misled customers with biased stock research. Citigroup, the nation’s largest financial services company, is paying $400 million as part of a $1.4 billion settlement announced Friday with New York Attorney General Eliot Spitzer and the Securities and Exchange Commission. The agreement includes fines and funds for restitution to investors and independent research. (Bloomberg, 12/23/02)
A Conference Board committee co-chaired by John Snow, Bush’s nominee for Treasury Secretary, is seriously considering recommending that US firms split the roles of charman and CEO. If the panel does not recommend a split, it could suggest use of a “lead” or “presiding” director, who would chair meetings of non-executive board members. The 12 members of the Commission on Public Trust and Private Enterprise include Andy Grove, chairman of Intel; Arthur Levitt, former chairman of the Securities and Exchange Commission; John Biggs, former head of TIAA-Cref, the teachers’ pension fund; Paul Volcker, former chairman of the Federal Reserve; and Pete Peterson, chairman of the Blackstone Group. The group made waves in September when it criticised executive compensation and recommended that companies deduct stock option costs from profits. The commission’s report, due on January 9, will cover broader corporate governance issues, corporate ethics and will also make recommendations on auditing. (US groups may be urged to split top roles, FT, 12/22/02)
Buffoons at the Gate
13D filings sometimes get colorful and this open letter to Mr. Terrence S. Cassidy, CEO and President, NWH, is a classic. Robert L. Chapman, Jr. charges that Cassidy is “nothing more than a Wall Street pretender who specializes in boisterously bullying the very shareholders to whom you owe a fiduciary duty.” Turn your x-rated filters off before viewing.
Donaldson Under Fire
President George W. Bush’s nominee to chair the SEC, was named in a shareholder lawsuit for failing to properly disclose questionable finances when he was a top executive at Aetna. The suit alleges Donaldson, Aetna, its current CEO, John W. Rowe, and other executives of flaunting the companyís internal financial controls in 2000 and 2001, even though they were aware of serious problems. According to the suit, the Aetna executives knew the company had problems handling payment of medical claims, problems that subverted the company’s ability to retain cash reserves necessary to cover the claims. The suit claims that an Aetna vice president resigned due to his discomfort with the situation after other executives encouraged Donaldson to disclose the problems. Continual boasts by executives about the state of the company’s financial situation “couple with their failure to disclose these known, material problems resulted in a material deception of the investing public,” said the suit. (see The Corporate Library)
CalPERS, Stepping Stone
Michael Flaherman, outgoing chair of the CalPERS Investment Committee, will join the New Mountain Capital Group as senior adviser in January. Flaherman, who served on the CalPERS board since 1995 and chaired the investment committee since 2000, is said to have managed some 130 investment professionals and external relationships at the $140 billion fund. New Mountain is a $770 million private equity fund that invests in “high quality growth companies,” according to a statement. We’re beginning to wonder if service on the CalPERS board, or even as a CalPERS employee, is now to be seen simply as a stepping stone to greater wealth in a person’s career.
CalPERS to Move on VC Disclosure
In early November we reported on Judge James Robertson’s ruling that data on CalPERS’ private investments, including venture capital funds, “is not a trade secret and is disclosable.” (CalPERS must reveal VC data, Mercury News, 11/15/02) At that time we wrote, the “public has a right to know and CalPERS will still have plenty of excellent investment opportunities.”Pensions&Investments then came out in favor of disclosure. More recently, P&I reported that CalPERS staff plans to have a specific proposal at the investment committee’s March meeting to strike a balance between fiduciary duty and transparency.
Now the Mercury News reports that state Treasurer Philip Angelides, who led a move to make the returns secret, is leaning toward releasing the rates of return of the venture capital funds. “I think there is a very strong argument for the fund-level data” to be disclosed, he said. However, he’s not convinced that more detailed information, such as the valuations of the companies invested in by those funds should be disclosed. (CalPERS may be leaning toward data disclosure, Mercury News, 12/17/02)
Update (12/19/02): CalPERS said it would release data for the quarters ended June 30, Sept. 30, and Dec. 31, 2002, and March 30, 2003. Under terms of the settlement, it will not release portfolio company information. In exchange, the Mercury News will withdraw all claims. “Ending this lawsuit frees us to work proactively on developing an industry standard for private equity reporting that allows us to do our fiduciary duty and provide maximum transparency,” William Crist, president of the CalPERS board of administration, said in a statement. “We intend to work with other institutional investors, the private equity industry and the public to develop the best reporting standards.”
SIF Seeks Additional Reforms
The Social Investment Forum, representing 500 members concerned with socially responsible investing organization, called on the SEC, stock exchanges, Congress, corporations and others to embrace additional reforms. Their statement reads, in part, as follows: “While much of the debate in recent months has understandably focused on addressing the most egregious – and most easily remedied – corporate abuses, it is important to note that the crisis of confidence in corporate America has its roots in structures and practices that clearly precede the Enron debacle. Moreover, many of these problems are likely to persist post-Enron unless concerned investors and citizens seize this historic opportunity to reform the way corporations are governed, and the way they do business.
Markets run on trust, and the integrity of those markets depends upon the integrity of the people running America’s corporations. However, to view the corporate scandals as simply the handiwork of a small group of rogue CEOs, accountants and financial analysts is to underestimate the significance of what has occurred. Tougher criminal penalties aimed at punishing a few ‘bad apples’ will not be enough; the fundamental problems are systemic in nature.” Specific reforms include the following:
- Stock options paid to top executives should be submitted to a company’s shareholders for approval, as should executive severance agreements (so-called “golden parachutes”).
- Corporations should be required to provide real time disclosure to shareholders of all company stock sold by senior executives.
- Any restrictions on the sale of company stock applicable to non-management company employees should apply equally to top executives and members of the company’s board of directors.
- In addition to audit, compensation and nominating committees, corporate boards should create “corporate responsibility” or “business practices” committees to oversee corporate ethics, corporate governance and corporate social responsibility.
- The positions of CEO and Chair of the Board for publicly traded companies should be separated and the Chair of the Board should be an independent director.
- Elections of corporate directors should be made more democratic by creating avenues for shareholders or combinations of shareholders with a certain percentage of shares to nominate candidates for vacancies on corporate boards. In addition, there should be mechanisms for enabling shareholders to be granted free access to the company-paid proxy statement in order to nominate such candidates for the board of directors. (see for example Democracy in Corporate Elections, SEC Rulemaking Petition File No. 4-461. See comments e-mailed to the SEC. Also, 4-465. E-mail comments to Mr. Jonathan G. Katz, Secretary, SEC.)
- Annual in-person shareholder meetings must be preserved, and should not be replaced by remote, online annual meetings. The annual in-person shareholder meeting is the only forum that allows shareowners to directly communicate with corporate management. It is an essential component of corporate democracy and efforts to substitute remote, online annual meetings for in-person gatherings would undermine this important feature of our system of checks and balances.
- The SEC, NYSE and other exchanges should develop standards requiring companies to disclose basic information about their social and environmental performance, including material risks, liabilities, and impairments, as well as investments and achievements in these areas – keeping in mind that such “intangibles” are increasingly viewed as indicators or predictors of corporate performance. (see Request for Rulemaking for Clarification of Material Disclosures With Respect to Financially Significant Environmental Liabilities and Compliance with Existing Material Financial Disclosures: 4-463.)
- The SEC should mandate strict disclosure of conflicts of interest between corporate management, boards of directors and auditors, including charitable relationships.
- Public pension funds, mutual funds and investment advisers should be required to vote their proxies according to explicit guidelines and to disclose their proxy votes so that investors know how their fiduciaries are voting their shares on important issues of corporate governance, corporate social responsibility and other issues that impact corporate performance. (see Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies: Release Number 33-8131.)
For the full list of recommended reforms and the related discussion, go to the Social Investment Forum, Corporate Reform.
The Social Investment Forum statement notes: “Many of the reforms necessary to prevent further corporate abuses will not require more government programs or increased government funding. What is really required is better disclosure so that markets are allowed to work efficiently and regulate themselves the way they are supposed to. Rather than mandating practices, the disclosure model encourages the adoption of specific corporate governance practices and holds companies accountable. Ultimately, shareholders can determine the extent to which company management is properly managing risk and promoting long-term shareholder value, and whether the company is meeting its obligations to its shareholders and to the various publics it serves.”
The Social Investment Forum statement on needed corporate reforms was authored by Joseph F. Keefe, president ofNewCircle Communications, on behalf of the Board of Directors of the Social Investment Forum. Keefe is a member of the Social Investment Forum board of directors.
TIAA-CREF Goes Half Way
In a December 6 SEC letter, TIAA-CREF, the largest US pension system, said it supports vote disclosure but wants investment companies to be allowed to provide investors in many cases with a summary report showing how proxies were voted as a group, rather than having to disclose the details of each proxy vote cast, Dow Jones said. (PLANSPONSOR.com, 12/12/02)
Women on Boards, Discrimination and Diversity
The Swedish government will introduce a gender quota for corporate boards unless one in four board members is a woman by 2004, said Deputy Prime Minister Margareta Winberg. Companies must make good on their promises to bring women into leadership roles in an area still dominated by men or Winberg, who also serves as minister for gender equality affairs in the center-left Social Democratic government, will be seek quotas.
Nearly 16% of Fortune 500 corporate officers are women, up from 12.5% in 2000 and 8.7% in 1995…The percentage of women holding so-called clout titles from executive vice president up to CEO increased to 7.9% in 2002 from 1.9% in 1995. Women who ranked among the five best-paid officers at their companies increased to 5.2% in 2002 from 4.1% in 2000 and 1.2% in 1995.
On the other hand, complaints of discrimination based on national origin have risen 20% over the last eight years, the EEOC said…agency attributed the rise to hostility to Muslims and Middle Easterners after the Sept. 11 attacks, increasing numbers of immigrants in the labor force and other population changes…”Most people think about race and gender discrimination — national origin discrimination doesn’t come to mind, but it’s having a greater impact on the workplace.”
Recent academic papers from Oklahoma State University, the University of Delaware, and Florida A&M find positive relationships between a company’s market value and the diversity of its corporate board and upper-management…”Diversity and independence helps a company’s bottom line, and increasing diversity in the boardroom to better reflect a company’s workforce, customers and community is ultimately in the best interest of shareholders and our economy.” (Connecticut Initiative Promotes a Better Bottom Line Through Diverse Boards) The above stories from Today’s Reputation Briefs, 12/13/02, firstname.lastname@example.org
Focus List Request from Tenet Shareholder Committee
In a sign of things to come, Dr. M. Lee Pearce, chairman of the Tenet Shareholder Committee, called on CalPERS to put Tenet Healthcare on its investment Focus List for 2003.
“By identifying specific corporate governance reforms and by bringing top management and the board in for discussion, as you do with all Focus List companies, CalPERS can use its considerable authority to help repair what appears to be a seriously dysfunctional company,” Pearce wrote to Michael Flaherman, chairman of the CalPERS investment committee. At the request of SEIU, CalPERS, which purchases health care for 1.1 million beneficiaries, previously agreed to look at Tenet Healthcare Corporation’s questionable pricing practices during the next meeting of its health benefits committee in December.
Earlier this week, Pearce wrote a 9-page letter to Tenet’s Board asking, “How many people must die before the Board puts an end to the current culture of profits over quality patient care?” Pearce called on the Board to:
- Remove senior management now, and undertake a national search for an executive with unimpeachable experience and integrity.
- Appoint a qualified, independent special committee of non-management Board members to investigate past practices and review quality of care.
- Independently investigate the inflated charge-master and resulting extraordinary Medicare outlier payments.
- Adopt a policy of transparency and openness.
- Separate the duties of the General Counsel, Chief Compliance Officer and Chief Corporate Officer and appoint a physician to be Chief Compliance officer.
- Add at least five new, truly independent directors to the Board. recommending reforms, including replacing top management, appointing an independent board committee to investigate past practices and quality of care, independently investigating the inflated charge-master and resulting excessive Medicare outlier payments, and adding at least five new, truly independent directors to the Board.
Our opinion? We’re going to see a lot more requests from shareholder activists for intervention by large institutional investors. (see Florida Physician Accuses Tenet Healthcare of Practicing ‘Wall Street , PRNewswire, 12/10/2002)
Spitzer Calls for National Database to Rate Analysts
New York State Attorney General Eliot Spitzer sparked controversy last month at Institutional Investor’s All-America Research Team awards dinner by skewering the evening’s honorees in his keynote address. His own study showed that All-America team members often lag their colleagues. He went on to propose a national database of stock recommendations that would allow individuals to check on the performance of particular analysts. We hope someone does it. (Guess who came to dinner, IIPlatinum, 12/12/02)
CalSTRS and LACERA Adopt Responsible Contractor Policies
The $100 billion CalSTRS and the $25 billion Los Angeles County Employees Retirement Association (LACERA) have followed recommendations by their investment staffs and joined the rapidly growing ranks of institutional real estate investors who have adopted Responsible Contractor Policies. The CalSTRS board voted unanimously to adopt the policy on December 4, 2002, and the LACERA Investment Board adopted its policy unanimously on December 11, 2002. Responsible Contractor Policies help investors to build value in their real estate portfolios by ensuring their contractors provide high quality services, pay fair wages and benefits, and obey labor law. Both policies are modeled on the Responsible Contractor Policy adopted eight years ago by CalPERS, and will apply to all construction, management and services for their real estate portfolios. (SEIU Capital Stewardship Newsletter, 12/12/02)
Ford Asked to Give Back Profits
As reported by the Detroit News, (Ford boss takes heat on stock deal, 12/11/02) investment banker Goldman Sachs Group presented Ford Motor Co. Chairman William Clay Ford Jr. with the golden opportunity to purchase 400,000 shares of its initial public offering about three years ago.
By getting the jump on a hot initial public offering (IPO), Bill Ford realized $8.4 million in paper profits. Such high-level back scratching was nothing unusual. Ford’s board is expected to review a written demand by Richard Berger, owner of 100 Ford shares, that Bill Ford hand over his profits to the company that bears his name.
Since Bill Ford was allocated Goldman shares because of his powerful position at Ford, and his ability to steer millions of dollars in future business to Goldman, profits from the IPO should therefore go to Ford and not to Bill Ford as an individual. The New York Times recently detailed the stock sale and the historic ties between Ford and Goldman Sachs. In 1956, Goldman Sachs chief Sidney Weinberg helped Henry Ford II take the family-owned automaker public. Weinberg is credited with structuring the deal that allowed the Ford family to retain 40% control of the company through a special class of stock. Weinberg was later appointed to Ford’s board of directors. The board of the Ford Motor Company announced it had formed a committee to look into the allocation of shares of Goldman Sachs to William Clay Ford Jr., the company’s chairman and chief executive. (Ford to Review How Chairman Got 400,000 Goldman Shares, NYTimes, 12/13/02)
Walt Disney Co. Chairman Michael Eisner purchased 30,000 shares of stock in the Goldman IPO. Disney also has received a demand from a shareholder that Eisner return profits to the company. Other executives named included former Enron Corp. Chairman Kenneth Lay, former Tyco International CEO Dennis Kozlowski and Yahoo co-founder Jerry Yang.
Northrop Grumman Approves TRW Giveaway
Shareholder activist John Chevedden reports that only 2 Northrop directors and about 50 shareholders attended the 17-minute meeting to approve the TRW merger. Chairman Kressa acknowledged that shareholders would not have the opportunity to vote separately on the corporate governance rules of the merged company which were cited at the meeting for having 10 major flaws.
Although only 51% of shares-voted were needed for approval, Northrop apparently paid for solicitations to make the numbers higher than needed. When asked about further developments on the Backstone deal to sell TRW automotive, Chairman Kressa said discussion of it was not germane to the meeting. The company added little of substance to questions on poor 3rd quarter performance and whether the added burden of integration could negatively impact 2003 results, especially with Kressa retiring in 2003.
Kressa said that Northrop approved the $60 million gift TRW made of their Lyndhurst headquarters on 68 acres to the Cleveland Clinic. If such property were given by a public entity, it would be an illegal “gift of public funds” but for corporations it appears to be business as usual, with little regard for shareowners. (see TRW headquarters is given to the Clinic, Cleveland.com, 12/10/’02)
Retirement Systems of Alabama Gets Majority of Board Seats at US Airways
RSA will hold 7 of 13 seats upon emergence from bankruptcy. RSA pledged to provide US Airways with $500 million in emergency financing to keep its operations running in bankruptcy, along with $240 million for a 36% stake in the company once it emerges from the bankruptcy courts, according to Reuters.
In addition, the $25 billion Alabama pension fund offered to put up $75 million if necessary to help the airline secure final approval for a desperately-needed $900 million federal loan guarantee. The request for financial aid from a government board, which would come in the form of a 90% guarantee on a $1 billion loan, has been granted conditional approval. (USAirways Cuts A New Deal With Alabama Fund, PLANSPONSOR.com, 12/6/02)
Teamsters Launch Capital Markets Program
Teamster fund trustees met in Washington to plan an agenda focusing on corporate governance and money manager accountability. Teamster funds combined total nearly $100 billion in assets. Teamsters General President James P. Hoffa addressed the trustees, “together we can influence corporate behavior and make companies more accountable to Teamster shareholders and members. ”
California State Treasurer Phil Angelides, a trustee of the first and third largest pension funds—CALPERS and CALSTERS—joined them. “No reform effort will be complete unless we, as owners of American corporations, commit to exercising the power of the purse to bring about a new era of corporate responsibility,” said Angelides.
CONTACT: Carin Zelenko of the International Brotherhood of Teamsters, +1-202-437-6279
SEC Backs Off “Ordinary Business” Exemption
PLANSPONSOR.com reports that in a letter to the United Brotherhood of Carpenters and Joiners of America, Martin Dunn, the SEC’s deputy director of corporation finance, indicated that after an SEC review, the SEC now “does not concur” with National Semiconductor’s view that their proposal could be excluded from the proxy. He added that “in the future, we will not treat shareholder proposals requesting the expensing of stock options as relating to ordinary-business matters.”
The new letter reverses a long standing policy at the SEC and could result in shareholder votes on options expensing at the following:
- Lehman Brothers Holdings
- Caterpillar Inc.
- Eli Lilly
- Apple Computer
In addition, the same union is submitting separate shareholder proposals to some companies to urge them to add a performance requirement to their options program. That would require the firms to beat the stock performance of their peer group in order for executives to cash out the options.
SEC Comment Record Broken
A new record has been set for the number of comments received for a rulemaking. The old record was 6,000 but, as of 12/9 they had tallied over 10,482 comments on the Mutual Funds Disclosure/Investment Advisors rulemakings.
S7-36-02 Mutual Fund Disclosures
- 7,188 form letters from 8 different partners
- 375 individual emails
- 67 hard copy letters
S7-38-02 Investment Advisers Rule
- 2,767 form letters
- 68 individual emails
- 17 hard copy letters
GRAND TOTAL: 10,482
This still doesn’t count much of the final surge that came in during the last week. Less than 20 letters were against the rule. Most of the negative letters said they supported guidelines and disclosure of voting
procedures, but strongly opposed the disclosure of actual votes. Some of those opposing the rule included:
- Optimum Financial Services
- Prudential Mutual Funds
- Oppenheimer Funds
- Putnam Funds
- GCG Trust and ING Funds
- Troutman Sanders LLP
- Chapman and Cutler
The Investment Company Institute also sent in comments, but they are not included in the above totals. Thanks to many of our readers for “pushing back” and supporting disclosure.
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Disclose VC Data
In early November we reported on Judge James Robertson’s ruling that data on CalPERS’ private investments, including venture capital funds, “is not a trade secret and is disclosable.” (CalPERS must reveal VC data, Mercury News, 11/15/02) At that time we wrote, the “public has a right to know and CalPERS will still have plenty of excellent investment opportunities.”
Now, influential trade publication Pensions&Investments has come out in favor of Public Disclosure. “Public funds should not cave in to the secrecy demands of private equity managers, who threaten to retaliate by keeping them out of future deals. Contractual relationships…shouldn’t trump public policy concerns for transparency.” Staff and trustees need to be held accountable. Yes, there may be increased costs due to the need to address additional public inquiries but addressing such inquiries will “provide insight to the official themselves about their own work.”
Disclosure will improve selection of managers, the measurement of their value and will help “fend off attempts to allocate assets to investments made more because of political influence than potential return.”
In a more recent P&I Daily Headline, CalPERS staff urged the $133 billion pension fund to take the lead in creating an industry standard for reporting private equity returns. The staff of the California Public Employees’ Retirement System, Sacramento, plans to have a specific proposal at the investment committee’s March meeting to strike a balance between fiduciary duty and transparency. Let us hope staff recognizes there is no conflict between duty and the public’s right to know.
PricewaterhouseCoopers Webcast on Sarbanes-Oxley Act
PricewaterhouseCoopers has archived their webcast on the corporate governance implications of the Sarbanes-Oxley Act. The webcast featured government and industry experts including US Representative Michael G. Oxley; Sarah Teslik, executive director of the U.S. Council of Institutional Investors; Bill McLucas, former SEC chief of enforcement and presently co-chair of the Securities Group of Wilmer Cutler & Pickering; and Dennis Nally, U.S. chairman and senior partner of PricewaterhouseCoopers LLP.
Educational Board Governance Series
NASDAQ and Corporate Board Member magazine are offering a webcast series featureing interviews and dialogue with recognized governance experts and board advisory firms. The series features topics-ranging from board and committee best practices to director’s and officer’s liability protection — designed to educate board members and corporate executives about their corporate governance responsibilities.
“In my travels around the country talking with directors and boards, there are very few directors who find comfort in their ability to keep up with all the information and best practices around their duties, especially as it relates to these key committees,” said TK Kerstetter, president of Board Member Inc., which publishes Corporate Board Member. “If we can summarize all these key issues in easy-to-absorb webcasts and printed supplements, then our education efforts to boards will have real value.” There is no fee for access and webcasts can be viewed at any time.
Eighteen webcasts are scheduled over the next 12 months, with ongoing board research and director feedback guiding future program development.
Balancing Risk and Return
In the current issue of Viewpoint, the journal of The Marsh & McLennan Companies, Dr. Mark J.P. Anson, chief investment officer for the California Public Employees’ Retirement System (CalPERS), and Dr. Cindy W. Ma, National Economic Research Associates (NERA) Vice President argue that it is the responsibility of the board to ensure there is a reliable process to identify significant risks to corporate business objectives, establish accountability and compliance in risk management, ensure up-to-date written risk management policies and procedures, and guarantee to shareholders that a sound internal control system is in place to manage risks.
Despite the challenges and complexities, risk management need not be viewed as a defensive action. In “Corporate Governance and Risk Management: What are the Responsibilities of the Board?”, the authors contend that risk taking is an essential component of a competitive economy. (see What Are the Responsibilities of the Board? by Mark J.P. Anson, Ph.D. and Cindy W. Ma, PhD)
Grinch to Steal Christmas
Torrance-based, Farmer Bros., a roaster and seller of institutional coffee has scheduled its annual stockholders meeting on the day after Christmas in an obvious move to defeat efforts to force the company to elect independent directors and to disclose more information about its finances, as requested by group of dissident shareholders led by Franklin Mutual Advisors, which controls 9.6%. To smell the coffee at this meeting, shareholders from out of town will be required to miss Christmas at home. Given that management has voting control over 52% of the stock, such a sacrifice seems unlikely to pay dividends. According to the LA Times, “under Roy Farmer’s management, Farmer Bros., with $200 million in annual sales, has adhered to a policy of disclosing as little as possible about its operations and strategy.” (Timing of Farmer Bros. Meeting ‘Bizarre,’ 12/9/02)
John W. Snow, tapped by President Bush to head the Treasury Department, is seen by many as being strong on corporate governance. He chaired as been active in the Business Roundtable, a powerful group of top US corporate executives, in 1995 and 1996 and was co-chair of a special commission organized by the Conference Board last summer. At that time, John W. Snow, Chairman, CSX Corporation, referred to the malfeasance at Enron, WorldCom and other companies: “these egregious failures evidence a clear breach of the basic contract that underlies corporate capitalism.” The Commission proposed wide ranging reforms on executive compensation including:
- Retention and direction of compensation experts by compensation committees – not management.
- Compensation committees setting comp not by ratcheting up industry averages.
- Uniformly expensing stock options.
- Substantial director and top management stock ownership for extended holding periods.
- Avoiding “special purpose entity” comp to executives.
- Greater disclosure of equity dilution and employment agreements.
- Shareholder approval of option repricing.
- Advanced notice of executive stock sales.
Snow emphasized there needs to be a vigorous role for compensation committees. He said: “The Compensation Committees of the boards need to act more independently of management, hire their own consultants, and hold executive sessions without management to avoid the potential conflicts that arise when management is making recommendations about its own incentive packages.”
Snow’s nomination was applauded by the American Business Conference (ABC), which bills itself as representing “CEOs of fast-growing midsize American companies.”
However, shareholder activist John Chevedden points out that as CSX Chairman, John Snow, “is not know to have taken any action on the 62% 2002 shareholder vote for a shareholder right to vote on CSX’s poison pill.” “Maintaining a poison pill without shareholder support and not responding to a majority shareholder vote are 2 key issues that show poor corporate governance according to corporate governance advocates. For instance, the Council of Institutional Investors, who members have $2 trillion invested in the market, hold that a poison pill should be approved by shareholders and companies should adopt a proposal that wins a majority shareholder vote.”
“The American corporation is in crisis today, and some of the toughest issues of corporate practice like executive and director compensation and the balance of risks among management, shareholders, workers and creditors have yet to be fully addressed,” Snow said in August.
Yet, Snow was paid more than $50 million in salary, bonus and stock for 12 years as chairman of the CSX. During that period, the company’s profits fell, and its stock rose a bit more than half as much as that of the average big company. He also received more than four million long-term stock options, which were valued at about $60 million when he was given them. Because CSX’s stock is lower than the prices at which those options can be exercised, they are mostly worthless today. Was it appropriate compensation?
In 2000, after the stock had plunged, CSX allowed him to return stock he had purchased, effectively reverse a $25 million loan to him by CSX. I’d bet that a lot of other shareholders would have loved a similar deal and most probably have a net worth considerably less than Snow’s $160 million. It’s the typical “heads I win, tails you lose” scam that passed for pay for performance at so many companies like Enron. At least such loans to top executives have now been forbidden by Sarbanes-Oxley.
He serves on the boards of Johnson & Johnson, Verizon, USX, Carmax, Sapient, Johns Hopkins University and the American Association of Railroads. One wonders if each of these boards has a policy about competing time commitments that are faced when director candidates serve on multiple boards.
CBS.MarketWatch.com points out that “Snow’s views on taxes aren’t well understood. He’s been successful in keeping his own taxes low, said Robert McIntyre, president of Citizens for Tax Justice, who figures that CSX has avoided paying any federal taxes on its profits in three of the past four years and has received $164 million in rebates. “If the president’s goal is to encourage even more corporate tax sheltering, then Mr. Snow looks like a fine choice,” McIntyre said.
According to the Corporate Library, Snow is the most “interlocked” CEO in a database of over 20,000 corporate directors. He is linked directly to 70 other directors and indirectly to 120 more.
- CSX loaned Snow $24.5 million to purchase company stock valued at $32.3 million, but after stock price dropped, the company forgave the loan. (Insider loans have been a prominent feature of recent corporate scandals).
- Though a Conference Board panel that Snow co-chaired called runaway executive pay a problem, Snow earned $10.1 million, plus $8 million in stock options. He was the third-highest paid CEO among 37 transportation companies.
- In 1997, CSX paid $25 million to settle a class-action suit that charged a subsidiary of discriminating against black employees.
- Thousands of former railroad workers have filed lawsuits saying they were exposed to asbestos.
John Snow will forgo the severance deal he negotiated just last year as chairman and chief executive of CSX. The severance package would have proven quite lucrative for Snow as he stood to receive some USD15 million in pay and benefits.
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NAIC Leads with Corporate Governance
The National Association of Investors Corporation’s publication “Better Investing” carried a cover article on corporate governance for its January 2003 edition. It was great to see an informative article that emphasizes the need to “Walk the Talk.” Phil Keating’s perspective was refreshing and at least thousands of readers in hundreds of investment clubs will be introduced into thinking about good governance.
At the same time, I was disappointed that Keating took a passive perspective. Although he emphasized the value of investing in well governed corporations, he did little to embrace the notion that shareholders who take an active role in corporate governance can add value. Better Investing included nothing on the responsibilities of prudent shareowners. The recent scandals were caused not only by greedy CEOs, analysts and negligent fiduciaries but by the complacency of individual investors…and investment clubs.
For example, the new rules requiring “independent directors” miss the point, since they don’t preclude installation of the CEO’s close friends who will have a hard time asking the tough questions or keeping CEO pay in line.
Currently, the only alternative for shareholders who don’t want to sell is to use the very expensive proxy solicitation process because corporations can bar shareholder nominees from appearing on the corporate ballot. Shareholders are left with old Soviet style election. You can vote, but the corporation’s ballot only lists one candidate for each position.
Until directors can be removed from office by shareholders, they will not be responsive to shareholders or to the larger society. Les Greenberg, of the Committee of Concerned Shareholders, and James McRitchie, the Editor of CorpGov.Net recently petitioned the SEC to allow shareholder access to the corporate proxy to elect directors. See Request for Rulemaking To Amend Rule 14a-8(i) To Allow Shareholder Proposals To Elect Directors: SEC Rulemaking Petition File No. 4-461. NAIC should be suggesting that readers of Better Investing and all their clubs should Mr. Jonathan G. Katz, Secretary, SEC, Secretary, SEC, to support rulemaking petition 4-461. (see Finding Companies That Walk The Talk)
George Diehr and Priya Sara Mathur Take CalPERS Seats to be Vacated by Crist and Flaherman
CalPERS is undergoing tremendous changes of late, including a new CEO and General Counsel. Now the voters have spoken. In the most expensive election in history for a member-elected seat, George Diehr, a professor of management science at California State University, San Marcos, will soon claim the seat elected by state employees occupied by William Crist, Board President. Priya Sara Mathur, a financial analyst with the Bay Area Rapid Transit (BART), won the local public agency seat occupied by Michael Flaherman, Chair of the Investment Committee. Rob Feckner, Chair of the Health Benefits Committee, represents school employees and was unopposed. Both Diehr and Mathur were endorsed by the incumbents who currently occupy the seats they will take.
Although CalPERS is the largest public pension fund and the second largest purchaser of employee health benefits in the nation, there was a virtual blackout of election press coverage. The exception was the Indian and Indian-American press, which focused on the possibility that Mathur, 29, would be the first South-Asian-American ever to hold elected statewide office. She is also the first woman elected to the CalPERS board in 40 years, though other women have served as appointed members.
Both Mathur and Diehr prominently highlighted the need for CalPERS to take a strong stand on corporate governance issues in their campaigns. Mathur listed it first on her “Issues facing CalPERS” internet page.
“Issues of corporate governance have arisen in many other areas, such as executive compensation, stock option expensing and corporate board decisions. CalPERS, as a major institutional investor, must wield its market power – and its ability to leverage greater market power through alliances with other pension funds and large institutional investors – to influence the decision-making of corporate boards and executives to optimize long-term growth.”
Diehr highlights the need for both Corporate Accountability and Responsible Investments on his issues page.
“In this era of Enron, Andersen and WorldCom scandals, CalPERS must exercise its significant influence to see that corporate governance, financial reporting and accounting practices protect the investor, not the CEOs and insiders. These times demand action. I will lead this fight.”
“CalPERS has no business investing in companies whose primary business is privatizing public-sector jobs. PERS should increase its investment in California housing developments and other ventures that produce solid returns while benefiting the workers and economy of our state.”
Diehr supports the SEC petition filed by CorpGov.Net editor James McRitchie and Les Greenberg of the Committee of Concerned Shareholders to provide greater democracy in corporate elections. In addition, he supports the petition by the Rose Foundation for Communities and the Environment and others. Request for Rulemaking for Clarification of Material Disclosures With Respect to Financially Significant Environmental Liabilities and Compliance with Existing Material Financial Disclosures: 4-463.
In short, I expect CalPERS to continue its central role in the movement to enhance the return on capital through increased accountability. (see Sacramento Bee, 12/07/02)
In other news at CalPERS, Larry Jensen has been named chief of its Office of Audit Services. Jensen, who joined CalPERS in June 1995 after more than nine years at California State University Sacramento, has served as acting chief of audit services since October, when Thomas Britting retired from the post. Jensen will oversee a staff of 30 auditors and report to General Counsel Peter Mixon, to CEO Fred Buenrostro, and to the Board’s Finance Committee.
Silicon Valley Execs Profited
Executives at Silicon Valley companies that lost most of their value during the dot-com bust made billions of dollars when they sold their stock, according to an analysis by the San Jose Mercury News.
The newspaper examined records of stock sales by executives, board members and venture capitalists at 40 companies that have become almost worthless since March 2000 and found that insiders walked away with $3.41 billion from the sales while, by Sept. 30, their companies’ total market value fell 99.8% to $229.5 million.
“This money was taken from investors who didn’t have the same information as these insiders and lost their money,” said Charles Elson, director of the Center for Corporate Governance at the University of Delaware.
Most of the companies are software, hardware and telecommunications firms. The newspaper only included companies whose stock price dropped at least 99.5%. Most had major restructurings that included layoffs and 15 declared bankruptcy. Several of the companies are under investigation by the SEC and Congress, some had to restate earnings and almost half are facing shareholder lawsuits, the newspaper reports. (Rich man, poor company: How some Silicon Valley executives made fortunes while the value of their companies plunged, 12/7/02, Mercury News)
CalSTRS to Disclose VC Data
The California State Teachers’ Retirement System (CalSTRS) has decided to release the performance results of the venture capital and other private funds in which it invests.
The move, which came in response to a request for the information from the Mercury News on Oct. 18, is significant because the pension’s $3.8 billion in assets invested in private equity funds have been performing poorly over the past two years. The Mercury News sued CalPERS, the state’s largest pension fund, in October, seeking similar information. So far CalPERS has resisted. (Teachers pension fund to disclose results, 12/6/02, Mercury News)
PBGC Takes Over National Steel’s Pension Plans
The Pension Benefit Guaranty Corp. (PBGC) said the plans are only 47% funded, with roughly $1.3 billion in assets to cover more than $2.8 billion in benefit liabilities. The company told the PBGC that it will not make any additional contributions to the plans, and the company has already missed more than $150 million in required minimum funding contributions. PBGC estimated that it would be liable for more than $1.1 billion.
Seizing the seven plans covering 35,000 workers and retirees of the Mishawaka, Ind. steelmaker follows the agency’s largest claim in March 2002 when it assumed $1.6 billion in pension liabilities from LTV Steel Corp. Both LTV and National Steel are part of a steady march of tottering US steel companies, which have needed the PBGC to make certain workers and retirees will get paid their pensions according to federal pension guidelines. The steel industry accounts for more than 40% of all claims against the PBGC but only 2% of covered workers.
Federal guidelines allow a payout for workers in plans that terminate in 2002 of $3,579 a month (or $42,954 a year) for workers retiring at age 65. Maximum guarantees are adjusted for retirees older or younger than age 65 and for those who choose survivor benefits. PBGC currently backs pension benefits for about 44 million American workers and retirees participating in over 35,000 private sector defined benefit pension plans. The agency is financed by insurance premiums from covered companies and investment income. (see PlanSponsor.com, 12/6.02, PBGC to Take National Steel Plans in 2nd Largest Claim Ever)
Pension Plan Shortfalls to Drag Market in 2003
The corporate pension crisis is expected to get much worse next year as the bear market forces many companies to make contributions to their defined-benefit plans to cover shortfalls.
In 2002, about 30% of the plans required contributions, according to a Watson Wyatt but next year it will likely be 65%. This compares with just 15 percent of employers that made pension plan contributions in 2000 and 25 percent in 2001. If current economic conditions persist, only about 20% of plans will have enough funds to fully cover liabilities in 2003.
The benefits-consulting firm points out that current law requires an annual comparison of the market value of a plan’s assets with its current benefit liability. If the ratio falls below 0.9, the plan may be subject to additional minimum funding requirements above and beyond “normal” funding requirements. However, if the ratio exceeds 1.0, plan contributions may not be deductible. As a result , contributions tend to be volatile. Because of the market’s collapse, many plans went from a situation where they were not eligible for a deduction to one of major underfunding.
“The bottom line is that if employers aren’t given more flexibility in terms of when they can or can’t make pension plan contributions, they won’t sponsor these plans,” notes says Kevin Wagner, a retirement practice director with Watson Wyatt. (Pension Crisis Will Worsen in 2003, CFO.com, 12/02/02)
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5 Out of 500 Walk the Talk
Corporations have failed to adopt prudent governance measures, according to GovernanceMetrics International. Its recently launched governance-tracking system rated every company in Standard & Poor’s 500 Index, assigning each a score from 1 to 10.
Only five companies: Johnson Controls, MBIA, Pfizer, SLM, and Sunoco received the highest rating of 10.
GMI rating criteria are based on securities regulations, stock exchange listing requirements and various corporate governance codes and principles. Among the latter are principles promulgated by the OECD, the Commonwealth Association for Corporate Governance, the International Corporate Governance Network and the Business Roundtable. In addition, they have sought the views of various corporate governance and legal advisors, institutional investors, corporate officers and company directors, and utilized the combined experience of the founding partners.
This endeavor has produced a set of 600+ metrics structured in a manner that can only produce yes, no or not disclosed answers. In this way we have attempted to eliminate a large degree of subjectivity to answer these metrics from official company filings with securities regulators and stock exchanges.
Each rating report includes a summary of the company’s overall governance profile and commentary on each of the seven broad categories of analysis employed by GMI:
- Board Accountability
- Financial Disclosure and Internal Controls
- Shareholder Rights
- Executive Compensation
- Market for Control
- Ownership Base and Potential Dilution
- Reputational and SRI Issues
GMI said it plans to cover 2,000 companies by the end of 2003.
“In the post-Enron world, it is evident that a new instrument from an independent provider is needed to measure corporate accountability,” said Gavin Anderson, GMI chief executive officer. Anderson cautioned that “a company receiving a low score in our ratings does not necessarily mean that it has woeful governance, although that is possible. It definitely means that it has relatively poor governance features compared to others in this particular universe. It is possible that such a company may do better when compared to other companies that we have yet to rate in a larger universe.”
Canadian Coalition for Good Governance Grows
As of September, C2G2 now totals 19 institutional shareholders with approximately $400 billion in assets. The Coalition views proxy voting on the part of all shareholders as central to its goal. The Ontario Teacher’ Pension Plan, which initiated its formation, publishes how they intend to vote on their Internet site.
The Coalition is developing a code of guidelines for proxy voting that it will make public to help shareholders make informed voting decisions. The code would cover issues such as:
- stock option plans that cause excessive dilution
- takeover protection
- shareholder rights plans
- conservative and transparent accounting
- separation of roles of Chair and CEO
- independent audit and compensation committees
See OTPP’s guidelines, which may form the core of a Coalition code. (reported in Corporate Governance Review, 9-10/02) The same issue discussed the Canadian Council of Chief Executivesapproach to good governance, which not surprisingly, comes down one the side that good corporate governance is more a matter of values than of rules.”
2003 CERES Conference
Registration is now open for the CERES 2003 Conference: Advancing Sustainable Governance. The conference takes place April 1-2, 2003 at the New York Hilton in New York City.
Two movements critical to the US economy, democracy, and the future of the planet — sustainability and corporate governance — are finally converging. Long-term prospects, for both businesses and the planet, depend on integrating broad fiduciary duties into corporate core strategies to enhance shareholder value.
Confirmed speakers include:
Jose Maria Figueres
Managing Director, Center for the Global Agenda, World Economic Forum
Former President, Costa Rica
President and CEO, World Wildlife Fund
(board member: Alcoa)
Jill Ker Conway
Visiting Professor, MIT
Chairman, Lendlease International
(board member: Nike, Colgate-Palmolive, Merrill Lynch)
Robert A.G. Monks
In November the International Corporate Governance Network (ICGN) awarded Monks its 2002 International Corporate Governance Award.
Secretary for Resources, the State of California
Alastair Ross Goobey
Chair of Hermes Focus Asset Management/Morgan Stanley & Co International
Ltd. and Chair, International Corporate Governance Network
Vice Chair, Chicago Metropolis 2020
(board member: Marsh & McLennan Companies, Environmental Defense, Rocky
Mountain Institute, Union of Concerned Scientists)
Senior Consultant, Landers & Parsons
Director, The Nature Conservancy, Florida Chapter
(board member: ConocoPhillips)
Mark Van Putten
President and CEO, National Wildlife Federation
Professor, University of Michigan Business School
(board member: Procter & Gamble, Unocal)
Corporate Governance 101
Venture capital firm, Telecommunications Development Fund (TDF) of Washington DC offers a basic online class aimed at new chief executives who need advice on such things as setting up a board of directors, an audit committee and getting risk insurance for directors and officers (see Online Classrooms). It was written by John Moore, president of the Greater Capital Area Chapter of the National Association of Corporate Directors.
Ginger Ehn Lew of TDF told the Washington Post she spent 18 months developing the information so entrepreneurs who build boards will have better relationships with their venture capitalists, some of whom probably will hold board seats. Lew said she has seen too many acquisitions delayed or canceled because the buyers found fundamental problems in the corporate governance of their takeover target. Some deals have called for companies to entirely redo their books, including such detailed and difficult work as reconstructing board meeting minutes no one had bothered with before, all of which could take months.
Lew says one of the most common mistakes new entrepreneurs make is appointing a board full of friends and acquaintances. The chief executive needs to go way beyond his immediate circle of friends to find the right people and then should assess time commitments, looking at how many other boards potential directors already sit on.
Information on the site begins with general advice about why a company has a board in the first place and then gets into how to manage disagreements between board members and company executives. It even outlines how to run a board meeting. The CEO should expect to spend 10% of his or her time or more on board issues, it says. It also touches on director compensation, how to change a board as the company grows, and whether to additionally appoint an advisory board. A common-sense guide called “How Do I Avoid Disaster?” counsels to avoid surprises and make sure to have at least one independent director from outside the company.
The course points out that liability-insurance premiums have risen 35 percent or more — sometimes as much as 300 percent — in 2002 from 2001, but insurance is still necessary. Lew says she has talked to many entrepreneurs who don’t think they need it.
At the end is a list of links to other resources, including CorpGov.Net, and a glossary running the gamut from annual meetings to term limits outlining some of the important points of running a board.
This is far from a comprehensive site and it certainly doesn’t stretch the boundaries of reform in what it recommends but it offers time-tested advice and is a welcome addition and will facilitate better corporate governance, especially in new firms.
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Cooking the Books: Costly to the Economy
The ballpark estimate of the costs to the economy is “approximately $35 billion, or .34 percent, off of Gross Domestic Product (GDR), in the first year, assuming the market does not recover from its July 19 level or drop substantially below it. The total, which is calculated using the Federal Reserve Board’s model of the US economy, represents the range of what the federal government spends per year on homeland security or the increase in the cost of oil imports from a 38 percent (or $10) increase in the per barrel price of crude oil.”
“The price—in both real dollars and consumer confidence—already has given policymakers impetus to enact new reforms in accounting and corporate governance. The question now is how soon investors will again have enough confidence in the corporate information system to come back to stocks and thus ensure that the cost so far suffered will be short-lived.” (Brookings paper by Carol Graham, Robert E. Litan and Sandip Sukhtankar)
Support for Mutual Fund Disclosure
According to the New York Times, the SEC has received more than 2,800 letters in support of their proposal for mutual funds to disclose voting policies and votes in corporate elections, yet enactment is still in question because of opposition from the funds themselves. Initially, fund managers said shareholders didn’t care how their funds voted on corporate governance issues. Apparently, we do.
“Publicizing their opposition to company proposals may alienate corporate executives. These executives may refuse to meet with a fund’s analyst. Or they may go elsewhere for management of the company’s retirement accounts, which generate lucrative fees for fund families.” The Times points out that neither argument puts the interest of investors first. “Some fund companies say that complying with the rule will be too costly. But the S.E.C. calculated the cost at $2,408 per investment company each year.”
“Mutual funds have little experience with corporate governance in their own operations: they are not required to hold annual shareholder meetings and rarely get shareholder resolutions from investors. So it may not be surprising that some fund companies oppose putting their votes under scrutiny.” Let’s hope awakening shareholders soon address that issue as well. The last day for comments is December 6th, so don’t delay. Get Active! (Why Don’t Mutual Funds Vote in the Sunlight? 12/1/02)
AFSCME Joins Open Ballot Movement
Les Greenberg, of Concerned Shareholders, and James McRitchie, editor of Corpgov.Net, filed SEC Rulemaking Petition File No. 4-461 on August 1st to allow shareholder proposals to be used to nominate directors who would be truly accountable to the owners of corporations and independent of management. This was followed on September 24 by another SEC petition,File 4-465, by Deborah Pastor, Portfolio Manager, eRaider.com. The eRaider proposal appears a little more vague with regard to the shareholder nominating process but it also seeks to stem broker voting on behalf of clients who do not receive specific voting instructions from beneficial owners.
With the announcement by AFSCME on November 26th that they will submit binding bylaws resolutions directly to corporations, the movement is gaining momentum. During the upcoming proxy season, the American Federation of State, County and Municipal Employees will put its strongest effort behind proposals seeking shareholder access to the proxy ballot for the purpose of nominating independent board members. The proposals, half of which are in the form of binding amendments to company bylaws, would:
- Require inclusion on a company’s proxy statement and proxy card the name of one board candidate if nominated by shareholders owning at least three percent of company stock;
- Allow for up to a 500-word background statement on the nominee; and
- Require the nominating shareholders to obey all relevant securities regulations and indemnify the corporation for any failure to comply.
Bylaw amending proposals for proxy access have been filed at Citigroup (NYSE: C), Sears (NYSE: S) and Exxon-Mobil (NYSE: OXM). Non-binding resolutions urging boards to adopt such changes have also been filed at AOL- TimeWarner (NYSE: AOL), Kodak (NYSE: EK) and the Bank of New York (NYSE: BK). Other companies targeted for action on other issues, such as executive pay, reincorporation in the US and business strategy reports include Adobe Systems (Nasdaq: ADBE), Allied Waste (NYSE: AW), Bausch & Lomb (NYSE: BOL), Circuit City (NYSE: CC), Electronic Data Systems (NYSE: EDS), Gateway (NYSE: GTU), Ingersoll-Rand Co. Ltd. (NYSE: IR), McDermott International (NYSE: MDR), MBNA Corp. (NYSE: KRB), PeopleSoft (Nasdaq: PSFT), Pitney Bowes (NYSE: PBI), Ryder Systems (NYSE: R), Siebel Systems (Nasdaq: SEBL), Tyco International (NYSE: TYC), UnitedHealth Care (NYSE: UNH), and Waste Management (NYSE: WMI).
While the proposal that Greenberg and I put forward would apply to all corporations governed by SEC regulations, the AFSCME proposal would only apply at those companies where binding bylaw resolutions are passed and at firms where boards choose to adopt advisory measures. In addition, while our proposal would allow any owner of $2,000 worth of company stock held continuously for a year to nominate directors, the AFSCME proposal limits nominating ability to shareholders owning at least 3% and limits the number of names that can be so placed on the corporate to one per election cycle.
The higher threshold and limit to the number of nominees is likely a concession being made by AFSCME. It will temper opposition from CEO dominated groups, such as the Business Roundtable, who don’t want any change in this direction but may be hard pressed to publicly oppose the idea of owners having at least some minimal say in nominating and electing directors.
The 3% threshold is lower than the 5% 13D level that I expect from the AFL-CIO and/or Council of Institutional Investors. However, at 3%, even the largest public pension funds, such as CalPERS, will usually need to find partners in order to meet the threshold. Would I rather it be lower? Certainly, but 3% is a good foot in the door and may even allow small shareholders using the Internet to form nominating groups. Although realistically, I don’t see that happening under this provision unless there are extraordinary circumstances. In those cases, the corporation may already on its deathbed and even a Herculean effort by shareholders may not be able to revive the body.
More objectionable is the apparent limit of nominating only one board member at a time through shareholder nominations that will appear on the corporate proxy. One dissenting board member can be largely ignored. The objective of bringing a truly independence voice to the board that is accountable to owners may be lost altogether if they don’t find a sympathetic ear on the board.
AFSCME sent a letter to 150 public employee pension funds, which collectively hold more than $1 trillion in assets, requesting they support their proposals. I hope their request finds support. However, I would urge those seeking to use the AFSCME model at additional corporations to be less compromising, especially with regard to limiting the number of nominees. Limit such nominations to less than half the board at any one time or even as few as two but one lone voice carries compromise too far.
Additionally, I hope funds and individual investors will continue to e-mail supporting comments on SEC Rulemaking Petition File No. 4-461to Mr. Jonathan G. Katz, Secretary, SEC. Let’s not limit the influence of shareowners in the nomination process to a few major corporations.
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Additions to CorpGov.Net
On our links page, I’ve added a section on Rating Services. Please let me know of services I’ve missed (email@example.com). I may add more to this important section as these services provide more information to me. On our Stakeholders page, I’ve added The Corporate Governance Fund Report and Cyber Securities Law, both great publications.
Another Innovation from the Corporate Monitoring Project
The Corporate Monitoring Project continues to innovate. Their latest newsletter outlines three proxy measures, the newest being the one on Voting Leverage.
Proxy Advisor Proposal
Mark Latham refers to this as the Project’s “flagship proposal.” It would allow shareowners to choose a proxy voting advisor paid with company funds. See the current proxy of A. Schulman, to be voted on by December 5. It was also submitted to Oakwood Homes, for inclusion in their future proxy.
The SEC continues to let management omit from the proxy my proposal for enabling shareowners to select the auditor by vote. The Corporate Monitoring Project has submitted a milder proposal to Cleveland-Cliffs and to USG, merely asking the Board to conduct a nonbinding shareowner poll of auditor reputation. The goal is to encourage auditors to build their reputations in investors’ eyes, not just in management’s eyes.
Latham submitted this new proposal to Visteon Corporation. Now that more institutional investors are posting their voting decisions on the worldwide web before the voting deadline, individual investors can imitate those decisions. This proposal asks the Board to consider modifying the company proxy to facilitate this, such as by adding a checkbox saying: Vote this entire proxy the way Calvert Group, CalPERS or another investor votes theirs.
By breaking the Board’s monopoly on guiding shareowner voting in the company proxy, this would increase the voting power both of individuals and of institutions.
Latham is spending several months in China as “an itinerant preacher of shareowner empowerment, giving presentations at Hong Kong University of Science & Technology, Beijing University, and Shanghai University of Finance & Economics.”
Though nowhere near America’s approximately 50% stock ownership, nearly 67 million Chinese own shares. That’s 5% of the population. Investors are demanding accurate information. Just as in the US, corporate law in China is founded on the concept of “shareholder democracy.” In theory, managers are accountable to shareholders through voting just as elected representatives are responsible to citizens. Improved corporate governance and shareholder participation may eventually lead to political pluralization.
To subscribe to The Corporate Monitoring Newsletter or to e-mail Mr. Latham go to the Newsletters page.