Guest Post: Miguel Carrasco – Managing Director and proxy solicitation consultant at Proxycensus Ltd specializing in issues relating to information transmittal, social media technology in IR and the technicalities of the cross border voting process.
Tag Archives | ICGN
The International Corporate Governance Network sent comments to the Ontario Securities Commission (OSC) and the Australian Stock Exchange (ASX). I think they warrant widespread reading and adoption. What follows are highlights from the OSC letter.
Gender diversity is a competitiveness issue for a company as a whole and a critical dimension of governance, both in the board’s oversight of the enterprise and in the board’s own composition and talent management. Increasing the representation of skilled and competent women on corporate boards will strengthen the corporate governance culture and ultimately contribute to value for all stakeholders. Continue Reading →
These are some fairly raw notes from the June 2013 ICGN Annual Conference in New York City. I was unable to attend the second day but the first day was great. Don’t miss the 2014 ICGN Annual in Amsterdam, 16-18 June.
Opening Remarks by Jon Feigelson, Senior Managing Director, General Counsel and Head of Corporate Governance, TIAA-CREF and Roger W. Ferguson Jr., President and Chief Executive Officer, TIAA-CREF. Continue Reading →
Join ICGN in Cape Town, following PRI in Person, on 3-4 October for the ICGN Debate and Responsible Investing Programme, hosted by IoD in Southern Africa and endorsed by the Johannesburg Stock Exchange. Continue Reading →
Unfortunately, I got sick in New York, so missed the entire second day of ICGN 2013. Several weeks later, I am still recovering and am way behind in my other work, so any real comments I have on the conference will be long delayed. In the meantime, here are a few selected tweets.
They aren’t in order. Some may be retweets. Nothing guaranteed here re authenticity or links that work but I found them interesting and hope you will as well. I’ve edited out some duplicates but some may remain. It was a great program. Continue Reading →
I urge readers to support the June 20th petition by the Council of Institutional Investors (CII) to the NYSE and Nasdaq for the exchanges to require listed companies to elect directors by majority vote in uncontested elections. CII’s letters to both exchanges are posted here. Continue Reading →
I look forward to seeing many of you at ICGN‘s forthcoming Annual Conference, hosted by TIAA-CREF and taking place from 26th-28th June at the Grand Hyatt Hotel in New York. A summary agenda is accessible via this link for more information. Please visit the ICGN website where you can register. See my 2010 coverage. Continue Reading →
CalPERS announced on Monday, April 2nd that Anne Simpson, who heads their corporate governance efforts, has been elected to the Board of the Council of Institutional Investors (CII). Continue Reading →
After extensive consultation with global investors, the ICGN releases two new best practice guidelines: ICGN Guidance on Political Lobbying and Donations and Model Contract Terms Between Asset Owners and Managers. Said Christianna Wood, Chairman of the ICGN Board of Governors:
In the post-global financial crisis environment few topics have received as much attention as asset manager contracts and corporate political contributions. We are pleased to be able to launch these Continue Reading →
Recently, ICGN held their annual conference in Paris. From the Twitter feed, it appears I missed a good one. (see ICGN Via Twitter) I’ve already mentioned Jon Lukomnik’s appeal to look again at the idea that shareowners’ interests and executives’ can be aligned through compensation strategies.
I think one origin of our errors was revising the tax code so that executive compensation above $1 million is only a tax deductible expense if performance based. The result has been, as Lukominik observes, that compensation plans have taken on the characteristics of “a slot machine: They pull a lever and three years later out comes a trickle of coins or a fountain of folding money.” This is a topic worthy of much discussion.
Another truthsayer at the conference was Robert A.G. Monks, whose L’Appel can be read as quickly as fast food but provides nutritional value of a much higher order. Bob lays out a number of observations. I’ll just list a few: Continue Reading →
@SMDavisYaleGov Stephen Davis. Debate on exec pay: time to replace alignment, paying CEOs simply as employees? See U-Turn For Exec Comp? 23 people gathered in a windowless conference Continue Reading →
Madame Colette Neuville received the prestigious ICGN Life-time Achievement Award in Corporate Governance at its Annual Conference. Madame Neuville, known as a stark defender of minority shareholder rights in France for the last 20 years, is recognised for her defence in cases such Vivendi vs Havas in 1998, Schneider vs Legrand in 2001 and Renault vs Nissan in 2002. An economist and lawyer, Madame Neuville has organised her efforts through Association de Defense de Actionnaires Minoritaires (ADAM). She has been a member of the European Corporate Governance Continue Reading →
Disclaimer: Given Dodd-Frank, proxy plumbing and all those comments I want to provide the SEC, the report below doesn’t do the ICGN Mid-Year Conference justice. I wrote this up more than a week later with poor notes and memory. Comments, corrections and substitute photos are solicited.
The Financial Crisis Inquiry Commission will report in December to give an unbiased historical accounting of the causes of financial crisis. It will be out in book form but will also be available through download.
$11 trillion in wealth was wiped away. The market took until 1954 to get back to the levels of 1929. Let’s hope this one doesn’t take as long but, more importantly will we learn the lessons necessary to prevent or minimizes future bubbles?
It was a failure of accounting and deregulation. Too many were rewarded based on volume not on performance and their was no continuity in risk (they thought) after all the slicing, dicing and creative complexity.
Rewards can’t be asymmetric and function properly. This was not a natural storm; the clouds were seeded. Signs were there, such as a 2004 warning from the FBI about a housing fraud epidemic, but they were glossed over. Now, our remaining investment banks are largely trading banks, not focused on generating capital but on gaming the markets. The betting market is much larger than the real economy… with more than 85% of transactions being synthetic.
Dodd-Frank requires the investment banks to hold 5% of the securities they sell but I’m not sure what good that does since that portion of their business is now minor. We need to rethink the role of finance in our economy. Continue Reading →
ICGN conferences are a great place to network with others in the field of corporate governance from around the world. The 2010 conference in beautiful Toronto Canada was no exception. I’ve reported on day 1 and day 2 of the topical sessions. Now time to cut loose a little.
The best example of that, within the context of the whole group, was a bit of a celebration at the Royal Ontario Museum. Tops in entertainment was “illusionist,” Brian Michaels. One trick involved a guy from the audience and, of course, a beautiful assistant tied up.
…And there was the jacket, on the assistant. Time to get untied.
Another illusion involved a woman from the audience who verified use of an ordinary tissue, which was then made to spin in the air with no visible means of support. Maybe you had to be there.
With ICGN being held in Canada, they brought several famous hockey players up on stage, along with a couple of Mounties and a woman with a great voice who sang the national anthem. Then the icing on the cake, with three of our Canadian hosts being presented with hockey jerseys. All had Wayne Gretzky’s number 99 and their own names on the back, with our “team” name, ICGN, on the front. They’ve skated to glory!
I had a great time networking with dozens of people I had previously only met via e-mail. One of these was Alex Todd. He authored a chapter in the forthcoming book, Corporate Governance: A Synthesis of Theory, Research, and Practice (Robert W. Kolb Series). Todd proposes “Aspirational Corporate Governance,” building on the work of Shann Turnbull and others. The ACG framework specifies three aspirational conditions for good corporate governance:
- Requisite organization handles information complexity.
- Requisite variety in information from stakeholders reduces uncertainty.
- Adaptive capacity provides response mechanisms to compensate for stakeholder uncertainty.
Todd goes on to create a diagnostic tool for measuring and analyzing these (existing and prospective) principles and practices as well as a blueprint for improving the design of any governance system. He groups governance styles into four broad categories that correlate with distinct business performance metrics:
- Control – management-controlled companies have better sales growth performance;
- Trust – companies with corporate governance practices that help shareholders establish trust enjoy higher valuations (Tobin’s Q);
- Sovereignty – companies with truly independent boards, both from management and shareholders, are more profitable (return on equity and profit margins); and
- Influence – companies with boards that are strongly influenced by management and where shareholders have fewer rights pay out more to shareholders in dividends and stock repurchases.
Read more in his article, Corporate Governance Best Practices: One size does not fit all. He recently revisited his research findings by tracking the stock performance of a small sample of companies with each of the four governance styles over the past two years and found distinct patterns in stock price performance associated with each of the four governance styles. However, the results were markedly different from the original study. This time, during the recession, issuers with the Management Controlled Board style had the worst stock performance and were by far the most likely to become delisted, while issuers with the Management Influenced Board style delivered the best shareholder returns, largely due to their tendency to pay dividends.
Todd appears to be on to something applicable to both structuring funds and, of course, in advising corporate boards.
Another fellow I got to meet was David R. Koenig, who recently launched The Governance Fund, LLC, a private investment management firm that uses a proprietary model of corporate governance based on several data-sets to capitalize on what he terms “the value gap” between well-governed and poorly governed companies. They’ve back-tested ten years of data and have been sending out model portfolios to potential clients so they can see that development isn’t based on cherry-picked after the fact correlations. I note that one of ICGN’s co-founders, Jon Lukomnik, the founder and managing partner of Sinclair Capital, LLC, has joined the Investment Committee of The Governance Fund, LLC, and will serve on its Board of Directors.
I see Koenig was also interviewed in the recently published book, The Hedge Fund Book: A Training Manual for Professionals and Capital-Raising Executives. You can peek inside the book at Amazon and see something about the fund’s unique characteristics. For one thing, the fund’s compensation is based on both risk and return. That’s very unusual and should serve them well, since the recent meltdown seems to have incentivized money managers to take excessive risk for short-term gain. Another feature is transparency of all positions and trades executed to investors willing to sign nondisclosure and intellectual property agreements.
Another unique characteristic is their Governance and Risk Advisory Board, which meets on a quarterly basis. The minutes of their review of the governance and risk management practices of the investment manager is made available to all investors as one method of providing enhanced transparency. Members include the following:
- Dr. Robert Mark, former Chief Risk Officer, CIBC and 1998 GARP Risk Manager of the Year, Managing Partner, Black Diamond Risk Enterprises, LLC
- S. Jean Hinrichs, former Chief Risk Officer, Barclays Global Investors, 2003 Buy Side Risk Manager of the Year (BGI)
- Dr. Don Chance, James C. Flores Endowed Chair of MBA Studies and Professor of Finance, Louisiana State University
- Dr. Robert Kolb, Professor of Finance/Frank W. Considine Chair of Applied Ethics, Loyola University
- Dr. Joseph Swanson, Clinical Professor of Finance, Kellogg Graduate School of Management, Northwestern University
Of course, I’ve had a strong interest in this subject for years, posting some thoughts on the idea of a Corporate Governance Mutual Fund in 1996, so I’ll be eagerly following the progress of the Governance Fund.
I also got a chance to learn a little about EIRS (Experts in Responsible Investment Solutions) from Peter Webster. I’m particularly interested in their ESG proxy voting service, which can help funds actively implement UN PRI or other principles into ownership policies and practice. See their one of their latest briefings on the risks of bribery.
Vindel Kerr, who I first met at a conference in London at the 6th International Conference on Corporate Governance (ICCG), is busy on a second edition of his book Effective Corporate Governance: An Emerging Market (Caribbean) Perspective on Governing Corporations in a Disparate World.
During one of the lunches, I got a chance to meet Anne Kvam with the Norges Bank Investment Management. They make CalPERS look small but don’t seem as far developed with regard to corporate governance… or maybe it is just those mild Norwegian manners. For example, they’re against “say on pay,” reasoning that’s the job of the board. Fine, if you can actually hold the board accountable… which I don’t think we can in most instances in the States. NBIM does appear very progressive regarding social issues. For example, see Pension funds urge chocolate industry to end child labour. There’s a good deal of transparency on their site and I look forward to paying closer attention to their ESG efforts.
Too many others to mention but I must say I’m looking forward to a possible visit to India in the fall and looking up Dr. YRK Reddy, who I’ve been in touch with for many years, and others if they are available during my stay. Well, until we meet again.
Other finds at ICGN:
- The Rotman International Centre for Pension Management (ICPM) publishes the Rotman International Journal of Pension Management in partnership with Rotman / University Toronto Press twice a year. To sign up, simply email firstname.lastname@example.org. Be certain to include your name, organization, and email address along with a subject line that reads RIJPM Subscriber Request. Great articles by some of the top researchers.
- Barroway Topaz puts out a quarterly client newsletter that can be downloaded in pdf format.
ICGN 2010 Annual Conference, The Changing Global Balances: Toronto, Canada
Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.
TUESDAY 8 June
Session 7 The New Balance – The World’s Largest Shareholders
The weight – and therefore influence of large pension funds and major asset pools
continues to grow. This session focused on the investment and governance philosophies of some of the world’s largest shareholders. What are the demands for better corporate governance when you expand investments in developing markets? How will these funds react to the shareholder democracy initiatives in the US? What do they think about say-on-pay and how do they secure the competence of the board of directors in portfolio companies?
Moderator: Frank Dubas, Global Managing Partner – Sovereign Financial Institutions, Deloitte, USA
David F. Denison, President and Chief Executive Officer, Canada Pension Plan Investment Board. – Assume risk. Build in for turbulence. Looking to emerging markets. We’re there now assuming they will be there in 10 years. Resilience in this recent downturn. We can have good alignment of interests with some of the long-term sovereign investors in Asia. Compensation is consuming a lot of time but it should because of its multifaceted nature. It is not just what you pay but how ensure it aligns with corporate strategy to reflect key elements. How take into account risk? Manage within tolerable limits. Much of what goes on in the boardroom is invisible but we can see the compensation framework and how directors use their discretion to make those decisions. It is a major indicator re director competency.
There is now a renewed realization that government must play a stronger role. We’ve overshot on the lack of regulation. Focusing on risk, caps on leverage. Capital levels. Canadian banks relied on force capital levels. We encourage government to get back to more regulations. Not stifling regulations. Align risk managers with a 30 yr time frame built into investment horizon. Difficult to build into compensation since discounting factors for 20-year compensation wouldn’t create what we want… wouldn’t retain the talent we need. It is a constant trade off to keep compensation as long as we can but not so long that we don’t attract talent. No easy answer. Engagement: with about 35 companies over past 12 months. Dramatically different attitude post downturn. Say on pay opens conversation to other key governance issues. Important investment related issues. Weighting impact of companies to focus resources. Develop networks, coordinate with others.
Anne Kvam, Global Head of Ownership Strategies, Norges Bank Investment Management, Norway. – We’re big and can’t maneuver. Having a well functioning efficient market is key because we can’t beat the market. Very long term. Not a question of being there or not being there. The challenge is how to be there to get information, to be responsible. As investors we’re concerned. UK, its bossy, standard setting.
Phone call from China, why voting against? You gave is no reason to vote for the measure. Without the necessary information to evaluate, we vote against. “Oh, okay we’re going to ignore your vote.” Looking at the competence and quality of boards. Independence… goes well beyond that. Diversity much more than gender. How are board members recruited? Recruitment was changed. What are competencies we’re looking for in women and then started applying that to men as well. Annual election. We vote against all say on pay. We see that as the board’s role. We will hold them accountable for how they do it. We don’t want to be bogged down. More important is that we have the right board. The competence of directors is paramount. Remuneration is important. We measure to what degree they succeed… then we hold them accountable. 9 out of 10 calls have been about compensation. I just don’t think that’s the right place to put the focus.
Government’s role: Self-regulation won’t work. Well functioning, legitimate. Increasing role as shareowner, prudent. Audience: How hold accountable if you can’t vote them off the boards? Even though we don’t have means yet, we will continue that fight, since we will be around for a long time… we’ll stick to our principles. Question re engagement: Not able to engage as much as we would like. Have to say no thanks to many because we don’t have capacity. We want to speak to boards on our agenda, not necessarily their’s. Relative vs. absolute returns. Strict selection of topics, markets and tools.
Scott Evans, President & Chief Executive Officer, TIAA-CREF Investment Management and Teachers Advisors, USA. – We’re permanent investors. Partner with investors we trust. Focus on individual securities. Avoid exposing to too much risk in any sector. We have an independent risk management group. They scan the skies looking for inclement weather. In some of these markets shareholder rights are much different. We have to evolve our practices to mesh. Agree that competence is what we seek. We have (or soon will have) established so many shareholder rights. Access to proxies, say on pay, majority voting, major planks. We’ve arrived to where we have rights. It’s now going to be about using our power wisely, proactively and consistently. How do we get the wide spectrum of shareholders engaged? Very important time for the transition of corporate governance. Sees government walking a fine line. On the margin, we caution that rules may have unintended consequences but they are good on balance. Question from Peter Clapman re activism. Equity staff actively engaged… both sides of house working together. We pursue engagement quietly were we think there’s a concern and clear changes need to be made. By being focused, concentrating on companies with big problems… stay out of the papers. Has excellent coordination with others investors on issues.
Session 8 – Break Out Sessions – How Do We Fix The System?
US style governance and the system of capitalism has come under attack as a result of the economic crisis. Now is the time to focus on specific problems and specific solutions. Each of the breakout sessions examined a particular issue. I only attended one but provide a few scattered comments reported on some others.
8.2 Carrots, sticks or codes? How can we make shareowners become good stewards?
For the first time the UK will have its own code for investor best practice. Is this a model that will work for the rest of the world? Other jurisdictions are developing their own codes – is there a case for a universal code? What are the barriers? Agreement on need for voluntary adherence. See FRC UK website. Revising to issue code with 7 principles and three objectives, generating a critical mass. Comply or explain may come. Clarifying relationships between fund managers, trustees. Appropriate regulatory reinforcement. Accept responsiblity to obtain or retain. Independent organization to monitor (Peter Butler) driven by shareholders themselves. Carrots – proxy access, disclosure, communication among shareowners themselves. CalSTRS interest in code. Develop and articulate best practices. Some US funds are active owners that but many funds need encouragement. Question to audience: should there be a global code of corporate governance for investors. Yes 74%; No 20%
8.3 What boards have learnt from the financial crisis
Some companies are coming through the crisis bruised and battered. Others have sailed through whilst many failed. What have boards learned from their experiences and what would they do differently now?
Difficult to draw conclusions. Need for boards to pay attention to risk. Key theme is getting right people on boards. Risk committee, risk officers. But still need right people on board and adequate time to have conversations around risk. Institutional changes; at least many are now having the conversation. Those with risk committees fared better than most. Institutionalized way to bring risk issues to board, priority acknowledged. Whatever you institute don’t fall to trap of imitation box ticking. Emphasized importance of accountability and responsibility at board level. Audience survey: 41% think boards aren’t taking adequate steps. Did the pre-crisis focus on independence interfere with technical capacity? No 63%.
8.5 Shareholder litigation
What has been the experience of shareholder litigation over the recent past. Has litigation improved standards of governance? What are the trends in litigation we can expect post the crisis? Is shareholder litigation going to be much more common in jurisdictions outside of the US? Is more litigation good or bad for financial markets?
Moderator: Michelle Edkins, Managing Director, Head of Corporate Governance Europe, BlackRock. – European right to nominate board members much stronger.
Charles Elson, University of Delaware, USA – Benefit of. Effective in duty of loyalty cases. Courts comfortable judging thieves. On the care side much more difficult. Care claim doesn’t exist in DE. Suit on a care claim that forces a specific change like clawbacks can be good where litigation results in decisions to avoid liability. SOX brought 404 review of internal control and risk.
Danger is that it has resulted in systems better designed to avoid liability than to address actual risk and controls. Institutions had risk depts but missed risk and kept board liability shielded. Ultimately costs the system itself. Cases specifically brought for specific reforms work. SOX created risk analysis. Unintended consequence because someone sold them a bill of goods. Companies typically threw a bunch of retired internal officers at it to cover the legal requirements. Prevention – independent, vibrant elections, skin in the game (incented). Need to address loyalty but can’t really get good governance on that through litigation. Elections have always provided the out, in theory, but you couldn’t get rid of directors in practice.
Shifting $40B in days. Where is corporate governance? Stoneridge did away with second-hand liability. Most important trend is limiting standing to those who purchased securities. Can only sue on offerings purchased. Notice to a class. Custodial banks should be filing claims for you. If you switched banks you often don’t have trading evidence to know if you’re in the class. How assured? If there’s a settlement and you’re in that class, you may have a fiduciary duty to file and be in the action. How do I ensure my claim is being filed? Ask your law firm. At custodian, many fall though cracks. Some comparison of Europe, South America. More European countries moving toward class litigation. Germany has group litigation but can take 13 years. Opt in. Everyone has right to litigate their case. Can settle a case on class basis but not bring them. (Dutch, prepackaged global settlement. Judge gave extraterritoriality on a prepackaged settlement because company wanted it.) What did you money managers know and when? Infrequently go to trial.
Interesting dialogue among audience members on limited discovery rules in Germany. There, loser pays their costs (Canada as well). Markets developing in advance of regulatory framework. Individual actions may be brought together as a group where there is a vibrant active pension fund… angry because they’ve lost huge amount to fraud. Willing to take action. Very uneven and bumpy. Shell wanted to draw a line in sand and get rid of issue of overstating oil reserves. Cultural barrier to Europeans suing in US. More leverage by bigger institutions.
Who benefits most? litigators and market. Who suffers? current shareowners. How hold accountable? remove from office.
8.6 Governance issues in controlled and private companies
There are many controlled companies that perform well over sustained periods of time. What can we learn from these companies? Because of the lack of accountability, minority shareholders need to be aware of the risks and warning signs when things might be going wrong – what are these? How can shareholders put pressure on controlled companies? Dual class shouldn’t be banned but should cease with trigger events. Majority board independence. Cumulative voting for directors. Minority should have board representation. Stand up to board. If not enough liquidity to get out, then don’t go there.
Session 10 – The Quality of Shareholder Votes
It is widely acknowledged that there are serious issues with the proxy voting system around the world. When shareholders cast their votes there are a variety of reasons that their votes may not be counted. They could be lost, pro-rated or rejected. The investor will never know if this has occurred. Derivative instruments create a second set issue in the proxy voting system, not only do they contribute to overvoting problems, they also lead to votes being cast by persons with no true economic interest in the corporation. While the result is often benign, it can distort the decision making process. This session examined three issues – the nature and extent of problems with the proxy plumbing system; empty voting/negative voting/hidden voting; and the role of institutional investors in promoting the effectiveness of the voting system.
Moderator: Carol Hansell, Senior Partner, Davies Ward Phillips & Vineberg LLP, Canada
Henry Hu, Risk Director, Securities and Exchange Commission, USA. – Problem of decoupling votes with economic interest. Negative. Debt can also be decoupled, credit default swaps. Creditors might want company to go into bankruptcy. Role of proxy advisors, states. Dual record dates; how does that dovetail with proxy voting? Participation rate. Retail investors technology to increase. Counting correctly. Overvoting. Votes actually voted. Hidden morphable ownership. Area enormously complex, only solved by a huge research grant (humor from prior academic post). SEC will look at comment letters with extraordinary care.
Erik Breen, Head of Responsible Investing, Robeco, The Netherlands. – Might be rational
not to vote, depending on expense of voting. Most investors lend to earn more money. Has flexibility to recall shares to my liking but don’t use much. 90%/10% better to have capability in-house to get most payoff. Doesn’t trust the voting system. Uncertain, poor audit trail. Too big of a voting chain. No incentive or liability if they get it wrong. Can’t breakdown into pieces. Keep true interest of beneficiary in mind, if outsourcing.
John Wilcox, Chairman, Sodali Ltd., USA. – Quality of vote is the issue. Bipolar or split brain issue. On corporate side: real businessmen don’t deal with compliance; they pay others for that service. At institutional investors there’s a gap between investors/traders and governance staff. Shareowners are now more powerful, so voting can make a difference. Some have made votes matter. Shareholder rights are promised in proxy plumbing. Environmental and social movement showed true economic impact. Gulf of Mexico. great lessons against split brain. Voting rights quality going to be recognized and improved through new rights. Lending should be economic. Where does the ownership lie at any one moment? Tax laws are applicable to rapid trading in derivatives. Could those rules be useful in tracking voting rights? We should be trying to make corporate governance process customized to companies.
Ken Burch from audience. Good corporate governance requires real judgment, can’t rely on proxy service for applying. Shareowners are accountability shy. You can’t depersonalize director elections.
Keynote: Lucian Bebchuk, Friedman Professor of Law, Economics, and Finance Director, Program on Corporate Governance, Harvard Law School
The Wages of Failure. The standard narrative of the meltdown of Bear Stearns and Lehman Brothers assumes the wealth of the top executives was largely wiped out along with their firms. Commentators have used this assumed fact as a basis for dismissing both the role of compensation structures in inducing risk-taking and the potential value of reforming such structures. Paper provides a case study of compensation at Bear Stearns and Lehman during 2000-2008 and concludes this assumed fact is incorrect.
We find that the top-five executive teams of these firms cashed out large amounts of performance-based compensation during the 2000-2008 period. Top executive teams of Bear Stearns and Lehman Brothers derived cash flows of about $1.4 billion and $1 billion respectively from cash bonuses and equity sales during 2000-2008. These substantially exceeded the value of the executives’ initial holdings in the beginning of the period, so the executives’ net payoffs for the period were decidedly positive. The divergence between how the top executives and their shareholders fared implies that it is not possible to rule out that executive pay arrangements provided them with excessive risk-taking incentives.
Paying for Long-Term Performance lays out remedies focusing on equity-based compensation, the primary component of executive pay, we identify how such compensation should best be structured to tie pay to long-term performance. We consider the optimal design of limitations on the unwinding of equity incentives, putting forward a proposal that firms adopt both grant-based and aggregate limitations on unwinding. We also analyze how equity compensation should be designed to prevent the gaming of equity grants at the front end and the gaming of equity dispositions at the back end. Finally, we emphasize the need for widespread adoption of limitations on executives’ use of hedging and derivative transactions that weaken the tie between executive payoffs and the long-term stock price that well-designed equity compensation is intended to produce.
In contrast to “hold until retirement,” set forth by proponents such as AFSCME and Jesse Brill, Bebchuk and Fried point out that can incentivize premature retirement, especially for long-serving successful executives.
- Prevent the ability to cash out equities quickly. Once vested, unwinding should be limited, holding for a fixed number of years.
- For example, hold for two years after vesting, then allow sale of up to 20% per year for five years (approach adopted by TARP Special Master, Feinberg)
- Limit the fraction that can be unloaded each year, say to 10%. Avoids short-term focus because 90% still held.
Execs may use inside information to decide when to sell or may control release of decisions disclosed.
- Remedied by hands-off cashing schedule, and here’s the part I hadn’t heard before, based on the average price of that year, rather than in a given day.
- One of the most important takeaways was that companies must prohibit executives from engaging in any hedging that protects against downturns in company stock price. If they don’t, executives can undo the effects of pay incentives built in by the board. While one size doesn’t usually fit all, Bebchuk believes this bit of advice is applicable to all companies.
- Another bit of advice. We all recognize that options don’t reflect actual loses. He suggests linking to a broader basket of the company’s securities, such as shares, preferred shares and bonds.
Government’s role: Provide shareowners with rights to prevent structures detrimental to long-term value. UK has stronger rights.
- Effect the power to replace directors: proxy access, majority voting, annual elections
- Effect the rules of the game: initiative to change charter, expand scope of subjects influenced through bylaw changes.
Warned that corporate governance applicable where shareowners are widely dispersed may not be applicable or may even be counterproductive where there are controlling shareownrs. At financial companies government should play broader role. With pay supervision other forms of regulations can be looser.
See also Lucian Bebchuk’s Keynote Speech at the ICGN Annual Meeting, Regulating Bankers’ Pay, The Elusive Quest for Global Governance Standards, and 2000-2010 Publications and Working Papers. When does he sleep?
Also consider: 10 percent of companies with the most highly paid CEOs earned unusually low returns in both the near- and long-term. Another study finds a negative relationship between a higher CEO share of the executive compensation pot and firm value.
Session 11 – The Evolving Role of Hedge Funds in Corporate Stewardship
This covered growth in Assets Under Management overall and by strategy type. Particular focus given to equity based strategies: Merger Arbitrage, Statistical Arbitrage and ‘quiet’ Activists. Quantitative and qualitative analysis on recent trends (e.g. leverage/prime broker issues/prop. trading desks, etc.) affecting these strategies and to what extent they are impacting markets. Do these strategies feed into claims of hedge fund short-termism?
Jane Buchan, Chief Executive Officer, Pacific Alternative Asset Management Company, USA. – Says hedge funds bigger than private equity. Asked: What do you fear? Anything that would restrict short selling.
Omar Asali, Harbinger Capital Partners, USA. – Discussed several cases. Looks for companies that are undervalued. Tries quiet strategy, then noisy. Works behind closed doors most of the time. If interests not aligned, take more adversarial position. We don’t have formulaic answer re proxy policies. turnover 3, 4, 6 times in 3-6 months but some up to 7 yrs… work with management in those companies.
Cliff Asness, Managing and Founding Principal, AQR Capital Management, LLC, USA. – Quant fund, value strategies. Doesn’t like accrual methods, sustainable growth, anti-democratic not better.. seems to be a push…benefits are in the price. Either neutral or we like good governance. Voting on prices. We’re looking for prices that aren’t right. Outsource most of the proxy voting. Useful platform for embarrassing management or to vocalize attention. Statistical arbitrage. Random “riskless” arbitrage (a trade we kind of like… we do it but the guy who runs it says we don’t.. they do it over days, not seconds). 6 to 12 month momentum strategies, profit in 3 out of 4 yrs. Nontaxable investors (like pensions) should be pursing short-term strategies because don’t have to be tax efficient. What do you fear? Anything that would restrict short selling.
Eric Knight, Chief Executive Officer, Knight Vinke, USA. – Why would you take on government? Take on when gov is a large shareowner. Royal Dutch Shell can’t be taken over, so if mismanaged a lot of potential stored value. There’s an enormous amount of information on these large firms that no one is reading. HSBC board members spend 20 days /yr. reading what’s been handed to them by management. They’re all brain-washed. (With respect.) Who has most votes. Can’t have proxy contests at large firms. Recognizing that, no group can bring about change. Big firms are controlled or at least influenced by stakeholders, gov, press, regulators, taxpayers, competitors. We look at which has interests aligned with shareowners. Communicate with a broad audience through press. Buy full pages in newspapers. Might spend a year before trying to force restructuring. Invests in highly liquid large caps over -5 yrs. We don’t short or leverage because it would handicap us. Avoids stalling tactics. European banks leverage 100 to 1. US 100 to 3.
Moderator: Christy Wood, Chairman, ICGN
Session 12 – The New Balance in Economic Growth – the Emerging Economies
Governance is critical to capital market formation in all jurisdictions. Approaches to governance have developed in the emerging economies appropriate to their markets and culture. What corporate governance improvements are under consideration in the emerging economies countries? This session theme is “Distinctive Aspects of Our Governance Practices and Why They Work for us.”
Moderator : Hasung Jang, Dean and Professor of Finance, Korea University Business School – 20 yrs emerging market 1/2 – family dominated ownerships similar to India, Brazil. Some litigation beginning in China. Pensions investing abroad. Recent initiative to introduce poison pills. Q: Why retrograde step now? Ans: We made much progress since crisis. Regulators taking back step to be friendly to business. Hasn’t been legislated yet.
Brazil – José Luiz Osório, Founding Partner, Jardim Botanico Partners, Brazil. – Improved investment market protection. Private special listing requirement. 204 IPOs in 2010 raising $100B. Huge success. Need a free press so can use as tool for activism. Board must vote best interests of owners but large concentration of ownership. New simplified proxies, how they pay (fixed and variable) some didn’t disclose. International accounting standards soon. New reforms 20% independent directors increased to 30%. Growing fast. election yr. wages increased 10% in first quarter. 10% base interest rate? Election yr. seminar, importance of equity markets as second part of presidential debate, so recognized in politics. Do your own diligence. Increased disclosure requirements for manager but 40 companies got together and sought an injunction. 4th largest buyer of US securities. We’ve been allowed to invest abroad for 2-3 yrs. Now listing or ADR equivalents is beginning.
China – Jamie Allen, Secretary General, Asian Corporate Governance Association. – Reaction against western standards emotional reaction but will get on. Best ideas come from around the world. Stimulus underlined role of state and state sector. Last 5 years banks becoming more normal. Decreasing non-performing loans. Have they taken step backwards? Independent directors, committees, financial standards, reporting. Not really step backwards but continuum. Different local institutions. Supervisory boards in China but party role strong, playing an important role above boards of directors. Ethical and cultural development is the rationale. Much more disclosure on who’s on committee. (state enterprises) What does it leave for board but implementing strategies, looking at operations… can be useful. Chair may be open minded to get views of others. Meetings fully scripted. Cross border acquisitions in Asia and around world. Dealing with different regulatory regimes may force them to be more open and sophisticated. Evolving. Q: Are minority shareholder allowed to say something in the not so free press? Ans: No, and that will constrain them at some point. Minority shareowners will play a role… especially in other part of Asia. Retail investors in China seem more interested in going to court and protecting rights. If can litigate, they may exercise stronger powers. Potential for plaintiffs bar where in other parts of Asia all the attorneys are working for corporates. Hard to invest abroad. Most still held by state. 20-25% of shares owned by individuals.
India – DR YRK Reddy, Founder Trustee, Academy of Corporate Governance. – BRIC $300B foreign reserves. Sansex up 90% in ten years. 2nd most attractive market after China. 139 new issues last year. 25% in public hands may be soon mandated for traded enterprises. That might help discipline minority interests. Unlisted state owned enterprises are going to have to follow same standards. Related party transactions/ relationship based, trust-based. Family businesses. Monarchs are not going to spawn a revolution against themselves. Manner of selecting directors has improved. Activism in boards have changed. Management needs to be challenged. The seem to be realizing the importance of more diverse opinions internally. Structurally, SME can’t take standards in full sum. Will take time. Internationalized firms appreciate world standards. 9% growth. Jamie did white paper on India. There is little counting of actual votes in India. Indian companies have been acquiring companies abroad. 2nd highest in UK.
Brazil wins corporate governance beauty question among those in attendance.
Closing Remarks and Thanks
Christy Wood, Chairman, ICGN.
ICGN 2010 Annual Conference, The Changing Global Balances: Toronto
Publisher’s Disclaimer: Many of the speakers, especially those affiliated with governments, indicated their remarks represent their own personal views. Not being the best note-taker, what follows are my cryptic recollections and personal comments. I’d say they are for entertainment purposes only, but that would lead readers to anticipate more than I deliver. For actual quotes and transcripts, contact the International Corporate Governance Network.
MONDAY 7 June
Christy Wood, Chairman, ICGN opened the conference noting that Canada set highstandards for its banks and in other areas, helping it weather the financial crisis better than the US.
Conference opening keynote
Jim Flaherty, Minister of Finance, Canada spoke of the G20 Summit coming to Toronto and walked us through how the financial crisis occurred and was addressed, noting that a majority of the stimulus packages will end about next March. The Canadian economy, which is growing at a rate of more than 6%, hopes to then cut its deficit in half, even while cutting taxes. He said that
Canada has the lowest taxes on businesses, is the first tariff-free country on manufactured imports and has the strongest recovery within the G7. Shareholders should bear the costs associated with bank failures, preferably through use of contingent cash reserves. He looks forward to a federal securities regulator in Canada and expressed hopes that emerging economies would increase domestic demand to counterbalance European fiscal discipline.
Session 1: The New Global Economic Balance
The financial crisis of 2008 and the “Great Recession” of 2009 raise tough questions about governance of the global financial system. The write-down of assets is approaching US$ 4 trillion, a record-setting destruction of wealth. How can global governance gaps be overcome? Is global integration under threat or will the widespread social backlash subside in a post-crisis world? What will the “New Normal” look like in terms of economic balance?
Antonio Borges, Chairman of the Hedge Fund Standards Board and the European Corporate Governance Institute, Portugal. – Greece represents the tip of an iceberg in the banking sector. What starts with a small country can create contamination. Sovereign debt had not been considered risky, like CDOs. Countries blame market speculators, according to conventional wisdom, but we need to solve the moral hazard problem that would accompany any bailout.
Christian Strenger, Government Adviser and Director, DWS Investment GmbH, Germany. – The root cause lies in fundamental deficits, lack of stringent supervision. The general public and the banks were misled concerning the safety of Greek bonds.
George Lewis, Group Head, Wealth Management, RBC Royal Bank. – Lewis began on an optimistic note, discussing the need to address trade flows and market distortions.
Borges: The Eurozone is working fine, in balance. Countries that are competitive will attract capital. Some Southern European countries have misspent their debt wastefully. Their fiscal problems will only be eliminated by becoming competitive and through growth. Stressed the importance of savings, since a lower savings rate leaves them very vulnerable when foreign capital is at stake.
Moderator Chrystia Freeland, Global editor-at-large, Reuters, Canada. – But didn’t Goldmen Sachs facilitate by hiding possible liabilities through public/private partnerships?
Strenger: Too often things were allowed that were not entirely in conformity with the highest ethics. There’s noting wrong with making $100M in a day but the general public finds it difficult to understand. Authenticity problems.
Lewis: We need to reinforce the role of fiduciaries and agents. Regulators need to establish better fiduciary standards, empowering shareowners, reinforcing a duty of care – suitability, not inappropriate mortgage products. Too little down-payment and there was also the issue of commissions based on selling mortgage products.
Borges: Don’t ask regulators to do more than they can, otherwise you generate a false sense of security. Who are the people interested in financial security? Investors must be mobilized around tougher transparency requirements. Investors are in charge, not regulators but ownership is decoupled when control rights are traded away. High frequency trading is having a growing impact, since a large number of shares do unvoted. (or were these last points made by Strenger?)
Lewis: Yes, there are problems around ownership and control. We need sound regulations to level the playing field, reinforcement of a stronger role for debt holders.
Freeland: Was government bailing out its friends? Canadian banks rebut that the source of risk wasn’t commercial banking but mortgages in the US.
Borges: It wasn’t casino banking but relying on market specialists. In addressing the issue Borges noted that about 80% of corporate financing comes from banks in Europe, about the reverse of in the US, where about 80% comes from market equities.
Christian: At least part of the problem was that companies are often engaged in businesses their boards don’t fully understand.
Borges: The most important role of financial markets is to impose discipline. Shareowners need to hold companies accountable.
Audience: A major function of the market is to control risk but if you can pass on the risk, responsibility vanishes and you don’t have to at prudently.
Borges: People who take risks must do so responsibly. Although retail investors may need protected, sophisticated institutional investors must push for transparency and then take risks. Risks should be taken by specialists. Regulations may raise the cost of capital.
Lewis: Touched on proposed Basel III rules and competition.
With more diversification by institutional investors, they know less and less about the markets they are in. Global guidelines and standards influenced by ICGN become more important. Meeting is timely with G20 also coming to Toronto. There was discussion around the idea that attempts to regulate executive pay have actually driven pay higher. Real answers will come with better boards and more control by shareowners, whose rights have been hampered in the US. Consensus around the idea of more input from ICGN into G20. ICGN should be viewed by them as a valuable resource worth consulting.
Session 2 – The business case for more women on boards
Diversity affects the way groups behave. Evidence indicates that more diverse groups foster creativity and produce a greater range of perspectives and solutions to problems. A larger proportion of women on boards seems to affect directors’ attendance behavior and the number of scheduled board meetings. Demographically dissimilarity in the boardroom seems to affect incentives for replacing CEOs, the director nomination process, and the design of compensation systems. But is this enough to prove the “business case” for more women in the boardroom? The panel discussed the most recent academic findings as well as practical experience from the US and Norway, the only country in the world where gender diversity on boards are regulated in law.
Eli Sætersmoen, Managing Director, Falck Nutec AS, Norway. – The threat was that companies that didn’t comply with the new requirement of 40% women on their boards would be liquidated. She’s been serving on boards for more than 10 years and sees that women add value… more detail oriented… leading to more socially robust and stronger boards. Interestingly, once companies had to bring on women directors they became very concerned about qualifications for directors. Once qualifications were written down, they were also applied to men. Result: golf club members down; professionals up. She suggests the Norwegian model could be adjusted based on culture… the real question is political will.
Faye Wattleton, former Chair of Nom. Comm of Este Lauder, USA. – She was the only woman on the board but it takes three before the culture of the board really changes. There needs to be a “critical mass” to reduce the need to “explain the details to the woman on the board.” We are a different species, resulting in more decisions grounded in reason and more open communication. A company’s highest governing boy should reflect society or at least its own customer base. Favors something more like affirmative action, rather than mandates like Norway.
Daniel Ferreira, Reader (associate professor), Department of Finance Director, Corporate Finance and Governance Programme, Financial Markets Group (FMG) London School of Economics. (book chapter on Board Diversity, Women in the Boardroom and Their Impact on Governance and Performance and other papers). – One difference is that not only do women directors have a better attendance record at board meetings but men at boards with women also have better attendance, suggesting their presence results in the job being taken more seriously. Women are most likely to be on certain committees, least of which are compensation committees… so there was no data to correlate women on boards with executive pay. Boards with women were more likely to replace CEOs after poor performance… apparently, tougher monitors. Gave a plug to further research being done by his “Women in the Boardroom” co-author Renee B. Adams on Swedish boards (see also).
Deborah Gillis, Vice President, North America, Catalyst. – Companies with more women had 53% higher return on equity. (see The Bottom Line: Corporate Performance and Women’s Representation on Boards, 2007 and the Catalyst Research and Knowledge Base). Agreed with Wattleton re need for three to change culture, signaling a tone at the top that is respectful of differences. More woman directors also leads to more woman corporate officers, more innovation and out of the box thinking. Companies with diverse boards are more likely to recruit the best talent. She would be hesitant to require quotas and likes the SEC’s recent requirement for disclosure re diversity to ensure the conversation at least happens. Boards need to broaden their search beyond C-suites.
Moderator David R. Beatty O.B.E., Conway Director, Clarkson Centre for Business Ethics and Board Effectiveness, Rotman School of Management, University of Toronto.
Session 3 – The Evolution of Capital markets – threats to good corporate governance
Capitalism has both good and bad sides. On the one hand, it fuels economic growth and wealth creation. On the other, it is susceptible to being managed or even manipulated by certain players in the system. This session examined threats to good corporate governance ranging from the role of new exchanges and high-frequency trading, derivative-based ETFs to regulatory arbitrage between stock exchanges.
Claire Bury, European Union. – We’ve moved from believing everything to nothing about what bankers tell us. Interested in high frequency trading and increasing liquidity at US banks. Also expressed concerns with securities lending/empty voting. Advocates transparency above a certain level in debates in Brussels this week. Concerning short-selling, sees need for European-wide disclosures. When voting capital is small, relative to trades shares, it leads to major problems. Frenetic trading generates profits for bankers and brokers but not usually for investors. During Q&A, suggested that maybe debt holders should hold voting rights if shareholders don’t exercise their rights.
Tom Kloet, Chief Executive Officer, TMX Group, Canada. – TMX recognizes the difference between mature and venture companies, operating both the Toronto Stock Exchange and the TSX Venture Exchange. Regarding high frequency traders, they are in the market to stay. With 25% of the volume, they keep markets liquid. He doesn’t think they are hurting corporate governance. ETFs were a key invention, first appearing on TSX 20 years ago.
Marcel Jeucken, Manager for Responsible Investment, PGGM Investments, The Netherlands. – Emphasized using shareowner rights, integration of voice with the investment process, and transparency. Advocates disclosing votes and informing management. Yes, buy proxy research, but also underst how that impacts each specific company, avoiding a check-box approach. Funds should be transparent themselves. Indexes can’t vote with their feet. Funds that integrate corporate governance concerns within their investment designs should outperform. Problems in Asian companies where votes are counted by hands raised, not in proportion to the number of shares held.
Moderator Doug Steiner, Strategic and technical operations consultant, Scotia Capital, Canada. Mentioned that he sees market for voting rights coming. We may soon be monetizing voting rights. (see Monetization, Realization, and Statutory Interpretation by Paul D. Hayward and post by Broc Romanek)
Session 4 – The New Balance in Corporate Social Responsibility
Understanding and managing a corporation’s relationships with its stakeholders is critical to the corporation’s ability to execute its strategy. A significant part of CSR, Environmental Strategy, is top in the minds of investors, businesses and governments internationally. The resource sector faces some of the most high profile issues in this area. During this session leading CEOs discuss their approach in mitigating their impact on theenvironment.
David Collyer, President, Canadian Association of Petroleum Producers . – Thinks tar sands mining can be responsible but they need to listen to their critics. Demand for energy is growing exponentially. Developed world is stabilizing but not India, China. Doubling by 2050. Oil on decline.
Supports diversification of supply sources but we need to be pragmatic about how long they will take to develop. World increasing reliant on conventional gas and oil resources. Tension: enviro, eco growth, energy security and reliability. Going to need all sources. How done responsibly. Oil producers are in much more than oil sands. They’re active in renewables. But oil sands lie at the nexus. They are a key part of addressing energy, representing the 2nd largest reserve of oil in world… 1/2 of accessible reserves. Canada is open to dialogue not possible in other parts of world where oil is being developed. Water use is a low 2% of Athabasca River flow. Surface area impacted by mining is less than a medium sized city. Only slightly higher contributor to greenhouse gases and conventional extraction. Canadians, 74%, support continued development. Working with his members to facilitate responsible engagement. Believes in responsible energy and they’re on track to improve and demonstrate. We’re up to the challenge.
Brian Ferguson, President and Chief Executive Officer, Cenovus Energy, Canada . - One of 25 largest Canadian companies. Probable reserves of 2.1 billion barrels. Technology driven oil sands company operating in Alberta and Saskatchewan.
Uses two technologies. On 15% use conventional mining techniques but 85% of sands are accessed through horizontal drilling wells. Cenovus has 40% of the global carbon capture and sequestration capacity… 15 million tons stored to date. Small footprint at well-pad. Striving for good governance. Rigorous, respectful and ready. One doesn’t have to be sacrificed for the other (environment and energy). Environmental stewardship integrated with exploration and extraction. Corporate responsibility impacts business. Will release report later this month. Oil sands will be a significant contributor for decades to come. Measurable improvements in intensity, footprint, air pollutants, water usage. 95% of water they use is brackish water. None from surface. Production growth is up 190%. Injecting steam into wells, extracting from wells below. Relative infancy so innovation continues. They see themselves as a technology company in the oil industry. Working on 50 different technologies. Energy efficiency and operations program. Environmental opportunity fund (with investments in renewables).
Hal Kvisle, Chief Executive Officer, TransCanada Corporation. - TransCanada is involved in pipeline and power generation. They are North America’s 2nd largest narutral gas storage operator. Big project to move gas down to US Midwest. Another to bring gas down from Alaska. ExxonMobil partner. Building largest compressors globally for the Mackenzie valley pipeline. $800M to get through regulations. $40B project. Mega project challenges. NGOs always ready to weigh in. Impact on right of way. Constructing below ground (unlike Alaska pipeline). Impact on consumers. 85% from clean sources, 15% coal. Reduce consumption. Substitution. Different forms of energy. Remove CO2 from atmosphere. Values: integrity, collaboration, responsibility, innovation. The entire financial sector was painted with one brush but Canada did relatively well. Things may unfold that way on energy side as well.
Damon Silvers, Director of Policy and Special Counsel for the AFL-CIO, Member of the Congressional Oversight committee for the TARP. – Ambiguities: Middle East blood, Nigeria, environmental issues. Good jobs in Alberta. Getting harder and harder to extract fossil fuels. People died on BP platform. Energy prices rising and becoming more volatile. Funds have chased commodity prices over time. Financial crisis should teach us the need for regulation. We are universal investors and don’t jump in and out for glamor. Bubbles: look out for them. Tobacco also reduced a lot of good jobs. Labor had a close relationship. We tried to figure out how to act responsibly. They ended up facing perjury charges, admitted to selling poison. There is no way to look at fossil fuels as anything other than selling poison. Good they are trying to do it less dirty but we shouldn’t continue to deny, even through there are a lot of good jobs there, that global climate change must be addressed sooner rather than later. The challenge isn’t how to shut it all down but is come up with a feasible transition strategy.
Collyer: Tobacco industry of our times. No. Hydrocarbons are going to be here. Policy makers will decide. This isn’t about my energy being better than yours. Focus has to be on cleaning up. Dirty oil? The worst kind of tobacco. Market will decide. Barriers could be put in place based on environmental damage.
Moderator Chrystie Freeland, Global editor-at-large, Reuters, Canada. – Asks Ferguson about worst case scenario? Yes, they’re looking at that. Every employee must understand their safety role. How do you make sure you go home safely. Governance practices and procedures. Understanding risk. He doesn’t contemplate an environmental disaster. When pressed, he responds that a “steam rupture” could come to surface. But it could be easily contained and mitigated. The inherent risk is low.
My reaction: Come on, you just lost all credibility with that answer… although, I then start thinking the Gulf spill could be good news for oil sands. For a more balanced view, see Report Weighs Fallout of Canada’s Oil Sands, NYTimes, May 18, 2009. My conclusion: If reliance on oil is like tobacco, oil sands will place us on a speedier path global warming and massive death… even if a lot of profits are made along the way.
Session 5 – International Financial Reporting Standards – Was Accounting a Root Cause of the Global Financial Crisis?
Were accounting standards one of the reasons behind the financial crisis? How do the standards continue to impact on companies?
Shyam Sunder, James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management. – Principles are hare to define. In legal systems, we have judges. The head of Arthur Andersen liked the ideal in the 1950s. Sunder likes it today. God has no accounting standards. While institutions seek order, we should keep in mind that any such order will be circumvented. Messiness will continue.
Paul Cherry FCA, Chairman, Standards Advisory Council,
Canada. – Canada put in place a form of arbitration.
Unfortunately, it was done once and shelved.
Moderator Kim Shannon, President and Chief Investment Officer, Sionna Investment Managers, Canada
Session 6: The New Balance: Strategic Environment for Business, Keynote: Lowell Bryan, Director (Senior Partner), McKinsey & Company, US
Dramatic shifts in world economy. Showed pictures of a couple of cities in China 15 years ago and today. Wow, from hovels to high rises. Expects, 50% growth in next 10 years from emerging markets.
Drivers. Organized people, urbanization, labor productivity. Less dependents, purchase power. Over 10-15 years there will be adjustments in currency that may reduce growth. Over $1B new middle class consumers in next 20 years. Creating new business models. Rethought and re-engineered. Refrigerator designed for interruptible electricity. GE developed electrocardiogram for India that cost 15%. Demand is up for raw materials.
Volatility could be back. How do you get your house in order with this much unemployment? We could revalue our currency. Demand for commodities will put pressure on prices. If currencies are overvalued, they will overpay for commodities. Developed countries are paying too little. China is paying too much.
Fault lines: currency misalignment, commodity (currency issue), debt risks. Surveys show a high probability of another financial shock in next 3 years. Safe harbors? Organizations need to be more flexible. Scenario planning should be taken seriously. Improve risk/reward opportunities. Banking relationships. Error on side of over-capitalization, over-liquid and over-prepared. Decisions just in time.
Invest heavily in options that pay. Lots of broken business models, capital strategies, regulatory regimes, posture to governments, make decisions just in time. Keen awareness of time horizons critical.
Companies have more degrees of freedom than individuals and governments. There are consumption growth opportunities. Assumption for inflation: risk here is financial. Demand driven high in developing markets. Developed world cutting spending and deficits. Will global structures survive? He thinks we’re going to get adjustment because market forces will push us to do so. Look at Asia in 1987. Their policies have served them well. Difficult economic times could lead to other problems.
Rise in populist governments. If you express your fears and prepare, maybe they won’t happen. Governments need right policies. Will populations do the right thing in a crisis? US saves more, gets better trade balance… not happening. Democracies frequently don’t understand their own interests. We face a backlash from a fading middle class, like the Tea Party. It has to happen to get policy adjustments. He’s confident government leaders will do right thing… eventually.
Welcome Reception at the Royal Ontario Museum
Peter Dey, Chairman, Paradigm Capital Inc., Canada received a lifetime achievement award for his work in making corporate directors more effective, developing governance guidelines in 1994 for companies on the Toronto Stock Exchange, and later helping develop global governance guidelines for the Organization for Economic Co-operation and Development and its Global Corporate Governance Forum.
Dey said he supports shareholder activism by advocacy groups like the Canadian Coalition for Good Governance (CCGG), but said their best tool is the use of private conversations with a board, not “public confrontations.” “Where you can be most effective is identifying good directors, getting them on the slate and electing them, and, if necessary, removing ineffective directors,” he said. “But to try to jump in and make judgments where the board should be making judgments, I think is just the wrong direction.”
As Canada gears up for the G20 summit, Toronto also gets ready to host the world’s largest investors at the International Corporate Governance Network’s (ICGN) annual global summit. The conference runs June 7 – 9 in Toronto, Canada and will gather institutional investors representing almost US$10 trillion in assets under management. If you’d like to touch base with CorpGov.net Publisher, James McRitchie, please email me before or during the conference.
“Policymakers and market participants alike want capital market stability, however regulation alone is not the best approach. We encourage G20 leaders and policymakers to recognize that engaged shareholders who exercise their rights and responsibilities are also fundamental to the proper functioning of capital markets, said Christianna Wood, Chairman, ICGN Board of Governors.
Jim Flaherty, Minister of Finance for Canada, will open the conference with a keynote address at 8:45 a.m. on June 7. More than 60 speakers from 30 leading markets will tackle a range of subjects including:
- The new world order following the ‘2009 Great Recession’ and 2008 banking crisis;
- The aftermath of the latest oil disaster with a look at CSR in action and resultant costs to society and share value;
- Impact of high-frequency trading and its possible role in massive and unexplained “market glitches”, plummeting stock market prices and high volatility; and
- Increasing international role of ‘super’ investors from government controlled funds from emerging markets such as China and global hedge funds.
The three-day summit will look beyond the traditional corporate governance lens of a public company and will instead focus on the wider evolution of capital markets to restore equilibrium integral to stability and growth of the world’s economies.
The recent banking crisis and collapse of the Greek economy leading to plummeting stock markets on both sides of the Atlantic, highlights the inter-dependencies between the world’s leading stock markets that can no longer work in isolation. Today’s environment presents a ‘New Global Economic Balance’ and one which sets new regulatory challenges and responsibilities on market participants for both issuers and investors alike. “Thoughtful discussion on this topic is urgently needed with all parties at the table, including rising powers from China and India as well as influential investors such as Sovereign Wealth Funds or hedge funds,” said Carl Rosen Executive Director of the ICGN.
Leading speakers include:
- Lucian Bebchuk: Friedman Professor of Law, Economics, and Finance Director, Program on Corporate Governance, Harvard Law School, USA;
- Jane Buchan: CEO, Pacific Alternative Asset Management Company, USA;
- Antonio Borges, Former Partner, Goldman Sachs, Portugal;
- David F. Denison, President and CEO, Canada Pension Plan Investment Board;
- Scott Evans, CIO, TIAA CREF, USA;
- DR YRK Reddy: Founder Trustee, Academy of Corporate Governance, India;
- Anne Kvam: Head of Corporate Governance, NBIM, Norway; and
- Shyam Sunder: James L. Frank Professor of Accounting, Economics and Finance, Yale School of Management.
“Investors have no borders. Canadian institutional investors are among the most active participants in global capital markets. As a committed member of the ICGN, we are proud to co-host this Summit and we look forward to welcoming the world’s governance community to Canada to discuss the most pressing issues currently disturbing global markets,” said Jim Leech, President and Chief Executive Officer of the Ontario Teachers’ Pension Plan.
The conference coincides with the ICGN’s 2010 Annual General Meeting which will map the ICGN’s work programme going forward, policy initiatives and priorities, and will elect board members for the coming year.
The ICGN Annual Conference is being hosted by the Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, two of Canada’s largest institutional investors and proponents of good corporate governance. The conference is co-chaired by Claude Lamoureux (former CEO of the Ontario Teachers’ Pension Plan) and David Beatty (founding Managing Director of the Canadian Coalition for Good Governance).
Lindsay Tomlinson, Chairman of the National Association Pension Funds, addresses the ICGN and notes that the Institutional Shareholders’ Committee put out a Statement of Principles on Shareholder Engagement. It will now have some enforcement teeth. (Check Against Delivery, 3/25/2010)
Firstly we expect that it will be an FSA requirement that all investment management firms authorised to do business in the UK will be required to make a statement about the way in which they comply with the Code. This could include words to the effect that they take no notice of it, but it would be a public statement which is made through our main regulator. A regulator which has immense power – for example to ban me from the industry for life.
In addition to that, there will be some form of monitoring mechanism which we proposed should be through each individual’s firms front office controls report a SAS70. And we are anticipating that the FRC will, itself, undertake some form of monitoring, probably at the aggregate level, but maybe extended to individual firms.
ICGN’s annual conference, this June held in Toronto, is on “The Changing Global Balances.” It just so happens that students at theRacetotheBottom.org are also exploring a good portion of this phenomena with a series “The BRIC Project,” which began on April 1, 2010. Dan O’Connell will write posts about corporate governance practices in Brazil. Rich Jasik will do the same for Russia. Kinny Bagga will examine India, with Dan Snare exploring corporate governance in China. Here’s a few fascinating observations from day one:
- Between 1997 to 2006, the cumulative volume of foreign portfolio investment into shares of companies located in BRIC countries grew to $697 billion from $70 billion.
- Brazil, Russia, India and China made up more than 50% of world GDP back in 1800, make up about 15% now are are likely to again make up 50% by 2050.
- BRICs already contribute almost half of global consumption growth.
- Being invested in the right markets—particularly the right emerging markets—may become an increasingly important strategic choice for corporations.
- “Conditions for Growth” include macro-economic stability supported by price stability via fiscal deficit reduction, institutions, openness to trade and foreign direct investment, and education.
- Corporate governance remains one of the most important factors constraining the BRICs’ attractiveness to potential long-term shareholders. Less active minority shareowners and large share concentrations inhibit market-driven changes in control.
I look forward to future posts in this interesting series.
In new calls for strengthened accountability, transparency and alignment in non-executive director pay, the International Corporate Governance Network (ICGN) is specifically calling for pay to consist solely of a combination of a cash retainer and equity based remuneration. The ICGN also calls for the elimination of perquisites for non-executive directors.
Commenting on the new Guidelines the ICGN Chairman, Christianna Wood says,
As the shareholder’s representatives, non-executive directors are elected by the owners of the company and must have a strong alignment of interest with the owners in the form of meaningful equity ownership while serving on the board. Furthermore, directors have a conflict of interest in that they set their own pay and as a result need to provide the utmost transparency and clearly state the board’s philosophy behind the director remuneration programme.
These principles were crafted over the last several years in a consultation that included many of the largest global shareowners. Ted White, Chairman of the ICGN Remuneration Committee responsible for developing the new Guidelines also commented,
These principles were hotly debated by our members from around the world. While practices differ from country to country, continent to continent, we all agreed that this was an important policy and that the principles of accountability, transparency and alignment of interest were agreed upon principles that should exist in the setting of all non-executive director remuneration programmes.
The ICGN acknowledges that remuneration practices differ around the world. Carl Rosen, ICGN Executive Director added:
Among the agreed upon themes are that non-executive director equity remuneration should be immediately vested and not performance-based. The ICGN believes that directors should have solely cash retainer and equity ownership remuneration, with a preference against the use of options.
The Guidelines aim to help communicate investors’ perspectives on this critical issue and are primarily addressed to companies and their non-executive board members. Since remuneration policies are set by the board, it is important that they be transparent, address shareholder expectations, and those setting them be held accountable. Accordingly, three principles underpin these guidelines: transparency, so investors can clearly understand the program and see total remuneration for non-executive directors; accountability, to ensure that boards maintain the proper alignment of interests in representing owners; and alignment of interest between non-executive directors and shareowners. The cornerstone of non-executive director remuneration programs should be alignment of interest through the attainment of significant equity holdings in the company meaningful to each individual director. Key aspects of the Guidelines are as follows:
- Places an emphasis on non-executive director alignment of interest with long-term owners.
- Draws a distinction to differences to executive remuneration, particularly related to performance-based remuneration.
- Opposes the use of performance-based remuneration for non-executive directors.
- Examines the tools of remuneration, and favors solely cash retainer and equity, with a preference against the use of options.
- Provides flexibility for companies to implement the principles in ways consistent with their unique circumstances.
- Calls for clear disclosure including the philosophy of the non-executive director programme.
- Calls for equity to be vested immediately but subject to holding periods.
- Suggests companies establish ownership guidelines for non-executive directors.
- States non-executive directors should not be eligible for retirement benefits.
The Guidelines are intended to be of general application around the world, irrespective of legislative background or listing rules. As global guidelines, they need to be read with an understanding that local rules and structures may lead to different approaches to these concepts. The ICGN will also seek change to legislation, regulation or guidance in particular markets where we believe that this will be helpful to generating corporate governance improvements and particularly where such change will facilitate dialogue and accountability.
The ICGN Non-executive Director Remuneration Guidelines has been developed by the ICGN Remuneration Committee in consultation with ICGN members. A consultation paper on the subject was sent to ICGN members for comment and a wide range of responses were received and contributed toward the final draft. The Guidelines will be launched at the ICGN Conference, being held on the 24 – 25 March at London’s Guildhall, entitled ‘Will shareholders rise to the ownership challenge?’ The event is hosted by the City of London and supported by the Department for Business, Innovation and Skills, among other partners.
The world’s foremost leaders in corporate governance will gather in Toronto from 7 – 9 June 2010 at the International Corporate Governance Network’s annual global summit to focus on the evolution within the global capital markets and its impacts on corporate governance. Full details of the program and side meetings can be found at www.icgn.org/conferences. According to David Beatty, Founding Managing Partner, The Canadian Coalition for Good Governance (Canada) and co-chair of the ICGN conference:
This year’s summit will bring together the world’s top thought leaders on corporate governance issues to look at new trends we’re seeing in the global capital markets – including the emergence of the BRIC countries – and its impacts on fostering good corporate governance from a global perspective. We are looking beyond the traditional corporate governance lens of a public company and focusing on the evolution of capital markets and the questions it raises for corporate governance. As we have seen from the recent global financial crisis, which sparked volatility across the industry, restoring equilibrium in capital markets and good corporate governance are integral to stability and growth in the financial markets.
“In an environment where policymakers and market participants alike are focused on reform, it’s time for ‘market-led’ change in corporate governance. Regulatory evolution alone is not enough to ensure global capital market stability. Thoughtful discussion on this topic is urgently needed with all parties at the table – including rising powers from China and India as well as influential players such as Sovereign Wealth Funds or hedge funds,” says Christianna Wood, Chairman of the board, ICGN.
The ICGN Annual Conference is being hosted by the Ontario Teachers’ Pension Plan and Canada Pension Plan Investment Board, two of Canada’s largest institutional investors and proponents of good corporate governance.
Over 60 speakers from 30 leading markets will tackle a range of subjects ranging from the evolution of capital markets and threats to good corporate governance, a new model for shareholder stewardship and rising influence of hedge funds and sovereign wealth funds, the efficiency of regulatory solutions to market-led problems, challenges to proxy voting across borders, executive compensation, increasing gender balance on boards, to the influence of BRIC economies and its impact on Western style governance.
Speakers include leading figures from policy, business, investment and stakeholder groups. The Conference is being opened by Jim Flaherty, Minister of Finance for Canada, which precedes a joint session with the World Economic Forum with a focus on the new global economic balance. Key sponsors are the Royal Bank of Canada, RBC Dexia Investor Services and TMX Group.
The conference coincides with the ICGN’s 2010 Annual General Meeting which will map the ICGN’s work programme going forward, policy initiatives and priorities, and will elect board members for the coming year. ICGN is a not for profit membership organization promoting the cross border exchange of information and experience, advocacy for reform and development of best practices in corporate governance. It has over 470 members based in more than 45 countries worldwide, who include investors responsible for $9.5 trillion in global assets.
James McRitchie, the publisher of CorpGov.net will be there. How about you, eh?
2007 News Highlights and ESOP Links
I went through all news items posted in 2007 and selected 1-3 from each month to represent 2007 News Highlights: Selected Trends. This should give readers a quick review of important developments in the field during the year.
Additionally, I added a section on Employee Ownership to our Links page. More democratic and flexible workplaces make fuller use of employee capacities and yield tangible economic benefits. Yet managers faced with a potential loss of status and power have been slow to change. By adding this set of links, perhaps we can make resources slightly more available to those considering employee stock ownership plans.
As we head into 2008, please let us know how Corpgov.net can serve you better.
Foundations Better Aligned
Major charitable foundations, with the notable exception of the Gates Foundation, are initiating or strengthening efforts to harmonize the social and environmental effect of their endowment investments with their philanthropic goals, according to a report in the LATimes. (Foundations align investments with their charitable goals, 12/29/07)
The article cites moves at the $8.5-billion William and Flora Hewlett Foundation, $6.1-billion John D. and Catherine T. MacArthur Foundation, $7.8-billion W.K. Kellogg Foundation, and a litany of others have finally joined the Ford Foundation, the nation’s second-largest, and some smaller foundations, such as the F.B. Herron Foundation, the Jessie Smith Noyes Foundation and the Nathan Cummings Foundation, which have long worked to align their charitable and investment practices.
The Times reported in January 2007 that much of the Gates Foundation’s $35-billion portfolio was invested in companies whose poor records on environmental stewardship, governance or human rights — in some cases involving the exploitation of child slaves — worked counter to the foundation’s charitable goals. That article sent shock waves though the foundation community and led to better alignment and many. At first, the Gates Foundation said it would examine its investment policies — but they later backed away from any reform.
Two Giants Leave the Field
At the end of December, two longtime trustees will retire from America’s two largest public pension fund boards, taking collectively nearly 60 years of experience and institutional knowledge. Robert Carlson joined the CalPERS board in 1971 when it boasted about $4.3 billion in assets. Today, CalPERS assets are around $250 billion. During Gary Lynes’ tenure, CalSTRS assets grew from $12.4 billion in 1984 to about $174 billion today. (Guiding hands for CalPERS, CalSTRS set to retire, Sacbee, 12/27/07) Both institutions became leaders in corporate governance, responsible for reforms that have transferred power from CEOs to boards. The next period will likely see a shift in power from boards to investors themselves as these giants continue to influence markets to become more democratic.
With Your Help, Mandatory Arbitration May End Soon – But SEC Oversight of SRO’s Needs Fundamental Reform
Les Greenberg, who teamed together with me in restarting the proxy access movement in the summer of 2002, may soon be getting some traction in his battle to revoke mandatory arbitration. Please write to your Congressional Representatives in support of Senator Russ Feingold’sArbitration Fairness Act of 2007. Also needed is your support for a Congressional investigation of the links between the SEC and SROs (self-regulating organizations like the stock exchanges) they regulate. Join with Greenberg in demanding Congress throw off the bedcovers.
Public customers of securities brokerage firms are required to agree to arbitrate disputes. Although arbitration can be a fair and efficient way resolving disputes when both parties choose it after the dispute arises, high administrative fees, a lack of discovery protections, and a lack of meaningful judicial review of arbitrators’ decisions all act as barriers to the fair and just resolution of an individual’s claim. When arbitration is required rather than voluntarily chosen, customers lose.
For example, in a survey of 100 financial advisers by Vestment Advisors, nearly 20% said they knew of someone who knowingly had violated compliance rules and regulations. Cited were cheating on computerized training, signing account forms for clients, not sending e-mail to the compliance officer for review and not processing checks the day they were received. (Advisers often skirt compliance rules, survey finds, Investment News, 5/29/07)
Brokers have the upper hand in arbitrations. That’s the conclusion of a 10 year study. The bigger the claim and the bigger the broker, the less likely the recovery. (Advisors Score Big in Arbitration Study, OWS Magazine, 6/2007)
Public Citizen, a Washington-based consumer watchdog group, reported that consumers won 4% of 19,000 California cases decided by one arbitration firm between January 2003 and March 2007. The study found one arbitrator who rendered 68 decisions in one day — “one every eight minutes,” said Laura MacCleery, director of the consumer advocacy group Public Citizen’s Congress Watch. “Consumers won zero.” Bills aim to get consumers their day in court, LATimes, 12/17/07)
Drawing on 30 years of experience serving as an NASD arbitrator and as legal counsel for either claimants or respondents, Greenberg’s filed a rulemaking petition in May 2005 to the SEC andSupplement that would have required a number of reforms: Others picked up on the cause. For example, in June of 2007 Daniel R. Solin petitioned the SEC to prohibit broker-dealers from requiring investors to accept mandatory arbitration clauses and Greenberg filed a letter in support.
As indicated above, Senator Russ Feingold introduced the Arbitration Fairness Act of 2007. Passage of that bill now appears more likely than enactment of SEC rules, so we ask for your support in that effort. However, Greenberg’s investigation also led down another even more disturbing path — the relationship between the SEC and SROs.
Through FOIA requests, which sought all communications between the industry dominated Securities Industry Conference on Arbitration (SICA) and the SEC, including SICA Meeting Minutes, Greenberg determined why the SEC didn’t comply with rules requiring them to respond to rulemaking petitions. Such petitions, which often deal with conflicts of interests within the SROs, are sent to the SROs for recommendation. That’s fine, but It turns out the SEC has essentially rewritten the rules because they don’t set a return deadline and if the SRO fails to take up the public Petitions, the SEC Staff takes no action at all.
Greenberg filed a Complaint for Declaratory and Injunctive Relief with the United States Securities and Exchange Commission (USDC Case No. CV 06-7878-GHK(CTx) alleging violation of the Federal Advisory Committee Act. Additionally, Greenberg wrote to Barney Frank, Chairman of the House Committee on Financial Services, requesting a Congressional investigation of the above-described egregious conduct of the SEC Staff, which stifles the legitimate rights of the investing public. Please join with us in writing to Rep. Frank in support of Greenberg’s request. Ask Frank to open a Congressional investigation into the relationships between the SEC, SROs, and SICA to determine what reforms are needed to ensure the best interests of the investing public will be served.
How Long Should Recommendations Take?
Ten years ago the Public Investors Arbitration Bar Association (PIABA) petitioned the SEC under section 192 to: (1) establish the American Arbitration Association as an alternative venue for customer arbitrations; (2) change the composition of arbitration panels hearing customer arbitrations; and (3) provide for a rotational system for the selection of arbitrators.
The rule requires the Secretary to refer such petitions to the appropriate division or office for consideration and recommendation to the Commission. From documents obtained through a FOIA request by Les Greenberg, it appears the SEC’s willingness to defer to SROs has no time limit, despite the legal requirement that recommendations are required. After 10 years, SEC staff has not made the required recommendation. The Staff wants what it is doing to be considered “normal,” but how long should the rights of non-SRO sponsors be deferred? A pdf copy of those documents is available at http://www.LGEsquire.com/PIABA Petition 4-403.pdf. One no longer has to wonder why securities arbitration rule reform (to level the playing field) has not occurred.
Greenberg has written extensively on how to improve the securities arbitration process. See hisPetition for Rulemaking (SEC File No. 4-502) (severe problems with NASD arbitration and questionable SEC oversight). The Petition has received favorable media coverage, e.g. 9/1/05, Registered Representative Magazine, “The Real Arbitration Nightmare“; 7/31/05, San Diego Union-Tribune, “Stockbroker losses bring no trials, lots of tribulations“; 7/17/05, Pittsburgh Post-Gazette, “Systems for resolving disputes may need an overhaul.” However, the SEC has failed to act on it as well. We may see international arbitration first.
Martin Lipton of Wachtell, Lipton, Rosen & Katz, addressed the Mergers, Acquisitions, and Split-Ups course at Harvard Law School, on the topic The Future of M&A. Lipton provides a fairly brief but interesting history of M&A and the developments that led to the conception of modern merger defenses, including his development of the poison pill. This was followed by questions from the audience and a very informative discussion. Be ready to set aside a couple of hours. Find links on the Harvard Law School Corporate Governance Blog at Martin Lipton on the Future of Mergers and Acquisitions. The only downside to the video is the clicking of students on their laptops, which sounds like constant rain.
Also of interest on the HLSCG Blog is an ealier post, Some Thoughts for Boards of Directors in 2008, from Lipton. Below are a few highlights:
- A key challenge facing boards of directors has emerged with new urgency: the task of promoting long-term value for shareholders in the face of tremendous pressures to realize short-term stock-market gains.
- Majority voting will become universal. In light of the ISS position and in an effort to avoid shareholder proxy proposals, it is advisable for companies to consider proactively adopting a majority voting bylaw.
- Companies should carefully weigh opposition to shareholder proxy resolutions that can be accommodated without significant difficulty or harm to the company.
- Where the corporation has significant performance or compliance issues, direct contact between institutional shareholders and non-management directors may forestall a proxy initiative by shareholders.
- To the extent that these (“say on pay”) measures are designed to usurp the power of the compensation committee to use its judgment in determining executive compensation, they should be strongly resisted.
- While there is no formal requirement in the NYSE rules or in the Sarbanes-Oxley Act that a company have a lead director, the independent directors should have a leader who is not also the CEO.
- The governance and nominating committee will increasingly come to the fore, as companies must navigate and respond to pressures resulting from majority voting standards, withhold-the-vote campaigns, proposals for shareholder access to company proxy statements, and other governance issues.
- In the current environment for director compensation, restricted stock grants, may be preferable to option grants, since stock grants will align director and shareholder interests more directly and avoid the perception that option grants may encourage directors to support more aggressive risk taking on the part of management to maximize option values.
- Full disclosure of all material related party transactions and full compliance with proxy, periodic reporting and financial footnote disclosure requirements is essential.
- directors must review and understand the registration statements and other disclosure documents that the corporation files with the SEC.
There was 43% increase in class-action lawsuits over last year, according to a joint study by Stanford Law School and Cornerstone Research due for release in January, many due to fallout from the subprime mortgage market. (Securities Class-Action Lawsuits Rise 43%, WSJ, 12/21/07)
With 42% of Bombay Stock exchange companies having family shareholdings exceeding 50%, India’s fortunes are closely linked to the way family businesses conduct themselves. How to deal with this large and important fact apparently became the major topic of discussion at the third CII Corporate Governance Summit in Mumbai. (Do family run corporates live up to investor expectations?, The Economic Times, 12/21/07 and Adopt a minimally prescritive approach towards corporate governance: Mr. Damodaran, SEBI, The Confederation of Indian Industry)
HVS’ 2007 Chief Executive Officer/Chief Financial Officer Compensation Report (Chain Restaurant Edition) profiles detailed compensation information and trends as it pertains to these two positions. Shareholders, activists,and compensation committees should find the report of interest.
Corpocracy and How to Get Our Democracy Back
One book on corporate governance made Ralph Nader’s list of Nine Books That Make a Difference: A Reading List for the Holidays. Here’s his brief review:
Corpocracy by Robert A.G. Monks (Wiley Publishers) summarizes its main theme on the book’s cover-”How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine-and How to Get it Back.” Corporate lawyer, venture capitalist and bold shareholder activist, Monks gives us his inside knowledge about how corporations seized control from any adequate government regulations and especially from their owners, their shareholders, and institutional shareholders like mutual funds and pension trusts. This is a very readable journey through the pits and peaks of corporate greed and power that shows the light at the end of the tunnel.
From a review of the same book, Philip L. Levine writes “Robert A.G. Monks has pulled away the covers, revealing who is in bed with whom, and very clearly articulating how we got to the unbalanced and unhealthy state we find ourselves in.” Nell Minow also sings the book’s praises:
Robert Monks is a true visionary, and this assessment of corporate control of every institution set up to provide oversight or assure accountability will provoke a series of “aha” moments from anyone who has wondered why we permit corporations to determine everything from pollution levels to the outcome of elections. With mastery of the languages of finance, economics, business, politics, culture, and values (in all senses of the word), Monks ties together the Babel of vocabularies with analysis that is utterly clear-eyed and recommendations that are creative but utterly rational.
Sir Adrian Cadbury, most noted for the Cadbury Code, a code of best practice which served as a basis for reform of corporate governance around the world, wrote a lengthily review posted atAmazon.com. (Or course, it wasn’t nearly as long as my rambling review.) Below are a few bits:
The balance of power between boards and CEOs in the United States remains a paradox, given the country’s regulatory history of preventing accretions of power in relation to trusts and to banking. Nowhere else would it be possible to elect a director on a single vote, nowhere else could shareholder votes be invalidated by “ballot stuffing”, nowhere else are shareholders so limited in their ability to raise issues at AGMs, which some directors may not even bother to attend. The prevailing concept of CEO/chairmen selecting their outside board members, thus compromising their independence, strengthens the hand of the CEO at the expense of that of the board.
In spite of setbacks, he believes that this essential accountability can be restored. He sees no cause for new laws, agencies or fiscal measures, though the existing statutory and regulatory framework should be effectively enforced. He argues that it is the major investing institutions that carry the obligation to themselves and to society to restore trust in the capitalistic system… The obligation, however, of the great foundations, among the investing institutions, to play their part in bringing about reform goes beyond the calculus of financial gain. It lies at the heart of their creation. They directly assist their chosen causes, but that is within the wider context of a market system which provides them with the ability to do this. They have a responsibility to maintain the means by which they fulfil the aims for which they were founded.
I was lucky enough to get a pre-print, which I read in a couple of sittings within a few days of its arrival. Corpocracy: How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine — And How to Get It Back both delights and informs in a way only Bob Monks can, because he has been at the center of so many of the important battles to make corporations more accountable. His lifework has been delineating the underlying dynamics of corporate power to devise a system that combines wealth creation with societal interest. No one else can write as well about “How CEOs and the Business Roundtable Hijacked the World’s Greatest Wealth Machine” because no one else has been as engaged as Bob Monks from so many angles.
His insights into pivotal points of view and decisions are enlightening. For example, he points to the role of Douglas Ginsburg, a leader in the field of law and economics, in instilling a belief that it is okay for corporations to violate environmental laws, as long as they account for possible sanctions in their budget. Under Ginsburg’s view, according to Monks, people aren’t motivated by moral or social obligation but by simple desire and cost-benefit analysis. Then there is Bob analysis of Lewis Powell’s court decisions. His finding of a constitutionally protected right to “corporate speech” provided the judicial framework for management “to commit untold corporate resources to influence public opinion and public votes – resources so huge and unmatchable that individual contributions are now all but meaningless in state and nationals elections.” And, of course, the Business Roundtable hold a special place in Bob’s heart. The “BRT has come to function in significant part as an agent for the CEOs…who have established themselves as a new and separate class in the governance of American corporations, answerable to virtually no one, accountable only to themselves.”
Monks appears to be a believer in the forces of markets but regulated to ensure a level playing field. Without that, the overall effect has been to turn the stock market into “a gigantic, round-the-clock casino that runs the biggest game the world has ever seen.” Market values and goals have become national goals. Corpocracy is another top-notch effort from the individual who continues to have greater lasting impact on the field than anyone else. Still, I would have placed a different emphasis in the “How to Get it Back” portion of the book..
Monks may be A Traitor to His Class, but he is also a gentleman, reluctant to force change. Through many books, Monks repeated what became almost a mantra that “no new laws” are necessary. I don’t recall seeing that in Corpocracy, although Cadbury repeats the phrase in his review. I think Bob is weakening on this point. However, he still seems too confident in the power of persuading elite leaders of the need for change. I’m with John Edwards, when he said recently, “It is unrealistic to think that you can sit at a table with drug companies, insurance companies and oil companies and they are going to negotiate their power away.”
When Les Greenberg, of the Committee of Concerned Shareholders, and I started preparing ourpetition on proxy access in July of 2002, I remember e-mailing Bob, asking if he would sign on with us. It was late in the week when Bob e-mailed back that he had a meeting scheduled with then SEC chairman Harvey Pitt on Monday. If we could get him the proposal over the weekend, he might be able to discuss it at his meeting. We did. My impression is that Bob’s primary focus was on Pitt’s 2/12/02 response to a letter Ram Trust Services had sent 13 years earlier where Pitt clarified the SEC’s stance that proxy voting is in fact an investment adviser’s fiduciary responsibility, generally governed by state law. I think Monks was asking Pitt for regulations to enforce that duty through required disclosures. Pitt was apparently won over by Monks, Amy Domini, and others.
My little story has two points. First, most of us don’t routinely meet with SEC chairmen. Bob’s history of involvement in corporate governance has been as one member of the elite meeting with other members of the elite. Like the fictional character, Forrest Gump, Monks met with many historical figures and has influenced important development. Unlike Gump, Monks has done so with candid intelligence and a deep awareness of the significance of his actions. Second, like the earlier Avon letter, the Ram Trust letter and follow-up eventually led to regulations. Monks may espouse “no new laws or regulations are needed” but several of his most important actions have led down that path.
Perhaps Monks is correct, as Cadbury points out in his review, that foundations have a special obligation to reform the market system which sustains their existence. That’s where Monks places much of his emphasis in the “How to Get it Back” portion of the book. In his flights of fantasy, Bob dreams of a president who will use his/her powers to end conflicts of interest and compel good governance in contractors. “The framework is in place. The laws exist,” he insists.
Yet, two pages later he notes the need for legal changes. He reminds us the First Amendment “was not meant to protect the Church from government intrusion, but rather to protect the government… We need similar protection today from the dominant institution of our own time, the corporation.” He defines corpocracy as “government by the corporations; that form of government in which the sovereign power resides in corporations, and is exercised either directly by them or by elected and appointed officials acting on their behalf.” I can’t help but believe that the tide won’t turn until the rabble of individual investors demands change. Individual investors have a vote in electing government representatives — the sovereign power; institutional investors don’t.
Lucian Bebchuk and Zvika Neeman, in a recent paper entitled Investor Protection and Interest Group Politics, also proceed on the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.” Yet, their own model contains the following hypotheses.
- Investor protection will be higher when the fraction of the electorate that directly or indirectly owns shares in public companies is large.
- Investor protection will be higher when individuals investing (directly or indirectly) in public companies are more financially educated and when the media is more active.
- Investor protection will be higher following scandals or crashes that make the problems of insider opportunism more salient.
Therefore, educated individual investors are critical if we have any hope of electing public officials who will protect politics from corporate influence and who will revise the legal framework so that it better combines wealth creation with societal interest. Roger Headrick’s “win” last year at CVS/Caremark, based on a margin decided by broker votes, lead to additional calls for the SEC to approve NYSE’s proposal to bar brokers from casting uninstructed investor votes in board elections.
According to Broadridge Financial, broker votes on average account for about 19% of the votes cast at US corporate meetings. However, the elimination of broker voting, if the SEC ever gets around to approving it, just takes 60-70% of retail shareowners out of the picture. It doesn’t address the more fundamental issues. How can we get shareowners to think of themselves as long-term owners rather than as betters at what Bob calls the biggest casino the world has ever seen? If they know they are owners, what tools can we make available so that voting is not only easier but also more intelligent? There are dozens of possible reforms. Here are seven worthy of further attention:
1. Proxy Assignment
Drawing from the other six, this may be the easiest to implement with a relatively large possible impact. That’s why I’m working on it. We need system(s) or perhaps just instructions, so that lazy but somewhat conscientious shareowners can assign their votes to others based on reputation, rather than tossing their proxies in the shredder. I surveyed brokers and determined that making such assignments will not be a problem at most. Now I simply need to find an institution or two willing to take the proxies. Of course there are lots of technical and legal details but they don’t appear insurmountable.
That’s the working name for a project Andy Eggers started. Andy is working on a PhD in political science at Harvard. The project is now housed within a nonprofit, Proxy Democracy, which Andy also founded. Here’s part of what he has posted as a brief description:
Before each voting deadline, we find out how respected institutional investors with a variety of voting philosophies have chosen to vote their shares. We’ll help you figure out which funds have similar voting philosophies to yours. When a fund you agree with makes a decision on a stock you own, we’ll send you a free alert. You’ll have a week or two to look at their decisions and cast your own ballot.
The system appears to depend on funds posting how they voted or intend to vote prior to the shareholder’s meeting…with Andy’s software crawling the internet to gather the information. This may work well in high profile cases. However, we’ll need more institutions to routinely post votes in advance.
Glyn Holton outlined how a “proxy exchange” could allow shareowners to transfer voting rights among themselves or to trusted institutions to increase voter effectiveness (see Investor Suffrage Movement). His proposal lays out a fairly complex system involving four classes of participants:
- Assigners: institutions such as mutual funds, brokerages, and pension plans that legally assign proxy rights to the exchange;
- Beneficiaries: the beneficial stock owners-primarily individual investors-on whose behalf those rights are assigned to the exchange;
- Aggregators: anyone willing to accept rights from beneficiaries or other aggregators through the exchange;
- Voters: parties who ultimately make voting decisions.
4. A US Shareholder’s Association
Shareholders in Europe “are gaining the upper hand, nudging up share prices and sometimes forcing out an executive or forcing the sale of the company. Most recently, the Children’s Investment Fund turned dissatisfaction into deal-making at ABN Amro, leading to rival bids for the bank, the largest in the Netherlands, reports the New York Times. (Boards Feel the Heat as Investor Activists Speak Up, 5/23/07)
The Times goes on to discuss the costs of such activist campaigns that appeal to shareholders through newspaper ads. Antonio Borges, chairman of the European Corporate Governance Institute and a vice chairman at Goldman Sachs in London, says sacrifices for short-term gain would remain exceptions because short-term investors could only sell their shares at a profit if they find new investors who believe in the long-term potential of the revamped company.
In reading the article, what struck me is the growing assemblage of activist funds and shareholder associations in Europe. Where is the US equivalent of the VEB (Vereniging van Effectenbezitters or Dutch Investors’ Association) or the UK Shareholders’ Association? In the US, BetterInvesting is the largest nonprofit organization dedicated to investment education.
Although their goals include helping their members to “learn, share, grow and more fully experience the rewards of investing success,” I find no mention on their site equivalent to the UK Shareholders’ Association’s vow to “protect your rights as a shareholder in public companies and promote improved standards of corporate governance.” It might make for more interesting investment clubs in the US if members acted as owners, instead of just stock pickers at the casino.
The US hasn’t had an effective advocate for retail shareholders since United Shareholders Association. Deon Strickland , Kenneth Wiles and Marc Zenner documented that USA’s 53 negotiated agreements are associated with a mean abnormal return of 0.9 percent, a $54 million shareholder wealth gain. Although Peter Kinder, President, KLD Research & Analytics, Inc., tells me USA “was a significant factor in turning ‘good governance’ into a checklist of factors that made easy or easier ‘maximizing shareholder value’, i.e., flipping or extorting the corporation” — something we obviously have to guard against in any new iteration. I’ve repeatedly contacted the National Association of Investors Corporation (NAIC) but they do not appear interested in governance issues. As I recall, USA was originally funded by a shareholder’s lawsuit. Maybe we need another.
Richard Macary’s AVI Shareholder Advocacy Trust presents an innovative mechanism to combine small shareowners to advocate changes in corporate governance. The Trust sets out its goals, makes its case to shareholders, and then is dependent on contributions. The Trust depends on a monitoring/activist agent who is so compelling that shareholders freely pony up contributions to support work that might pay off. Free rider issues abound.
The Trust is not a “for profit” vehicle nor can any contributor expect to get any kind of return on their contribution. In a way, it’s similar to contributing to a campaign or political action committee where you agree with their platform or want to see a specific candidate elected, so you contribute. Your only upside in that scenario is that if your candidate wins, you believe it will be good for you or your position, be it lower taxes, a cleaner environment, less regulation, etc. The trust is also set up to compensate the managing trustee, who is essentially the coordinator, director and general contractor of the effort. The trustee is very much like a general contractor in that he, she or they will essentially hire and direct all of the professional and advisors needed to execute upon the trust’s goals.
6. Collectively Paid Proxy Research
Because of the expense and free rider issues, the only reason most institutions vote are the federal regulations Bob Monks helped to create that require pension and mutual funds to vote stock in their beneficiaries’ interests. Of course another of Bob’s important contributions was founding Institutional Shareholder Services, increasing the research done on proxy issues and its availability. The biggest obstacle to voting now is not the time it takes to vote but the research needed to make an informed vote. Most people realize that just going along with the board of directors for lack of an easy alternative is not a meaningful vote. But understanding the proxy issues requires too much time and expertise, especially for individuals.
On that front, the Corporate Monitoring Project and VoterMedia.org, both initiated by Mark Latham, have shown the way to empower voters with better information. Latham’s system allows shareholders to allocate collective corporate funds to hire a monitoring firm to advise them on the issues and how to vote. Latham’s system would eliminated free rider issues and creates an incentive to pay for much more research.
“Comprehensive analyses of proxy issues and complete vote recommendations for more than 10,000 U.S. companies are delivered by ISS’s seasoned U.S. research team consisting of more than 20 analysts.” We can thus estimate about four hours of analysis per proxy, costing perhaps $2000 including ISS infrastructure costs. Considering the amount of money we shareowners pay CEOs and boards of directors who are elected and compensated based on our voting, and the amount of capital at stake in the typical company they manage for us, we should be spending more than $2000 to guide our voting.
Mark proposes use of shareowner resolutions to choose an advisor from among competitors. Any proxy advisor could offer its services, specify its fee, and have its name and fee appear in the ballot. The winner would give proxy advice to all shareowners in that company for the coming year. The advice would be published on a website and in the next year’s proxy. The company would pay the specified fee to that advisor. The voting could even be designed to hire more than one advisor, with a separate yes/no vote on each candidate. Advisor name brand reputation can make these voting decisions feasible without another level of paid voting advice. (see Proxy Voting Brand Competition, Journal of Investment Management, Vol. 5, No. 1, (2007).
7. Provide Full Public Disclosure of Votes as Tabulated
This is more of a technical fix, rather than a monumental reform that will bring in more individual investors but I thought I’d just stick it in here at the end of “how to’s” Bob might have discussed. Yair Listokin’s Management Always Wins the Close Ones highlights the need for open ballot counting.
Informational asymmetries between management and potential opponents should be mitigated by allowing anyone to obtain a real-time update of the voting. The status quo allows management to obtain frequent vote updates, while shareholder opponents of management often have no comparable knowledge. This allows management to win votes when underlying shareholder preferences are against a proposal because management can tailor its expenditures as needed; if management sees that it is well behind, it can undertake an extraordinary effort, while its opponents have no obvious way of responding. If all parties had the same knowledge about the likely outcome of the vote, then managerial opponents could respond and potentially neutralize management’s efforts to push the vote in a particular direction.
Obviously, anything we can do to make corporate elections less rigged will also help to bring shareowners out to vote. Why bother if the fix is in? My hope is that once shareowners get used to voting in their best interests in corporate elections, that behavior will also carry over to civic elections. Activists in either social institution will likely carry over to the other.
Kerrie Waring Joins ICGN
The International Corporate Governance Network (ICGN) announced the appointment Kerrie Waring to a new senior executive position of Chief Operating Officer. Waring joins the ICGN from the Institute of Chartered Accountants, England & Wales, where she has been Corporate Governance Manager. The COO position has been created following a rapid growth in ICGN’s membership which now exceeds 500 in 40 countries worldwide. ICGN members include institutional investors responsible for global assets of US$15 trillion.
Anne Simpson, ICGN’s Executive Director commented “ICGN has grown rapidly in recent years and the creation of the COO position will enable us to meet the expectations of our increased membership. We’re delighted that Kerrie will be joining the team given her strong track record in business and financial management within the global governance industry. She has tremendous energy and initiative both of which will be a great asset to the organization.”
ICGN Chairman, Peter Montagnon “This is a key appointment for ICGN given the organisation’s position of growing influence as the leading international voice for governance. As the range and scope of our work increases, the COO role will be critical. Kerrie brings the ideal combination of experience with membership bodies, with an impressive range of skills from the international arena.”
Waring comes to the ICGN with a wide range of professional experience in corporate governance. At the ICAEW she led their US-UK cross border initiative under the “Dialogue in Corporate Governance” project. In her prior role as International Professional Development Manager at the Institute of Directors she led the development of several initiatives including the Global Director Development Circle linking board training institutions in the US, UK, Australia, New Zealand and Canada.
She was co-author and editor of the Handbook of International Corporate Governance: A Country by Country Guide and co-author of the World Bank-OECD’s GCGF global director training toolkit. Waring also wrote a series of papers for the ICAEW under the “Beyond the Myth of AngloAmerican Corporate Governance” initiative.
Waring is a professionally qualified Chartered Company Secretary, having won the JC Mitchell Prize for best paper in the corporate governance section. She has an honours degree in International Business and Japanese, and speaks Japanese fluently. She holds both UK and New Zealand passports.
What the SEC Didn’t Do and Interest Group Politics
Excellent commentary by Ted Allen on the Risk & Governance Blog. Instead of simply stripping shareowners of the right to proxy access, the SEC could have
- adopted a rule of limited duration (e.g., that would apply to corporate meetings until Dec. 31, 2008, or Dec. 31, 2009) that would permit investors to file only non-binding access proposals.
- adopted a rule to address its disclosure concerns without barring access proposals completely by amending Rule 14a-12(c) to clarify that investors who make director nominations pursuant to an access bylaw must also file a Schedule 14A detailing their ownership, background, and solicitation efforts.
Additionally, the SEC could have sought public comment on the New York Stock Exchange’s proposal to bar the counting of uninstructed broker votes in uncontested board elections. (Commentary: A Missed Opportunity on Proxy Access, 12/19/07)
But they didn’t. Are they protecting investors, as the law mandates, or protecting the vested interests that brought them to power or will reward them after service at the SEC? It would make an interesting case study for the framework outlined by Lucian Bebchuk and Zvika Neeman in a paper entitled Investor Protection and Interest Group Politics. (see also the Harvard Law School Corporate Governance Blog)
That paper highlights the fact that “the legal rules themselves are partly a product of an agency problem, as insiders might use direct corporate lobbying efforts in ways that serve their own interests.” Of course, institutional investors can’t influence regulatory activities using such corporate funds.
One flaw in the paper, or at least I certainly hope it is a flaw, is the assumption “that individual investors, who invest in publicly traded firms either directly or indirectly through institutional investors, are too dispersed to become part of an effective organized interest group with respect to investor protection.”
Apparently, that is what many would like us to believe. As I recall, the only representative of individual investors invited by the SEC to roundtable discussions on proxy access was Evelyn Y. Davis, who kept insisting she was “prettier” than Nell Minow. Yet, groups of individual investors in countries outside the US have been critical in achieving reforms and protections.
On a State Department sponsored visit to Korea to discuss the need for corporate governance reforms, I remember visiting representatives of People’s Solidarity for Participatory Democracy (PSPD), specifically their Participatory Economy Committee. The PSPD uses shareholder proposals, civil and criminal lawsuits and lobbying to improve corporate governance. I’m sure many other countries have similar organizations.
Some believe, the United Shareholders Association, a now defunct Washington group financed by Texas oilman T. Boone Pickens, played a largely positive role in the 1980s here in the United States and might have accomplished much more, had it continued. The authors should revise their model to include such a possibility, especially given the key role that individual investors play in several of their predictions (hypotheses).
- Prediction 5: Investor protection will be higher when the fraction of the electorate that directly or indirectly owns shares in public companies is large.
- Prediction 8: Investor protection will be higher when individuals investing (directly or indirectly) in public companies are more financially educated and when the media is more active.
- Prediction 9: Investor protection will be higher following scandals or crashes that make the problems of insider opportunism more salient.
Clearly individual investors can have an important role to play in establishing investor protections, even if they were largely ignored in the SEC’s recent deliberations regarding proxy access.
Damon Silvers on Corporate Watchdog Radio
Corporate Watchdog Radio co-hosts Francesca Rheannon and Bill Baue attended the Summit on the Future of the Corporation in mid-November in Boston, a gathering to consider a fundamental re-design to integrate sustainability into the corporate structure. There, Rheannon interviewed two prominent thought-leaders: Arie de Geus, a former Shell executive and orignator of the “Learning Organization” concept, and Damon Silvers, General Counsel for the AFL-CIO. Rheannon speaks briefly with de Geus about human capital in business. Then she talks more extensively with Silvers about the labor movement’s role in creating a more sustainable business model. Stream or download via the web. Better yet, subscribe to the podcast.
Corporate Governance Index in Shanghai
Shanghai Stock Exchange (SSE) and China Securities Index Co., Ltd. (CSI) co-announced that the SSE Corporate Governance Index will be officially published on the first trading day of 2008. (Shanghai bourse to launch Corporate Governance Index in 2008, Antara News, 12/19/07; Shanghai Stock Exchange To Improve Corporate Governance Through New Systems, mondovisione)
The corporate governance index was, apparently, established via voluntary application. In addition to self-evaluation, threre was an expert review. As earlier reported, to qualify, listed firms must have a listing history of no less than 12 months on the SSE or on other stock exchanges, and meet relevant corporate governance requirements. Those under ST or *ST status are barred from consideration. (SSE corporate governance index in the pipeline, Market Avenue)
The average length of reports from the largest 350 London-listed companies was nearly 140 pages, twice as long as ten years ago, according to a survey by Deloitte. Ironically, the consultancy blames the increase on additional sections extolling corporate social responsibility. The Economist points to the “dense legalese. (Heavy Reading, 12/18/07)
Securities Investors’ Association, Singapore (SIAS) highlighted in New Delhi’s Business Standard (India needs the right investment culture, 12/19/07) SIAS has been helping citizens with financial planning, spreading awareness about investors’ rights and fighting for corporate transparency. Though we represent small investors, world-class institutions like Standard & Poors’, PricewaterhouseCoopers, Singapore Stock Exchange, the Business Times and the Straits Times among others have joined hands with SIAS to grade and award public listed companies for their best corporate governance practices.
To prepare directors for these challenges, the Wharton School of the University of Pennsylvania has partnered with Spencer Stuart, one of the world’s leading executive search consulting firms, to jointly offer Corporate Governance Essentials for New Directors. The three-day program will be offered at Wharton’s Philadelphia campus on March 17-19, 2008. Preceding the program, on March 16, participants may attend an optional “Immersion Day” — a full-day session outlining the foundations of finance and accounting as a refresher from a broad perspective for all board members.
The Corporate Library released CEO Pay 2007, covering over 3,000 US corporations, based on the latest available data from proxies filed through October 25, 2007.
‘The U.S. Department of Labor plans to start fining defined contribution plan administrators up to $1,000 a day if they fail to disclose certain documents to participants. (Plans to be fined on disclosure issues, InvestmentNews, 12/18/07)
Workforce Planning Database
The Conference Board has launched an Employer-Practices Locator, a Web-based database that includes specific actions employers have taken to address challenges presented by the mature workforce. “Employer-Practices Locator aims to help individuals, companies, and institutions who are actively addressing the challenges of the maturing workforce by giving them a way to find the latest ideas and practices in this rapidly changing field.” Thanks to plansponsor.com for bringing to my attention. Although far from complete, the framework is promising if the Conference Board continues buildout.
Corporate Governance Survey
Sherman & Sterling’s fifth annual Corporate Governance Survey of the 100 largest US public companies finds:
- Intense shareholder pressure focused on the voting standards in director elections. Fifty-six of the 100 companies surveyed now require directors to be elected by a majority of the votes cast rather than a plurality.
- The number of companies with “poison pills” and/or classified boards decrease to 17 compared to 33 2004. Only 33 of the companies had classified boards, down from 54 in 2004.
- No discernible standard with respect to disclosure of related person transactions has emerged but 71% disclosed at least one related person transaction.
- 22% separate individuals chairman and CEO but only 5% have adopted policies requiring separation.
- Requiring term limits for directors rose steadily between 2004 and 2006 but dropped this year from 71 to 66.
New this year is a compensation survey, which found:
- Many companies failed to provide “analysis” in the Compensation Discussion and Analysis disclosure about the “how” and “why” of their compensation policies.
- Only 45% disclosed the specific targets for the performance metrics used to determine the annual bonuses paid to their Named Executive Officers (NEOs). Of the 55% failing to disclose, only % explicitly noted the omission was due to confidentiality concerns.
Evidence of Corporate Governance Failure
William Wright, Editor of Financial News, says “the problem is that too many people understand corporate governance in its narrowest definition as a set of rules, instead of in its broader sense as a set of concepts to overcome the inevitable agency cost that comes with the separation of ownership from management.”
The box-ticking approach of Sarbanes-Oxley fails and Wright cites 3 major pieces of evidence:
- We’ve done nothing to address the cult of the Napoleonic leader and the failure of boards to challenge the executive management.
- The dramatic rise of hedge funds and private equity firms, which act more as owners of companies instead of just holders of their securities.
- Institutional shareholders fail to engage with management, outsourcing this engagement to proxy voting companies.
The height of failure, according to Wright, can be seen in the IPO for Blackstone. Their prospectus warned investors they would “have limited ability to influence decisions regarding our business.” Shareholders piled in; shares surged 18%; and have since plunged more than 40%. (Governing excess in financial markets, 12/17/07) However, blaming shareowners may be blaming the victim. Until shareowners have the right to replace directors with those of their own choosing, their tools may be too limited to get the job done.
Jones to Take Seat on CalPERS Board
Henry Jones, retired Chief Financial Officer (CFO) for the nation’s second largest school district (Los Angeles Unified), has apparently won his bid to represent retirees on the $259 billion California Public Employees Retirement System (CalPERS) Board of Administration. According to the preliminary count, of the 124,112 votes cast, Jones received 64,116, for a 4,120 vote margin victory.
Jones managed a $7 billion budget, oversaw the District’s investment practices and also managed the implementation of CalPERS and CalSTRS reporting requirements for more than 90,000 employees. Jones’ extensive experience in advising on pension fund issues includes having been twice-elected as Treasurer of the Council of Institutional Investors, a shareholder rights organization comprised of more than 100 public, labor and corporate pension funds with assets then totaling more than $1 trillion.
I said, he may well be the most highly qualified candidate in history to ever run for the CalPERS Board. Many others were similar in their praise. Jones received endorsement from a wide variety of constituents, including at least 18 employee/retiree organizations and four current board members.
Jones will replace Robert F. Carlson, who is retiring in January after serving 37 years on the CalPERS Board. Jones will be sworn into office in January.
Another Strike Against Cox’s SEC
Gretchen Morgenson discusses a report by the Government Accountability Office, “Opportunities Exist to Improve Oversight of Self-Regulatory Organizations,” to be released 12/17/07, which finds the SEC fails to make good use of internal audits conducted by the nation’s stock and options exchanges. The GAO had the same finding three years ago.
Additionally, “when referrals come in to the S.E.C. from the exchanges, they enter a digital netherworld where investigators can search by stock ticker, date of the unusual activity and type of trading, but not by the name of someone or some firm who may be under scrutiny.” “…Call it one more data point for those who increasingly wonder whose side the S.E.C. is on.” (Quick, Call Tech Support for the S.E.C., NYTimes, 12/16/07)
Pretty unbelievable, eh? According to a post by John F. Olson (Partner, Gibson, Dunn & Crutcher LLP and Visiting Professor, Georgetown Law Center) on the Harvard Law School’s Corporate Governance Blog, Chairman Cox’s Statement on Proxy Access (12/13/07), the real culprit for the SEC overturning proxy access is Roel Campos, who denied Cox the ability to garner a 3-2 vote by leaving the Commission.
I posted two responses. The first, addressed Cox’s misleading argument concerning the impact of Long Island Care on AFSCME v AIG.
The second noted, The truth of the matter is that Chairman Cox refused to make changes to the draft rule (around the 5% and the disclosure provisions) that would have made it palatable to investors in July — the very changes he then said at the November open meeting he wanted to make.
Roel Campos had real family reasons for leaving, and felt there was no point in putting it off just to vote “no” on an unacceptable proposal.
The reality is that Cox always had the power to do the right thing — to put out a good rule with the support of Roel Campos and Annette Nazareth, or to do nothing once Campos had left. These choices were Cox’s to make. To blame Campos is incredulous.
Former SEC official, Lynn E. Turner, also weighed in, noting that while Cox “speaks of favoring access for investors, his actions speak much louder than any spoken words, and show that he truly opposes shareholders receiving equal rights and access with management to the proxy.” (Heroes and Villains, 12/17/07)
I’ve patched the Seach Hints page, so now you can more easily limit your search to some of the best corporate governance sites, including CorpGov.net. (That’s how I find obscure archived news on my owh site.) The very small box at the bottom of the page is the newest feature and searches on it include two of my personal favorites, TheCorporateCounsel.net blog and TheRacetotheBottom.org. within the group. Yes, I know, you can’t even see what you’ve typed in the small box… but it works.
InvestmentNews ran my letter to the editor under the title, Sticking head in sand won’t solve climate change. The paper’s editorial said the SEC should not require disclosure of business risks due to climate change, “since there are so many unknowns.”
Russia is a step closer to joining the Paris-based Organization for Economic Cooperation and Development (OECD), since Poland dropped its objection to their entry. The Economist asks if Russia will raise its standards to the required levels of transparency and good government. If it fails to do so, will the OECD will turn a blind eye, or will the accession talks fizzle out? If Russia only pretends reforms, “the developed world will be without its best watchdog on issues of global importance, including money laundering, bribery, corporate governance and reform of bureaucracy.” (Club rules, 12/13/07)
In a case that tested the bounds of auditor liability, a jury in Virginia found accounting firm Goodman & Company guilty of aiding and abetting a client company that allegedly breached its fiduciary responsibilities. Yet despite the guilty verdict, the jury did not award damages to the plaintiff, hedge fund Costa Brava Partners. (Jury Finds Accounting Firm Guilty, CFO.com, 12/14/07)
Chuck Jaffe offers good advice on the next proxy access go-round: Allow access to those “who have been shareholders of record for along time, say five or 10 years and up,” as well as to those with a 5% stake. “Meanwhile, investors who want to be activist shareholders should write their favorite corporate executives, asking them to allow shareholder access; corporations can allow access on their own without an SEC rule requiring it. And those same investors should watch these proceedings and make sure the next proposals from the SEC get many more comment letters.” (A proxy for elitism, MarketWatch, 12/13/07) How we can get more than 34,000 letters is hard to imagine… but we’ll need to give it our best shot.
In Non-Access, the SEC, and the Restrictions on Shareholder Rights: An Arbitrary Exercise of Rulemaking, J. Robert Brown presents an important conflict beweeen the adopting release and Cox’s opening statement. “To the extent an access proposal is submitted and excluded in the 2008 proxy season and litigation results, plaintiffs will likely raise the argument and there is a substantial likelihood that they will prevail.”
A resolution from the Indiana Laborers’ Pension Fund submitted to Beazer asks the board to make a report to shareholders within 90 days of the annual meeting detailing how many of the company’s mortgages are subprime, as well as the regions most reliant on subprime mortgages and the firm’s expectations of mortgage defaults. The proposal also asks for the identity of the purchasers buying mortgage loans on the secondary market. Beazer sought to exclude the proposal but the SEC rejected their “no action” request. Exect a flood of simlar resolutions at other builders, mortgage companies, and financial firms. (Agency Rejects Beazer’s Request to Omit Mortgage Report Proposal, RiskMetrics Group, 12/14/07)
New York Common to Improve Ethics
New York Governor Eliot Spitzer, State Comptroller Thomas DiNapoli and Insurance Superintendent Eric Dinallo proposed a new set of regulations for the $154.5 billion New York State Common Retirement Fund, which will improve efficiency, protect the pensions of one million government employees, and help reduce potential conflicts of interests.
According to the press release, “the new regulations will create a new audit committee, mandate an actuarial committee to review actuarial standards, establish clear standards for evaluating investment performance and risk, and strengthen the investment advisory committee.”
In addition, under the terms of the proposed regulations the Comptroller will:
- establish conflict of interest disclosure and reporting standards for the Comptroller, members of all committees, and all outside consultants and investment managers;
- establish an independent audit committee with members not affiliated with the comptroller or the Fund to review and report to the Comptroller on the internal and external audits of the Fund;
- post the Fund’s investment policy statement on the web, including investment objectives, guidelines, limits and standards for evaluating investment performance and risk;
- develop transparent procurement rules;
- establish an actuarial committee with unaffiliated members to review actuarial decisions and standards and the financial soundness of the retirement system (Note: such a committee already exists, though it is not required by law or regulation); and
- post all standards, policies and disclosures on his office’s public website.
Although it does not appear as strong as regulations recently set by CalSTRS, the proposed rules would certainly be a step in the right direction. Can CalPERS and other large funds be far behind?
Some Foundations Get Active
Nice overview in the January/February 2008 issue of Corporate Board Member, Foundations Join the Ranks of Shareholder Activists.
Mentioned are the two foundation members of CII: the Lens Foundation for Corporate Excellence, founded by veteran shareholder activist Robert A. G. Monks specifically to promote corporate responsibility, and the Nathan Cummings Foundation, which is funded from the estate of the founder of the company now known as Sara Lee Corp. and has some $575 million in assets.
The Noyes Foundation is cited as using the whole panoply of shareholder-activist tactics. During the 2007 proxy season, it voted in support of dissidents on each of the 31 shareholder resolutions filed at 18 targeted companies on declassifying boards, providing more detailed reports on political and charitable contributions, separating the jobs of chairman and CEO, limiting executive pay, etc.
In late 2002, members of the Rockefeller family asked Rockefeller Philanthropy Advisors to “figure out how foundations could influence corporations on social issues,” says the firm’s Doug Bauer. Looking around for someone to help him out with the assignment, he discovered the As You Sow Foundation in San Francisco, a group that describes itself as “dedicated to ensuring that corporations and other institutions act responsibly and in the long-term best interests of the environment and the human condition.” Together they created Unlocking the Power of the Proxy, a 64-page how-to guide for would-be foundation trustees and staff members. Bauer says that about 11,500 copies have been distributed since then, either in printed form or by downloading. (see also Gates Foundation Investments At Odds With Mission, Corpgov.net, January 2007) When they update the guide, we’ll let you know.
In the late 1990s, after a decade of stagnation, Japan began to embrace more of an American corporate governance model. Then the dotcom crash and the Enron scandal caused a loss of lustre.
Support for reform began to fade as the the Japanese economy started looking better. An article inThe Economist, “Going hybrid,” notes that Japan is having a debate about shareholder versus stakeholder capitalism. (11/29/07)
SEBI Chair Questions Board Independence
SEBI chairman M. Damodaran suggested raising the bar for representatives on company boards. Addressing a CII conference on corporate governance in Mumbai, India he questioned the role of government nominees on the board of state-owned companies.
“Do people, who represent a certain constituent, continue to represent them when they get into the boardroom? Sometimes it appears that they seem to forget the source from which they have come from,” said the SEBI chief. He also suggested a cap on the number of boards a person can be a director. (SEBI chief questions role of govt nominees on boards, The Economic Times, 12/13/07)
More importantly, will compliance with the 50% nonexecutive directors mandate be again be postponed? Additionally, like the USA, India may need to look at what it takes to ensure directors are really independent.
A new Fitch Ratings report, Evaluating Corporate Governance, emphasizes the following five overarching categories: Board Effectiveness, Board Independence, Management Compensation, Related Party Transactions, Integrity of Accounting and Audit.
“Credit investors need to be aware that while sound governance generally serves the interests of all stakeholders, there can be discrepancies between the interests of bond and equity holders particularly around questions of promoting short-term performance over long-term stability,” according to Dina Maher of Fitch’s Credit Policy Group. For example, stock options that vest in the medium term, rather than quickly, give management incentives that are more in line with creditors’ interests.
Regarding board independence, the report implicitly acknowledges the weakness of current standards and notes, “The purpose of assessing independence is to uncover trends or patterns that might suggest a more pervasive campaign to stock the board with individuals who are beholden to management and unlikely to question the decisions management makes concerning the company. In this context, it may be important to identify and evaluate board interlocking relationships, where a director may sit on boards of several companies that do business with each other. These relationships could undermine the spirit of independence, and thus should be adequately disclosed and reviewed.”
The report also includes an important discussion of majority-owned companies, where a small circle of individuals own or control the company and often also hold key executive and managerial positions.
“Best” Corporate Citizens May Include Worst
CRO released Part 2 of its 10 Best Corporate Citizens By Industry 2007. The latest rates the citizenship disclosures, policies and performance of large-cap, public companies in the Auto & Vehicles; Paper; Technology Hardware; Technology Software; Transport; and Travel & Lodging industries. Part 1 rated Chemical, Energy, Financial, Media and Utilities industries.
Many question how can companies like Monsanto come to the top of the list, while at the same time they are continuing destructive practices GMO’s, terminator seeds, etc. Harrington Investments, for example, introduced a binding amendment to Monsanto Corporation’s corporate bylaws that could bar corporate indemnification of directors who fail to adequately oversee corporate activities that cause “harm to the natural environment, public health, or human rights.”
“We chose Monsanto as our target for this new approach, because we view this company as facing significant legal and reputational liabilities that might have been prevented with better board oversight. These include allegations of selling potentially dangerous products abroad, bribing foreign government officials, and releasing genetically engineered products that have not been proven safe for human consumption or the natural environment. Such activities are bad for our company’s reputation, and could lead to substantial liabilities,” said Harrington. The press release goes on to list several lawsuits and settlements. (Shareholder Proposal Revisits Fiduciary Duty at Agribusiness Goliath, Monsanto, CSRwire, 12/11/07)
Light Sentences for Corporate Crime
Sixty-one percent of defendants sentenced in the Bush administration’s crackdown on corporate fraud spent no more than two years in jail. In the past five years, 28% of those sentenced got no prison time and 6% received 10 years or more, according to a review of 1,236 white-collar convictions. Former WorldCom Chief Executive Officer Bernard Ebbers is serving 25 years and ex-Enron CEO Jeffrey Skilling 24.
“Sentencing white-collar defendants to two years or less does not send a strong deterrent message,” says Joshua Hochberg, who ran the U.S. Justice Department’s criminal fraud section from 1998 to 2005. “On the other hand, convicting a lot of defendants sends the message that you will be caught and there are consequences.” (Bush Fraud Probes Jail Corporate Criminals Less Than Two Years, 12/13/07)
WSJ Editorial Countered
The WSJ published two letters to the editor in response to their editorial “Union Proxies,” which applauded the SEC’s decision to deny shareowners proxy access rights. One was from Glenn Cooper of London. I suspect this is the same Glenn Cooper who led a campaign by activist shareholder Efficient Capital Structures calling on Vodafone to spin off its minority stake in Verizon Wireless. Cooper countered the WSJ with, “Experience from the U.K., with one of the world’s most shareholder-friendly corporate governance regimes, demonstrates that shareholders will engage with shareholder-initiated actions only to the extent they are serious and further shareholder value.”
The second letter from Richard L. Trumka, AFL-CIO Secretary Treasurer, pointed out the “sole support” cited for WSJ’s view was “an unpublished, non-peer-reviewed graduate student paper.” Countering the findings of that paper, Trumka notes, “AFL-CIO are determined by independent proxy voting consultants who vote the proxies of AFL-CIO and non-AFL-CIO pension funds the same way. They do not have access to systematic data on whether those companies’ employees are represented by unions, and if so, by which union.”
I’m sure WSJ received a great many letters protesting the editorial. Mine was as follows:
Cox didn’t vote to maintain a status quo “unchallenged for 30 years.” From 1976 to 1990, the SEC allowed access proposals. Back then, even the Business Roundtable wrote that proxy access would simply “enable shareholders to exercise rights acknowledged to exist under state law.”
In 1990, when shareholder proposals began to pass, the SEC reinterpreted its rules without seeking public comment.
The student paper you cite found AFL-CIO funds more likely to vote against directors when their unions are involved in plant-level conflict. It also found, “Non-AFL-CIO labor union pension funds do not exhibit the same changes in voting behavior.”
You say Cox is sticking up for our interests by refusing to buckle to unions and “barons on Capitol Hill.” Frankly, I trust my elected union and Congressional representatives more than the Wall Street Journal. Let’s not deny the benefits of democracy. Motivations differ, but voting reflects the majority.
From Zac Bissonnette’s BloggingStocks.com, “Denying proxy access because many candidates would have special interests is like arguing that union members shouldn’t be allowed to vote or run in political elections because they have ulterior motives. Maybe they do, but that’s up to the voters to decide!”
Rupert Murdoch completed his acquisition of Dow Jones. Will this mean more anti-shareowner editorials?
Another Blogging Activist
And speaking of Zac Bissonnette, he is pressing for governance and executive compensation changes at Adams Golf through BloggingBuyouts.com.
Interviewed by DealScape, he said, “I really believe that the Internet is already starting to and will, much more so in the future, make it easier for very small shareholders to effect change through reasoned arguments on blogs and message boards,” Bissonnette said. “If you think about it, you really shouldn’t need to be a 13-D filer to have your concerns heard. If your ideas make sense, they should be listened to.” (Blogger wages shareholder activist campaign, 12/12/07)
ESRC Seminar on Corporate Governance and Political Economy
The Economic and Social Research Council will hold a seminar series on Corporate Governance, Regulation and Development in 2008-09. The four seminars will be hosted by Queen’s University Belfast (John Turner); University of Birmingham/Loughborough University (Victor Murinde/Chris Green); Oxford University (John Armour); Thankom Arun (University of Central Lancashire).
The first seminar takes place on Friday 4th April 2008 at the Queen’s University Management School, Belfast. The theme of this seminar is the political economy of corporate governance and will focus on how political and legal systems affect corporate governance in developed, transition, and developing
The ESRC has made limited travel and subsistence funds available for participants. Travel and subsistence costs will be reimbursed to PhD students who attend the seminar. Presenters of accepted papers will have travel within the UK and subsistence costs reimbursed. For more information, see their call for papers.
Dallas Joins F&C
F&C Investments, which manages over £100 billion of assets on behalf of more than 3 million people, announced that it has recruited George S. Dallas as Director, Corporate Governance. Mr. Dallas joins F&C from Standard & Poor’s in London where he has been Managing Director with responsibilities in the areas of analytical policy and research.
Dallas has written extensively on corporate governance and international finance and edited the book Governance and Risk (McGraw Hill, 2004; see Benchmarking Corporate Governance Risks). He is member of the advisory board of Duke University Global Capital Markets Center, is a professorial fellow at Tilburg University in The Netherlands and a member of The Conference Board’s European Council on Corporate Governance and Board Effectiveness, the European Corporate Governance Institute and the International Corporate Governance Network.
More UK Pensions Dabble in Hedge Funds
The number of UK pension schemes allocating to hedge funds has increased ‘dramatically’ to 47.8 pct this year, compared to 17% in 2006, according to a new survey by Barings Asset Management. However, the average proportion of a scheme’s total assets allocated to hedge funds is still relatively low at 3.7%, up from 3.4% last year. (UK pension funds ‘dramatically’ increase allocation to hedge funds, Thomson, 12/11/07)
Pakistani Judges Learn Corporate Governance
The International Finance Corporation (IFC), a member of the World Bank Group, started training the judiciary in Pakistan to equip judges with knowledge on issues and best practices related to corporate governance. (Judges trained in corporate governance, The News, 12/11/07)
CalSTRS Board Positions Filled
A Malibu high school teacher and two incumbents have won election to the board of the $180 billion CalSTRS. Returning for another four-year term are board Chairwoman Dana Dillon of Weed, Siskiyou County, and Trustee Carolyn Widener of Los Angeles. Harry M. Keiley, a teacher in the 12,000-student coastal Santa Monica-Malibu Unified School District, earned his first stint on the 12-member governing board. (Malibu teacher joins CalSTRS board, Sacbee, 12/11/07)
Cox’s Rationale Questioned
Bill Baue’s SEC Sacrifices Shareholder Rights to Achieve Temporary Certainty (SocialFunds.com, 12/11/07) nicely summarizes the SEC’s recent action to withdraw proxy access rights from shareowners, especially with regard to Chairman Cox’s rationale. One revelation for me, in reading Baue’s article, is that in an 11/16/07 letter to the SEC, AFSCME laid out several relevant requirements they have included in their proxy access proposals that could have served as the template for similar disclosure rules by the SEC. AFSCME concludes:
If the Commission believes that neither the requirements of the proxy access proposals nor the language of Rule 14a-8(i)(3) provides sufficient assurance that proxy access would not permit an “end run” around the Commission’s disclosure requirements applicable to contested elections, the Commission could amend the Election Exclusion to allow exclusion of proxy access proposals that do not satisfy those Schedule 14A requirements. Doing so would allay the Commission’s concerns about the adequacy of disclosure in a proxy access regime while preserving shareholders’ rights under state law to alter the procedures by which directors are nominated and elected.
It now appears Cox had everything he needed if his real concern was protecting shareowners from potential conflicts of interest. That leaves his decision even more baffling. J. Robert Brown came up with an explanation that may make sense for those at the SEC who want to keep making the rules as they go along, without public input. “The Commission is using the non-access issue to sneak into Rule 14a-8 language that will make it far more difficult for shareholders to propose other types of changes connected to the election/nomination process, a substantial change in the status quo.”
The language adopted by the Commission is extraordinarily broad on its face and is not significantly limited by the adopting release. The staff can, as it did with the 1976 proposals, turn it into whatever it wants, even changing the interpretation contained in the adopting release (which of course is what the Commission argues is permissible under Long Island Care). And, there is no denying that the language of the rule puts into play a much wider category of proposals than had previously been the case.
Brown makes a good case that the recently adopted rule is ”arbitrary and would allow the staff to exclude any proposal that it decided was likely to increase the likelihood of a contest.” Anyone concerned with the direction of shareowner rights should read his recent post, Non-Access, the SEC, and the Restrictions on Shareholder Rights (Part 3), 12/11/07.
Women Directors Have 100 Year Lead in Norway
As the scramble intensifies in Norway for companies to meet the legal mandate of women filling 40% of corporate board seats by January 1, growth in the US remains flat.
Women hold 35% of the seats at 500 companies covered by the law in Norway, up from 7% in 2002. Contrast that with 14.8% of the board seats at the 500 largest companies in the US. At 59 of those companies, there are no women directors. The Norwegian experience appears positive from a report in the Wall Street Journal (Behind the Rush To Add Women To Norway’s Boards, 12/10/07), with the possible exception that some women may be serving on too many boards.
In the US, Catalyst research shows a substantial correlation between corporate financial performance and women’s representation in leadership positions. Yet, self-perpetuating boards don’t seem to care. One bright spot, according to Catalyst; women are gaining a slight bit of ground as chairs of nominating/governance committees. (2007 Catalyst Census Finds Women Gained Ground as Board Committee Chairs, 12/10/07) If the US keeps up its current progress of .2% increase per year, we may get close to where Norway is now in 100 years.
Bandits Fork Over Part of Take
Gretchen Morgenson discusses UnitedHealth Group’s recovery of nearly $1 billion in pay from former executives involved in options backdating. Dr. William W. McGuire, UnitedHealth’s CEO, will cough up $418 million worth, in addition to the almost $200 million he already forfeited. He still holds options worth $800 million but is also barred from joining a public company board for 10 years.
Compensation committee members, Thomas H. Kean, the former governor of New Jersey, and Mary O. Mundinger, dean of health policy at Columbia University’s nursing school, who oversaw the agreement weren’t penalized. However, the board set up a committee of representatives from four long-term institutional investors to advise on director candidates and qualifications.
Morgenson believes the agreement “will force boards to institute clawback provisions in all employment agreements with top officers and then enforce them.” (Sharper Claws for Recovering Executive Pay, NYTimes, 12/9/07) Although it is great news, it still feels a little like getting bank robbers to turn back only a portion of the loot. Unfortunately for shareowners, that’s progress.
WSJ on No Access Vote
In an op-ed, Union Proxies (12/6/07), the WSJ attempts to justify SEC Chairman Chris Cox’s vote to strip the right of proxy access from shareowners.
The op-ed is factually wrong from the beginning, “He voted to maintain a status quo that had gone unchallenged for 30 years until last year.” Someone at the WSJ should read the AFSCME v AIGdecision if they are going to write about proxy access. It really is educational.
In truth, the same year the SEC revised the election exclusion it issued an interpretive statement. The court found, “The 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals used to oppose solicitations dealing with an identified board seat in an upcoming election and rejects the somewhat broader interpretation that the election exclusion applies to shareholder proposals that would institute procedures making such election contests more likely.” It is clear that in 1976 and until 1990, the SEC allowed proxy access proposals.
In 1977 the CEO’s exclusive lobbying organization, the Business Roundtable, even wrote to the SEC, “to permit shareholders to propose charter or bylaw amendments to provide access to the nomination process by way of management’s proxy materials would do no more than allow the establishment of machinery to enable shareholders to exercise rights acknowledged to exist under state law.” In 1980 a shareholder of Unicare Services was able to place a proposal on their ballot permitting any three shareholders to nominate board candidates and have them placed on the proxy.
AFSCME v AIG goes on to cite several other cases where companies sought to exclude access proposals but the SEC refused to allow it. The court found, “It was not until 1990 that the Division first signaled a change of course by deeming excludable proposals that might result in contested elections, even if the proposal only purports to alter general procedures for nominating and electing directors.”
Why the change in course? In 1990 more shareholder proposals passed than in the proceeding 40 years combined. Access proposals could begin to have real consequences. (Jane W. Barnard, “Shareholder Access to the Proxy Revisited,” Catholic University Law Review, Volume 40, Fall 1990, Number 1) Beginning in that year, the SEC reinterpreted its rules, without going through the rulemaking process or seeking public comment.
The WSJ article then asserts, “[W]hat really matters is whether such proxy slates serve the interests of all shareholders, or merely a few.” Les Greenberg, one of many who sent me a copy of the article asks, “But, who decides — the few members on the entrenched BOD or the shareholders, the true owners?” [Background note: Les Greenberg (on behalf of the Committee of Concerned Shareholders) and I filed Petition No. 4-461, which the Council of Institutional Investors said "re-energized" the "debate over shareholder access to management proxy cards to nominate directors." See Equal Access - What Is It?]
The WSJ goes on to cite “a recent study by Ashwini Agrawal of the University of Chicago” who examined the voting patterns of AFL-CIO-controlled pension funds over a four-year period. Mr. Agrawal’s student paper found that AFL-CIO funds are more likely to vote against directors of firms during collective bargaining and union member recruiting, when they are involved in plant-level conflict between labor unions and management. Yes, some shareholders vote against directors partly to support other interests, rather than to increase shareholder value alone. However, Agrawal also found, “Non-AFL-CIO labor union pension funds do not exhibit the same changes in voting behavior.”
The first clause of the Magna Carta guarantees “freedom of elections” to clerical offices of the English church. This was designed to prevent the king from appointments officials and siphoning off church revenues. Proxy access is essentially a shareholder’s Magna Carta. It would allow shareowners to prevent managers and self-perpetuating boards from having a lock on who sits on corporate boards and would substantially reduce their opportunities to siphon off corporate assets.
Should we deny democracy because a few voters bring their own agenda to the polls or proxy? I think not. Everyone brings their own motivations, but voting demonstrates the concerns and expressed wishes of the majority.
The WSJ goes on to assert that if proxy access were of real value investors would insist on proxy access. “That no such premium exists explains why investors at large aren’t clamoring for this kind of proxy ‘reform.’” Yet, investors are clamoring for proxy access. When the SEC proposed an unnecessarily complicated proxy access in 2003, the concept received more comments in support than any previous rulemaking in the agency’s history. Similarly, this year there was record breaking support for the concept.
The most self-ingratiating statement comes at the end of the op-ed, “Mr. Cox is sticking up for their interests by refusing to buckle to political pressure from unions, some SEC staff, left-leaning media and barons on Capitol Hill. Average investors should be grateful.” Who are these groups again?
- Unions, who represent millions of Americans and have a fiduciary duty to protect our pensions.
- Media. For a somewhat dated table, see the National Organization of Women’s Who Controls the Media? The media is hardly left-leaning.
- Barons on Capitol Hill. Oh, the WSJ means our elected officials.
Who are we going to trust, our unions, our press, our elected officials, or the Wall Street Journal? Maybe Rupert Murdoch is already exerting too much influence on their editorial content.
Morningstar and SmartMoney picked up an abbreviated form of my article questioning SEC Chairman Cox’s late and erroneous use of the Supreme Court’s Long Island Care decision (TALK BACK: SEC Chairman’s Last-Minute Proxy-Access Problem, 12/4/07 and 12/05/07). The SEC’s response clarifies that the decision probably came to their attention after the July meeting. Therefore, Cox probably did not intentionally wait to introduce a new argument. However, it does nothing to explain how Long Island Care added additional uncertainty to AFSCME v AIG, when it more obviously added clarification. The best course for the SEC to conform with Long Island Care would have been to reaffirm their 1976 Statement that supported the SEC’s original rule.
According to a report in the Sacramento Bee, “Anne Sheehan, chief deputy director of policy at the Department of Finance, was unanimously elected by the state Personnel Board as its CalPERS representative for 2008…. At CalSTRS, Sheehan played a key role in the fund’s adoption of groundbreaking limits on campaign contributions that Wall Street money managers can make to trustees, the governor and other elected officials. CalPERS is expected to consider rules modeled after those approved by the teachers’ fund.” (Sheehan elected CalPERS trustee, 12/5/07) I welcome her addition. I’ve been pushing for CalPERS to address potential conflicts of interest since 1997. [see Letter to CalPERS on Closed Meetings (June 23, 1997), Letter to LA Times. CalPERS: Not Quite Clean Enough (Feb. 12, 1998), and Petition for adoption of regulations re conflicts of interest at CalPERS (Feb. 21, 1998)]
The Corporate Library has released Paul Hodgson’s report, Subprime Golden Parachutes. The nine page study of ‘subprime’ lenders presents an examination of 16 companies, finding that the average severance benefit for the ‘subprime’ CEOs is close to setting a new record. “At companies like Bank of America (BAC) or Countrywide Financial (CFC), the bulk of a CEO’s exit package is tied up in retirement benefits. At companies such as Lehman Brothers (LEH), Morgan Stanley (MS), JPMorgan Chase (JPM), and Goldman Sachs (GS), most of a CEO’s expected termination benefits come in the form of restricted stock… At the top of pack—and far ahead of his colleagues in financial services—is Lehman’s Fuld, who could be entitled to an exit package worth nearly $299 million.” (Soft Landings for CEOs, BusinessWeek, 11/15/07)
“People who do not have financial and economic expertise have the common sense and judgement that experts sometimes do not have and these people make sure experts are clear because they ask questions like ‘what is this investment and what is the risk,” according to Antoine de Salins, head of France’s 33.8 bln eur FRR, the pension scheme. (Non-financial directors improve governance in pension reserve funds – FRR, Thomson, 12/5/07)
Representative Henry Waxman (D – California) chaired a hearing and released a report detailing conflicts of interest at executive compensation firms. According to the report, “Over 100 large publicly traded companies hired compensation consultants with substantial conflicts of interest in 2006. In many cases, the consultants who are advising on executive pay are simultaneously receiving millions of dollars from the corporate executives whose compensation they are supposed to assess.
- The fees earned by compensation consultants for providing other services often far exceed those earned for advising on executive compensation.
- Some compensation consultants received over $10 million in 2006 to provide other services.
- Many Fortune 250 companies do not disclose their compensation consultants’ conflicts of interest.
- There appears to be a correlation between the extent of a consultant’s conflict of interest and the level of CEO pay.
CalPERS CEO Fred Buenrostro, selected as the most influential player in the first corporate governance ranking by Directorship magazine will address the 8th annual Directorship Institute on December 11 in New York. Directorship announcement has the links.
ESG Handbook Available
The Boston College Institute for Responsible Investment released their Handbook on Responsible Investment across Asset Classes, funded by the F.B. Heron Foundation, in collaboration with theSocial Investment Forum and the European Social Investment Forum.
Compared with public equities, relatively little attention has been paid to ESG considerations for other asset classes. Even has been written on what opportunities for engagement are available to responsible investors in fixed income, private equity, real estate, venture capital, or even commodities. The Institute hopes the Handbook will help investors:
- Incorporate responsible investment methods into their investment mandate;
- Identify and evaluate opportunities for responsible investment; and
- Coordinate the vocabulary and metrics used to measure social and environmental outcomes.
Each chapter focuses on a single asset class, identifying three key issues and challenges for responsible investment, including real-world examples of responsible investment underway in each area. Each section includes information on how to:
- Design a responsible investment strategy;
- Identify opportunities for market-rate responsible investments;
- Incorporate engagement strategies into investment strategies.
Severance Less Important Than Succession Planning
“Other than rare cases when boards use significant discretion, we don’t pay much attention to the actual severance payout when evaluating the quality of corporate governance in rated companies,” says Moody’s Analyst Drew Hambly. “Instead, we focus on signs of inadequate succession planning, mishandling the CEO search, or a lack of willingness by the board to restructure pay when the departing CEO’s pay had been high relative to peers.”
Analyzing Unexpected CEO Departures and Severance Payouts for Signs of Weak Governance is a new report from Moody’s. According to the report, signs of weak governance, in the wake of an unexpected CEO departure, are:
- Limited internal candidates, suggesting inadequate succession planning.
- Board mishandles the CEO search and eventual transition.
- Board pays new CEO well above peers, provides highly favorable contractual terms and does not link pay to performance.
Board Practices Study
RiskMetrics Group released its 2008 Board Practices Study. Key findings include:
- Board independence levels rose to 74% in 2007 after having leveled off at 72% in 2006 (the first year no increase at all was found from the prior year’s levels).
- 45% of major U.S. companies had separated the posts of chairman and CEO at the time of their most recent shareholder meeting—an increase of 20% since 2000, and four percentage points over the previous year.
- The number of companies with staggered boards continued to decline in 2007, to 52% overall, down from 55% in 2006.
Proxy Access: Was Long Island Care a Deception?
During his testimony before the Senate Banking Committee on Nov. 14, Cox said the AFSCME v AIG decision “applies only in one of the 12 judicial circuits in America. And it has created great uncertainty and danger for every stakeholder in our public markets.” He then led us to believe the AFSCME v AIG decision was in conflict with a more recent Supreme Court decision.
This uncertainty is compounded by a recent decision of the U.S. Supreme Court, which creates doubt about the state of affairs even in the Second Circuit. The Supreme Court reversed another panel of the Second Circuit in a similar case of an agency that changed its interpretation of its rules. Just as in the proxy access case, the Second Circuit rejected the agency’s more recent interpretation. Justice Breyer’s opinion for the unanimous Court held that the agency’s interpretation of its own regulations is controlling unless plainly erroneous. As a result of this decision, it is more likely today that even a Second Circuit court would uphold the agency’s longstanding interpretation of our proxy access rule. In this escalating state of confusion, the only rule across America at the moment is every litigant for himself.
He wanted the ”legal uncertainty” created by these two apparently contradictory court decisions cleared up before the 2008 proxy season begins next spring. That’s the logic he used to sell to the public on why the SEC needed to adopt a new rule this year. The other primary reason was the need for “important shareholder protections, such as disclosure and antifraud rules” if proxy access were to be implemented.
As Commissioner Nazareth said in her statement on the day the no access rule was passed, theLong Island Care v Coke Supreme Court case that Cox alluded to was decided “six weeks before our July open meeting. Yet, the Long Island Care decision was not mentioned in any of the discussion at the open meeting nor in the proposing release. I find it striking that so much emphasis is now placed on a case that apparently no one thought worthy of discussing at the proposing stage and that, as far as I am aware, did not appear in any of the literally thousands of comment letters we received on the non-access proposal.”
Nazareth also noted, the disclosure proposed in the access rule (which I presume was approved by Cox), “would have been more burdensome than in the takeover context.” If additional disclosure requirements were advised, why didn’t the Commission consider options “such as applying existing disclosure requirements and prohibitions on false and misleading statements to nominations done through bylaw procedures. Alternatively, the Commission could have proposed revising Rule 14a-8(i)(8) to allow companies to exclude proposals that do not require a nominating shareholder to comply with the proxy contest disclosure rules.”
The disclosure requirements Cox apparently wants, especially those that would have been required for simply introducing a proxy access resolution, appear to be were designed not primarily to protect investors but to impose such a burdensome process that it would discourage such filings. (see mycomments on the limited access rule)
The more pressing issue of the two was clearly the “escalating state of confusion” caused by the conflict between Long Island Care and AFSCME v AIG. In Long Island Care decision, the Supreme Court reversed a decision by the Second Circuit and concluded that the Department of Labor (DOL) was entitled to deference, since the agency had arrived at its rule through public notice and comment. In the words of the Court, “That the DOL may have interpreted the two regulations differently at different times in their history is not a ground for disregarding the present interpretation, which the DOL reached after proposing a different interpretation through notice-and-comment rulemaking …” (my emphasis)
In the AFSCME case, the SEC adopted amendments to Rule 14a-8 through notice and comment in 1976, and in a Statement accompanying the adopting release, announced an interpretation that would allow for shareholder access proposals.
According to the AFSCME ruling, the 1976 Statement clearly reflects the view that the election exclusion is limited to shareholder proposals dealing with identified board seats in an upcoming election not shareholder proposals that would institute procedures making such election contests more likely in future elections.
As the AFSCME decision notes, SEC staff, changed its interpretation over time, not through notice and comment as was the case in Long Island Care, but inconsistently through no action letters, without “reasoned analysis.” The Second Circuit found that “The SEC fails to so much as acknowledge a changed position, let alone offer a reasoned analysis of the change.”
Chairman Cox created the impression that Long Island Care resulted in confusion. However, if Long Island Care had any bearing at all on AFSCME, it was that deference must be given to the SEC’s original interpretation and the 1976 Statement that supported the rule. Long Island Care didn’t create confusion, it resulted greater certainty.
Does Cox really believe Long Island Care conflicts with AFSCME or led to created greater confusion? If so, how? If the two decisions are truly in conflict why didn’t the Business Roundtable or other opponents, who can afford the highest paid attorneys in the land, make that argument that during the public comment period?
If Cox read Long Island Care before the SEC’s July hearing on proxy access, why didn’t he bring it up then? Did he intentionally spring the case on the public just before adoption to reduce the time for analysis.
Cox clearly appeared to rely on the confusion argument in convincing the public of the need to move forward now, if not the other Republican Commissioners. Is it mere irony that if the rule adoption goes unchallenged, the SEC’s new rule might be protected by the very Long Island Care decision that Cox said created uncertainty? Now, if the no access rule goes to the Supreme Court, the SEC can point to the fact that, like DOL in Long Island Care, the SEC went through public notice and comment and is due the same deference.
If such a rule had been adopted in California, it might face a serious procedural challenge since agencies are required to include in the original notice “each technical, theoretical, and empirical study, report, or similar document, if any, upon which the agency relies in proposing the adoption…” A California state agency that relied on a decision, such as Long Island Care, as the rationale for enacting a rule would probably have to go out for an additional public comment period if the agency failed to discuss or reference that case in its public notice. If federal rulemakings procedures don’t require something similar, they should.
What I find disturbing is that Cox misled the public into thinking that because of Long Island Care, AFSCME would have been overturned… when Long Island Care actually made the exact opposite more likely.
One-two Punch as Bush Administration Begins Wrap-up
According to a report in the NYTimes, business lobbyists are stepping up their efforts in Washington, “in the belief that they can get better deals from the Bush administration than from its successor.” “Documents on file at several agencies show that business groups have stepped up lobbying in recent months, as they try to help the Bush administration finish work on rules that have been hotly debated and, in some cases, litigated for years.”
Poultry farmers want an exemption for chicken manure fumes. Businesses want a roll back of family and medical leave requirements. Electric power companies relaxed pollution-control requirements. Trucking companies want to increase the maximum number of hours commercial truck drivers can work. Automakers want less stringent standards for car roofs. Coal companies want to dump rock and dirt from mountaintop mining operations into nearby streams and valleys. “Some of the biggest battles now involve rules affecting the quality of air, water and soil.” (Business Lobby Presses Agenda Before ’08 Vote, 12/2/07)
Of course, Cox’s recent action to revoke shareholder proxy access could be characterized in the same vein. Gretchen Morgenson’s article in the same paper, however, frames it in terms of a one-two punch. Shareowners lost billions to subprime loans or fallout and then lost their best shot at firing incompetent directors. Morgenson appears to agree with most shareowners; he should have left the AFSCME v. AIG decision to guide at least the next proxy season, allowing continued proxy access.
“A look at boards of companies with some of the biggest write-downs shows few members with expertise in mortgage trading or even in the securities business, Morgenson writes and then goes through examples. “With so few capable directors who hold themselves accountable to owners at public companies, is it any wonder that pension investors are turning to alternatives like private equity? Those managers act like owners. The downside is that private equity managers extract huge fees, reducing pensioners’ gains.” The obvious answer is to get directors to think like owners by making them directly accountable to shareowners through proxy access. Morgenson is clearly in the camp of shareowners. (Fair Game: S.E.C. Sends Investors to the Children’s Table, 12/2/07)
The first two words in the title of Morgenson’s article are “fair game.” It is clear the rules of corporate governance, as played in the US, tip strongly in favor of CEOs and self-perpetuating boards. Another interesting question would be, “Was the recent rulemaking was conducted fairly?” I hope to touch on that question in a future post.
Mr. Dash concludes his article, “SEC Bars Investors’ Directors” in the NYTimes (11/29/07) with the following, “Until last year, the S.E.C. had told companies for more than 30 years that they did not have to allow a vote on changing the rules for the election of directors.” (my emphasis) That statement is clearly in error.
From AFSCME v AIG court decision, “The SEC’s first interpretation was published in 1976, … The Division of Corporation Finance …continued to apply this interpretation consistently for fifteen years until 1990, when it began applying a different interpretation, although at first in an ad hoc and inconsistent manner.”
One example of many; in 1980 Unicare Services had to include a proposal on their ballot permitting any three shareholders to nominate board candidates and have their name placed on the proxy. A similar proposal the same year allowed a “reasonable number of stockholders” to place candidates on the proxy statement of Mobil. There are many other examples. Then in 1990 the SEC issued a series of no action letters ruling that proposals concerning board nominations could be excluded.
I discussed this change and the possible reasons behind it in my article entitled “Toward Democratic Board Elections,” in the July/August 2003 edition of The Corporate Board — more than two years before the AFSCME v AIG decision, but a year after petitioning the SEC with the Committee of Concerned Shareholders to restore proxy access.
Marketplace Falls for Status Quo Explanation from Cox
In a short number, explaining “proxy access, the normally astute folks at Markeplace said, “Activists hope to change that and give some stockholders a chance to have more say. Well, this week the SEC thought about it … and decided to keep things as is.”
Wrong. The status quo was proxy access. The decision of AFSCME v AIG restored that right at the end of 2006… a right the SEC had stripped away in 1990, not by writing new rules but by reinterpreting existing rules without public notice or comment. Marketplace misleads its listeners by accepting Cox’s unfounded “status quo” explanation. (Buzzword: Proxy access, 11/30/07)
Readers concerned with the SEC action to curtail the rights of shareowners should consider sending a note, such as the following, to each of the declared presidential candidates.
Where does (candidate name) stand on corporate governance, specifically shareowner access to the proxy?
Presidential candidate Senator Dodd and 8 other senators made their position on two SEC proposals clear (see http://dodd.senate.gov/index.php?q=node/4113).
Does (candidate name) stand with investors and pension funds representing trillions in assets held for millions of Americans or with the 160 members of the Business Roundtable? Under a (candidate name) administration will we see greater democracy in how corporations are governed?
The SEC met on November 28th and stripped shareowners of rights recently reaffirmed in the decision of AFSCME v. AIG.
Not only did US investors oppose these rules, many foreign investors also opposed them, since they resulted in significantly fewer rights in the US than they have internationally. This move cannot help the competitiveness of the US capital markets.
At a time when there is a very high level of volatility, uncertainty and lack of transparency in the markets, how will does the Commission’s action to betray shareowners instill investors confidence? Investors are also becoming increasingly aware that business and Wall Street sold us a bill of goods when it came to subprime investments. Now the SEC, mandated to protect investors, has reduced our right to replace directors who failed us.
How will (candidate name) advocate reforms at the SEC to deliver proxy access and protect shareowners?
(Your Name and Contact Information Here)
Contact Information for presidential candidates:
Biden: info@JoeBiden.com or press@JoeBiden.com
Obama: http://my.barackobama.com/page/s/contact2 orhttp://my.barackobama.com/page/s/mediarequests
Giuliani: email@example.com media call 646-943-7890
Huckabee: firstname.lastname@example.org or Pressroom@explorehuckabee.com
Hunter: email@example.com media firstname.lastname@example.org
Keyes: email@example.com Media: firstname.lastname@example.org
Paul: email@example.com or firstname.lastname@example.org
Trust Declares Victory
AVI BioPharma announced that it has entered into an agreement with the AVI Shareholder Advocacy Trust (the “Trust”) under which the company’s board of directors has appointed Dr. Gil Price and William Goolsbee as directors of the company. These new directors will fill the unexpired terms of Alan P. Timmins and Dr. James Hicks, who have resigned as directors of the company effective Oct. 29, 2007. Timmins will continue to serve as the company’s president and chief operating officer and Hicks will continue to serve the company as a consultant. Continue Reading →
Delaware Court of Chancery has made important rulings concerning stock option plans for directors and the issuance of stock to directors in Noerr v. Greenwood and Linton v. Everett. According to Edward P. Welch and Andrew J. Turezyn, the cases “counsel directors and their legal advisors to consider carefully such issues as fairness, disclosure to shareholders and approval by disinterested directors and/or shareholders after full disclosure.” (The National Law Journal via Law Journal Extra, 10/13)
The Florida State Board of Administration, the nation’s fourth-largest public pension fund, sued Sears, Roebuck & Co. for $3.5 billion, saying the retailer’s executives should have known about the company’s controversial handling of bankrupt debtors. “The people that are home free are the directors and the CEO, who caused Sears that loss,” said Horace Schow II, the Florida fund’s general counsel. “They ought to cough up something.” (see Houston Chronicle, 12/22)
SEIU Master Trust filed a resolution with Columbia/HCA to give all candidates for director equal access to the proxy. The binding resolution would amend Columbia’s bylaws. Currently, only candidates who have been nominated by the board are listed in the annual proxy statement. Shareholder nominees are not disclosed. (for more info. contact: Joni Ketter, SEIU, 202-898-3374.)
CalPERS reported 1996 costs of 13.7 basis points for investment operating costs. The fund also indicated it earned a 24.3% return during the year ended 9/30. Domestic stocks, which comprise two-thirds of the $126 billion fund’s assets, earned a 38.9% during the 12-month period compared to the benchmark of 38.4% for the Wilshire 2500 Index.
The Communications Workers of America announced that Walt Disney Co agreed to elect its board members every year instead of every three years as it does now. Before agreeing to the change, Disney tried to block a CWA proposal and urged the SEC to allow it to omit the proposal from their proxy statement for the 1998 annual meeting. Business Week, recently ranked Disney as the nation’s worst corporate board.
Business Week joins the chorus calling for the SEC to “return to what it started to do in the first place: reverse the Cracker Barrel policy and review employment-related resolutions on a case-by-case basis, as it once did. Everything else should stay the same.” (see 12/29 edition) The Business Rountable and theAmerican Society of Corporate Secretaries both generally endorsed the proposal. Opposition comes from a broad shareholder coalition of religious, environmental, labor and social investment groups, joined by Nell Minow of LENS and Ralph Whitworth of Relational Investors, according to IRRC(12/12).
John Gilbert is interviewed by CNNfn. At 83 he’s still going strong, although he’s cut back from 75 meetings every year to “only” about 35 or so. Charles Elson, professor of corporate law at Stetson Law School discusses the Gilbert brothers role in the landmark 1947 case, S.E.C. vs. Transamerica, that helped define shareholder rights.
Molly Ivins brings corporate governance news to her readers. Her Dec. 17, 1997 column mentions Doug Henwood’s book,Wall Street: How It Works and For Whom and the SEC’s “proposed new rules that will damage the tiny move for corporate democracy.”
Bernard Black’s Shareholder Activism and Corporate Governance in the United States reviews a wealth of unpublished sources and provides needed insight to a struggling field but fails to give much of a glimmer of hope to those of us who believe corporate governance monitoring efforts could yield substantial rewards. (See Black)
Disclosure of Corporate Governance Practices by Australian Companies, a report by the Center for Corporate Law and Securities Regulation, University of Melbourne is noted in our bibliography. (see Ramsay)
Catalyst survey found the number of women holding a place among the top five earners at Fortune 500 companies more than doubled since 1994. But only 20% of female corporate officers — the people in the senior ranks of a corporation — hold “line positions,” compared with 41% of male corporate officers. Line positions are jobs that directly involve corporate profits and losses and that traditionally lead to the highest positions in business. (see PBS)
Guy P. Wyser-Pratte, president of Wyser-Pratte & Co. Inc., announced today that he has filed amended preliminary proxy materials for the Pennzoil Company meeting, including a proposal to elect himself to the Pennzoil board. As a result of Pennzoil’s cumulative voting system, Mr. Wyser-Pratte may be elected to the board by slightly more than 20% of the shares that vote. Wyser-Pratte’s by-law proposals would require a unanimous board vote for anti-takeover defensive actions taken by the board, unless such actions have been approved by a shareholder vote. Other proposals by Wyser-Pratte would reportedly allow the holders of 10% of the shares to call a special stockholders meeting, would make it easier for shareholders to make proposals and nominations at shareholder meetings, and would facilitate business combinations with large shareholders and their affiliates.
Masters’ Select International fund will ask five highly regarded international investment managers to pick 8 to 15 of their favorite stocks. Masters’ Select Equity used this technique for domestic stocks and gained 23.4% from 1/31 through 12/11. That was better than the 17.3 % gain for its peer group of large growth funds. Such a strategy would also facilitate closer monitoring of governance issues. However, this possibility wasn’t addressed by 12/14 New York Times article “When Mutual Fund Stars Converge.”
Hong Kong’s coming Mandatory Provident Fund is the major subject of December’s Company Secretary. Total pension assets in Hong Kong, currently estimated at US$15 billion are expected to rise to $75 -$300 billion in ten years. The MPF will require every employer to provide a qualifying retirement scheme if enabling legislation is enacted during this session. In addition, the issue describes an Institute-funded research project currently being conducted. Over 6,000questionnaires were sent out to company secretaries and directors. Many of the questions address the Consultancy Report on the Review of the Hong Kong Companies Ordinance.
December’s Corporate Agenda includes a profile of Eli Lilly. In 1993 their board ousted its CEO of 32 years. Four years later market capitalization has risen from $12-13 billion to $70-75 billion. The active board and members of senior management go on a 2-3 day annual retreat to review the year and discuss strategic planning.
The issue also includes an article by Lucy Alexander on poison pills. She cites Georgeson’s study finding that pills have resulted in an 8% premium for take-over targets over the last 5 years. IRRC’s Robert Newbury questions their methodology and TIAA-CREF’s Peter Clapman says “the economic evidence is still very ambiguous.” The Corporate Governance Advisor includes a related article by Terence Gallagher and Walter Gangl on Pfizer’s TIDE (Three-year Independent Director Evaluation) plan. Incorporated into the plan are requirements that the board maintain its majority of independent directors, that the pill will be reviewed every 3 years by the corporate governance committee (comprised solely of independent directors), and that the committee may review a number of listed factors such as shareholder opinions, relative valuations academic studies, etc. The author’s believe the TIDE plan represents “a new generation” addressing investor concerns. While that view may be questioned by institutional investors, the plan does encourage dialog between investors and corporations.
Women now hold almost 9% of board seats in the Fortune 1000 (up from 6% in 1992 and 7.6% in 1994), according toDirectorship.
Criticism of Business Week’s recent board ranking is rampant. Many thought the survey questionnaire was a guessing game. Another criticism was that respondents were asked to use corporate performance as one measure to rank boards…then the evaluation announces that “good governance appears to pay off”…circular reasoning. (IRRC’s CG Highlights 12/5/97) The same issue carries continuing coverage of the SEC proposal to overhaul rule 14A-8.
Ira Millstein and Paul MacAvoy have completed a study based on 1991-95 data which demonstrates that corporations with active and independent boards appear to have performed much better than those with passive boards. (see Millstein)
A recent Stanford study found that interlocking directors have less influence in large firms and in those firms whose chief executive belongs to a Business Roundtable or Business Council. (see Business Wire)
Global Proxy Watch reports that Proxinvest and Andre Baladi &Associates will launch a fund aimed at European shareholder-friendly firms. They expect to start with $34 million from French institutional investors and to attract additional funds from U.S. and U.K. once the fund is up and running. Selection criteria include an assessment of whether a company structures its board and motivates directors to produce shareholder value, discloses sufficient information to investors, and produces exceptional shareholder returns. (contact Stephen M. Davis of Davis Global Advisors) Davis also reports there have been over 85 corporate governance conferences this year so far.
Election results are out for the CalPERS at-large directors. Incumbents Charles P. “Chuck” Valdes and William B. Rosenberg were reelected by wide margins.
Unions are examining the voting records of 91 money managers to identify practices which conflict with AFL-CIO proxy voting guidelines. “While some union fiduciaries have been activists in corporate governance, many others have been virtually asleep on the subject until now with no idea of how money managers have been casting proxy votes for plan assets, some union officials said.” (Pensions &Investments, 12/8)
In another storey from P&I the Swiss Pensionskasse Schweizerischer Elektrizit?tswerke (PKE pension fund) will post its investment management structure, asset mix, manager mandates, performance results and volatility quarterly on itsinternet site.
Directors & Boards editor James Kristie has created the first corporate governance timeline with 100+ entries. Sure to be a useful reference, the timeline starts with Morgan’s appearance at the Pujo hearings of the U.S. Congress in 1912 and ends with this year’s SEC’s announcement of potential significant modifications to its shareholder proposal rules. Complementing the timeline in the latest issue of Directors &Boards are several historical-oriented features including:
- An examination of the all-time top 10 legal cases that have impacted the way boards operate. Charles Elson takes us through the cases that confirmed business is carried on primarily for the profit of shareholders, director decisions must be made on an informed basis, action against director requires causation, exec compensation must bear some relation to services performed, the rights of shareholders and the power of the board, judicial review of takeovers, director duties regarding compliance, the private enforcement of proxy rules, and the applicability of insider trading;
- A 10-year quest for director accountability. John Wilcox takes us through 3 stages of institutional activism from defining a role, to reform of the proxy rules, to a focus on financial performance and board accountability. Wilcox calls for a compilation of reports from all a board’s standing committees as an effective accountability mechanism for boards to shareholders;
- Louis Lowenstein argues that although U.S. mechanisms to motivate shareholder groups and those which facilitate control of the board are weak, disclosure systems more than make up for these weaknesses; and
- A history of executive compensation (with its own timeline from the 1800s to the present). The recent emphasis here is on the mega-grants of stock options which may bring about a rank and file uprising, government intervention shareholder resistance or an expanding pool driving pay levels down.
For more information on Directors &Boards see their listing on our Stakeholders page or call James Kristie at 215/405-6081.
The SEC has extended the comment period on charitable giving by public companies. The SEC is studying these issues in connection with HR 944 and 945. One bill would require public companies to disclose their charitable contributions; the second would require each to allow its shareholders to participate in deciding which charities the company should contribute to and how much to contribute…much like the system developed at Berkshire Hathaway. See comments to date as well as Washingtonpost.com. Another option, not being studied, might be a similar requirement for political contributions…of course, to be fair, the same limitation would need to apply to labor as well.
Stephen Davis, of Davis Global Advisors, reports that in a 1996 survey of European shareholders by the Centre for European Policy Studies and Davis Global Advisors “none of the respondents – including those who said they vote up to 100 per cent of their domestic securities – cast ballots for more than 10 per cent of the shares they hold in outside markets.” To address this issue and others the International Corporate Governance Network voted to convene two working groups charged with drafting best-practices principles by June 9, 1998, 30 days prior to their next annual conference held in San Francisco. (Company Secretary, 10/97)
Catching up on other news from Stephen Davis, the National Association of Pension Funds (NAPF), representing about 30% of institutional investment in Britian, called for a number of reforms including:
- Shareholders should vote each year on the report of a corporate board’s remuneration committee.
- Nonexecutive directors serving more that 9 years should no longer be considered independent.
- Confidential voting.
- Directors should be required to undertake formal training within 12 months of appointment.
For a more complete list of highlights and commentary, see the Global Proxy Watch (10/3/97).
A binding anti-pill proposal by the Union of Needletrades, Industrial and Textile Employees hit a setback when U. S. District Court dismissed a lawsuit from UNITE challenging the use by May Department Stores of discretionary authority to vote down the proposal. The proposal apparently would have won approval if the company was denied discretionary voting authority. Judge Koeltl notes, the case “provides a clear example of the disruption and confusion that would be created by an interpretation of SEC Rule 14a-4(c)(1) that forced the company to include any and all potential shareholder proposals in its original proxies.” For a much more complete report see IRRC’s CG Highlights 11/21/97. In the same issue, IRRC reports that “smaller, more active boards that meet less frequently were held up as the ideal at a Nov. 18 American Society of Corporate Secretaries issues seminar in New York.”
Czech Republic enacted law establishing country’s 1st securities commission. (The ISS Friday Report, 11/28)
Forbes ran a cover article on 12/1 on Turning employees into stakeholders which focuses on Science Applications International Corp. in San Diego. “Employees own 90% of the company; the other 10% is held by consultants or employees who left in the early days before SAIC instituted a requirement that departing owners sell their shares back to the company…Its four different employee-ownership programs are among the most sophisticated in the country.”
Graef Crystal writes “If ever there were a case for indexing stock options to the market (i.e., causing the price that must be paid to exercise an option to rise and fall with changes in the broad stock market), that case exists with Fisher at Kodak. Assuming that he has not made any option exercises thus far in 1997, his option shares, on Nov. 11, 1997, contained a paper profit of $21 million. That’s a lot of money for performing at only 34 percent of the market during your tenure as CEO and for destroying 23 percent of your shareholders’ wealth in the last year alone.” (The Business Journal, Portland 12/1)
Investor Relations Magazine will hold its first annual Canadian awards ceremony on Thursday, February 26, 1998. Winning companies will be chosen for their outstanding performance in key areas of investor relations including financial reporting, corporate governance, takeovers and other areas. (see Canadian Corporate News)