Apple Inc. (NASD:AAPL) is one of the stocks in my portfolio. Their annual meeting is coming up on 2/28/2014. ProxyDemocracy.org was down for maintenance when I checked and voted on 2/19/2014, so no voting advice there. I checked a few other sources such as CalPERS, Florida SBA and OTPP but none had disclosed their votes on their sites as of yesterday. I voted with 89% of the Board’s recommendations. View Apple’s Proxy Statement. Continue Reading →
Tag Archives | proxy
Despite the Apple Board’s best effort to obtain a “no-action” letter to exclude my proxy access proposal, it is included among the items to be voted on at or before the annual meeting to be held on February 28 at our Company’s principal executive offices in Cupertino, CA. See Apple’s proxy, Proxy Proposal 11, ‘Proxy Access for Shareholders’ on page 63. (A minor gripe – why doesn’t Apple provide a linked index to our proxy so that shareholders can easily flip to the subject they are looking for? Let’s hope part of their strategy isn’t making it too hard to analyze the issues and vote.)
Here’s the thrust of my argument. We need directors who can address the big money pile – not with short-term buyback strategies that facilitate extraction of value but with long-term strategies that create value. Investing $150B in Treasuries or money markets is not efficient use of our money. The returns of Google Ventures, for example, are far above the industry’s mean. There is no reason why Apple couldn’t also put our money to good use though an Apple Ventures type of vehicle or through a revamped and enhanced Blue Sky program. Continue Reading →
Reeds, Inc $REED; you read the Proxy, the crazy Preliminary Proxy, and the rationale for proxy access. You’ve seen the movie, where I explained the need for proxy access Now, don’t forget to vote! The annual meeting is December 20, 2013. According to ProxyVote.com, Internet voting is accepted up to 11:59 p.m. (ET) the day before the meeting/cut off date. That’s Thursday! Below are my proxy recommendations. Continue Reading →
In mid-July I e-mailed investor relations at Reeds Inc. $REED (IR@reedsinc.com) asking if REED had a classified board or plurality requirements for director elections. Can shareowners call a special meeting or act by written consent? What supermajority requirements are in place re M&A or other actions? No response. This surprised and disappointed me since they were prompt in answering previous e-mails: Make kombucha; we’re already working on it. Try one with coconut water and ginger; good idea. Where can I find Reeds Kombucha in Sacramento?; here’s a list.
According to FactSet Research Systems, “insider/stake ownership” at REED is 33.5% of the company’s float. Being almost a controlled company, maybe they don’t feel the need to respond to inquiries from ‘outside’ shareowners about the firm’s corporate governance. They not only didn’t answer me, they blocked me from following their Twitter feed. Maybe management and the current board think the less outside shareowners know, the better for them? Continue Reading →
Cisco Systems, Inc. $CSCO is one of the stocks in my portfolio. Their annual meeting is next week on Tuesday, 11/13/2013. ProxyDemocracy.org had collected the votes of 2 funds when I checked on 11/13/2013 (there have been more since). I voted with management 56% of the time. View Proxy Statement.
Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →
Procter and Gamble $PG is one of the stocks in my portfolio. Their annual meeting is coming up on 10/8/2013. ProxyDemocracy.org had collected the votes of three funds when I checked on 10/1/2013. I voted with management 60% of the time. View Proxy Statement.
Warning: Be sure to vote each item on the proxy. Any items left blank are voted in favor of management’s recommendations. (See Broken Windows & Proxy Vote Rigging – Both Invite More Serious Crime) Continue Reading →
I found another case of corporate elections where ballot measures failed to be identified ”clearly and impartially.” This time at Oshkosh ($OSK). Should we be surprised? Isn’t it time you took a minute out of your day to send a message to the SEC asking for an end to such abuses?
When it comes to proxy ballots, regulations are complex and mailing deadlines are tight. Broadridge helps fulfill regulatory responsibilities efficiently and economically. Broadridge handles the entire process on-line and in real time, from coordination with third-party entities to ordering, inventory maintenance, mailing, tracking and vote tabulation. Continue Reading →
Malcolm Gladwell’s book The Tipping Point: How Little Things Can Make a Big Difference discusses the “Broken Window theory.
If a window is broken and left unrepaired, people walking by will conclude that no one cares and no one is in charge. Soon, more windows will be broken, and a sense of anarchy will spread.
In the following post I argue that relatively minor problems, like how items left blank on a proxy are counted and how Broadridge labels shareowner proposals, sends a signal. Just like an abundance of graffiti tells you gangs are in charge, switching blank votes to management and relabeling shareowner proposals to gibberish tells you that shareowners are indifferent and that corporate managers have a clear invitation to more serious crime. I ask readers to take a simple action at the end of the post that, like fixing broken windows, could lead to the end of much more serious abuses. Continue Reading →
Institutional Shareholder Services, an MSCI business, seeks to hire a full-time, permanent analyst to join its environmental and social proxy issues research team in Rockville, MD. The primary duties and responsibilities of the position are to conduct research, write reports, and make recommendations on environmental and social issue shareholder proposals that will be voted on at the annual shareholder meetings of publicly traded U.S. companies. Continue Reading →
Schlumberger (SLB) is one of the stocks in my portfolio. Their annual meeting is coming up on 4/11/2012 in Curacao, frequently referred to as “one of the Caribbean’s best-kept secrets,” and not easy to get to from Continue Reading →
More than 40 investors joined in filing and co-filing the resolution seeking comprehensive disclosure of corporate lobbying. Among them are New York Continue Reading →
European Policy Perspectives: Tuesday, December 6, 2011, 2:30 PM GMT, 3:30 PM CET. Presented by ISS’ Jean-Nicolas Caprasse, Head of Business, Europe; Daniel Jarman, Head of U.K. Research; Thomas von Oehsen, Head of German-Dutch Research, ISS and Eva Chauvet, Senior Analyst, French Research, ISS, this webinar will give an overview of key updates to ISS’ benchmark European proxy voting policies for the 2012 proxy season.
U.S. Policy Perspectives: Wednesday, December 7, 2011, 11:00 AM EST. Presented by ISS’ Dr. Martha Carter, Head of Governance Research; Carol Bowie, Head of U.S. Compensation Research; and Patrick McGurn, Special Counsel, it will give an overview of key updates to ISS’ benchmark U.S. proxy voting policies for the 2012 proxy season.
The Securities Transfer Association (STA) released a study, 2011 Transfer Agent Survey to Estimate the Costs of a Market-Based Proxy Distribution System, that evaluates the costs to public companies of beneficial owner proxy processing services over providing those same services to registered shareowners.
The study concluded that public companies could save more than 42% if proxy services were subject to free market competition instead using a Continue Reading →
It is great to see Manifest, the proxy voting agency, raising the issue of management voting proxy items left blank by shareowners.
In the majority of markets with developed shareholder voting procedures, for each proposal, the shareholder has three choices; to vote for, against or abstain. Alternatively, shareholders can actively elect for the chairman to direct their votes at his/her discretion (a directed proxy). In cases where the shareholder has not made a choice in any regard (an undirected proxy), it is common for Continue Reading →
The Public Company Accounting Oversight Board (PCAOB) published a concept release that asks for public input on how to get auditors to become more independent, more objective, and more skeptical – and especially whether a mandatory rotation system for audit firms would achieve that objective. While mandatory rotation has been considered and dismissed in the past, PCAOB Chairman James Doty wants to take a fresh look at the idea to see if it might reduce the pressure on auditors to put concerns about the Continue Reading →
Eleanor Bloxham, a contributor to Fortune magazine, tells readers Why corporate directors should thank Dodd and Frank. With investors focused on “say-on-pay,” ISS recommendations against directors are down substantially.
Ture, but this isn’t likely to last. Most institutional investors seem to be taking a year off from voting against compensation committee members, giving them a free pass this year. Personally, I haven’t joined them. In fact, this is the first year I’ve been conscientiously voting against pay enabling compensation committee members. Expect an increase in such votes by institutional investors next year if companies ignore “say-on-pay” votes this year.
Directors should thank Dodd-Frank, not for temporarily distracting investors but for bringing better focus to their jobs… requiring that compensation committees be composed solely of independent directors and reducing conflicts of interest in compensation consultants, among many other reforms.
A new proxy vote analysis service, InGovern Corporate Governance Platform, allows institutional investors to analyze various companies, follow the agendas of shareholder meetings, exercise votes and collaborate with other investors. Research based on “objective criteria” – Governance Radar – is also embedded into the platform, according to a press release from Bangalore.
This is a part of InGovern’s pioneering efforts at promoting shareholder activism among institutional investors in India.
Global research has shown that there is high correlation between good corporate governance and long term returns on an investment. Shareholder activism is in its infancy in India. The Ministry of Corporate Affairs and SEBI have been prodding institutional investors to exercise their rights as minority shareholders in companies. Investors can hope to get superior investment returns by actively participating in enhancing the corporate governance culture in India.
Looking for coverage of the Southwest Airlines (LUV) annual meeting, I couldn’t find much. Dispatchers picketed outside. (Southwest Airlines Dispatchers Not Feeling LUV, NBC) The rising cost of fuel and integration of AirTran Airways were listed as concerns. (Despite tough economic conditions, Southwest tells shareholders future bookings look Continue Reading →
The United States Proxy Exchange (USPX) released draft guidelines for shareowners to use in making say-on-pay voting decisions. Comment letters are due by June 2nd to email@example.com. Please put “Say-on-Pay Guidelines” in the e-mail subject line. Letters will be posted to the USPX website, unless you indicate you would rather remain anonymous. (Disclosure: I am a member of USPX. Anyone can join for a nominal cost.)
Our draft guidelines lay out the problem of rising CEO pay, largely unrelated to performance. Shareowners now have a “say-on-pay.” However, if we mindlessly vote in favor of executive pay packages we will be adding to the problem, providing “insulation” for compensation committees and CEOs who can then point to shareowner approval.
Indeed, at a webinar earlier this week, Equilar indicated that 77.4% of votes at S&P 500 companies have so far resulted in 90% shareholder support for pay packages. A recent post by Dominic Jones, of IR Web Report, shows that most Investors spend just 5 minutes on annual reports and proxy materials.
To help shareowners make the best use of that five minutes we propose two general tests:
- The ratio test: Vote down all pay proposals where companies paid their CEO more than whatever pay ratio to average pay you think is outrageous. Peter Drucker warned it should be no more than 20. You may willing to pay up to 50, 100, 150 or more. We show you how. (For an interesting series of posts on the effort to kill the Dodd-Frank requirement to report company ratios, see Jay Brown’s series on Executive Compensation and Ratio Disclosure.)
- Median executive compensation: Vote against compensation packages of any firm at which executive compensation exceeds median pay (or some variation of that) in the previous year. Almost every year, median CEO pay rises because no board wants to think of their CEO as average. Paying above average of surveyed peers results in an average that continually ratchets up. Some of us think it is time for CEO pay to ratchet down for a while.
We also recommend that when you vote down a pay package, you also vote against the compensation committee that recommended its approval by the board. At a recent meeting of the Silicon Valley chapter of the National Association of Corporate Directors, Abe Friedman, former global head of corporate governance and responsible investing at BlackRock and Barclays Global Investors, concluded that voting out five compensation committee chairs and putting their pictures in the Wall Street Journal would do more for the pay issue than say on pay rights granted by Dodd Frank.
Again, comment letters are due by June 2nd to firstname.lastname@example.org Please put “Say-on-Pay Guidelines” in the e-mail subject line. Letters will be posted to the USPX website, unless you indicate you would rather remain anonymous.
After 6 hours of continuous typing and close to 15 hours of editing, my notes from this year’s Berkshire Hathaway annual meeting are complete. At the end of it all, the total tally is over 18,000 words and over 24 pages of wisdom from Buffett and Munger. As always, these notes were taken by hand, without the use of a recorder. For those of you who were not able to make it to the meeting this year, I hope the notes serve as an Continue Reading →
The American Civil War began on April 12, 1861 or 150 years ago today. Texas companies now appear to believe they are again outside the United States with respect to federal laws regarding proxies, based on the flawed decisions of Judge Lee H. Rosenthal. As reported at theCorporateCounsel.net on April 5th:
KBR filed a lawsuit in the Federal District Court for the Southern District of Texas seeking a declaratory judgment that would allow the company to exclude a shareholder proposal submitted by John Chevedden due to his alleged lack of eligibility. Yesterday, the court ruled in KBR’s favor, upholding the Apache decision from last year (which had been filed in the exact same court). We have posted the court’s memorandum and order in our “Shareholder Proposals” Practice Area.
Like Apache, KBR filed a lawsuit rather than attempt to exclude the proposal through the normal SEC channels (and thus challenging the Hain Celestial position of the Staff regarding the use of introductory letters from brokers as evidence of ownership under Rule 14a-8(b)).
Ted Allen, reporting for RiskMetrics (ISS), went into more detail, which I abbreviate here (Federal Judge Allows KBR to Omit a Shareholder Proposal, 4/5/2011):
Following the litigation strategy used by oil company Apache in 2010, KBR bypassed the SEC’s no-action process that is used by hundreds of companies each proxy season and filed a lawsuit in federal court in Houston, where the engineering company is based.
While the court’s ruling is not legally binding outside Texas, this case may inspire other companies to bypass the no-action process and file their own lawsuits. Chevedden has been a magnet for omission requests in recent years, in part because he and his network of retail investors typically file more than a hundred proposals each season on popular governance topics like declassification and the repeal of supermajority voting rules. This year, more than a dozen companies have raised a variety of eligibility challenges against Chevedden network proposals, but few have obained no-action relief from the SEC.
In its lawsuit, KBR argued that Chevedden’s ownership letter from Ram Trust Services (RTS), a Maine-chartered non-depositary trust company, failed to satisfy the requirements of SEC Rule 14a-8(b)(2), which requires investors to provide a statement from a “record” holder, which can be an “introducing broker” or a bank, according to the SEC staff. KBR argued that RTS is not a record holder, because it is an investment adviser and is not a participant in the Depository Trust Co. (DTC), a nationwide clearing agency that holds most of the shares that are owned by U.S. retail investors.
The KBR lawsuit was heard by U.S. District Judge Lee H. Rosenthal, the same judge who ruled for Apache in a relatively narrow decision in March 2010. In the Apache case, Rosenthal said a similar RTS letter was not sufficient to comply with Rule 14a-8(b)(2), but the judge did not address a second ownership letter from Northern Trust because it was submitted too late.
Since the Apache decision, the staff of SEC’s Corporation Finance Division has rejected similar arguments raised by Devon Energy, Prudential Financial, and Union Pacific to omit proposals filed by Chevedden and affiliated investors.
Notwithstanding those staff decisions, Judge Rosenthal concluded that the Apache decision was still good law, in part because of the eligibility requirements the SEC adopted in August for its proxy access rule, Rule 14a-11. In that rule, the SEC said an investor whose broker is not a DTC participant must “obtain and submit a separate written statement from the clearing agency participant through which the securities of the nominating shareholder . . . are held, that (i) identifies the broker or bank for whom the clearing agency participant holds the securities, and (ii) states that the account of such broker or bank has held, as of the date of the written statement . . .”
I contacted Jay Robert Brown, Professor, University of Denver Sturm College of Law, who blogs at theRacetotheBottom. Here’s his quick response. (I hope he takes up the subject further.):
The reigning principles of administrative law is that courts are obligated to defer to agency interprestations of their own rules. In this case, the staff of the SEC has made its position clear and the court should have followed it. Had it been litigated with someone having the necessary resources, the outcome likely would have been different. Some of the analysis also is wrong. The analysis that the SEC simply defers to courts in this area is not supported by the citations in the case. All of this means that its an unfortunate result for John Chevedden but not likely to be followed by other courts.
It may not be followed by other courts but there are a lot of companies in Rosenthal’s jurisdiction. Apache, for example, issued its definitive proxy on April 7 without including a proposal from Chevedden. Although they had warned the SEC earlier this year of their intention, the SEC did not issue a no-action letter and Apache did not go to court. They simply waited for the KBR decision as a go-ahead.
Now I learn that Kinetic Concepts, also based in Texas, informed the SEC on April 5 that despite the SEC’s March 21 denial of their no-action request, Kinetic will also move forward without a proposal from Chevedden, based on the KBR decision.
However, even a quick glance at page 6 of her decision (2011-04-04 KBR Chevedden Docket 24 – Memorandum and Order) reveals the judge didn’t base it on what is required in order to show evidence of ownership for a 14a-8 proposal. Instead, she bases her decision on evidence of ownership requirements adopted in 14a-11, which are provisions for placing shareowner director nominees on the proxy. Aside from being on a completely different subject, these rules are not even in effect, since the SEC put a stay on the rules pending a court decision!
Now Apache and Kinetic Concepts no longer feel compelled to even go to court. They are simply citing the flawed decision, which goes against several SEC failed no-action requests, assuming that no one will bother to enforce the law.
Chevedden files a lot of resolutions on core corporate governance issues and they are frequently supported by a majority of shareowners. It is no wonder that those who oppose more democratic corporate governance are so ready to attack. However, this latest court decision stretches the bounds of credulity. With last week’s budget agreement behind us, maybe the SEC will finally wake up to this usurpation of power and will enforce the law.
When the SEC issues a no-action letter, it is merely stating that it will not bring an enforcement action against the company. Since the SEC has not issued no-action letters to either Apache or Kenetic the SEC is free to bring an enforcement action against them but such action would, of course, be a matter of administrative discretion.
I recommend readers help raise the profile of this failure to act by sending e-mails to the Office of Chief Counsel at email@example.com and the Chairman at firstname.lastname@example.org. Also, fill out the form at https://tts.sec.gov/oiea/QuestionsAndComments.html since this will go to the Division of Enforcement, which would be the office actually taking action, if anyone does at the SEC.
It could be something as simple as the following:
I understand Apache and Kinetic Concepts informed the SEC they would exclude shareowner proposals from John Chevedden and further they will do so without the SEC issuing letters indicating it would take no action on such an omission. In fact, the SEC rejected such a request from Kinetic Concepts on March 21. These companies have not met the burden of 14a-8(g). They have not demonstrated they are entitled to exclude these proposals. In fact, the SEC said as much in letters issued to Hain Celestial, Union Pacific, Devon Energy, Prudential, News Corp. and Kinetic Concepts.
I believe taking action against Apache and Kinetic Concepts should be a high priority for the SEC. Otherwise, a growing number of companies will simply believe they can ignore shareowner resolutions, which form an important cornerstone of corporate governance.
Lewis Gilbert was instrumental in winning a formal SEC rule in 1943 that shareowner proposals be included in the proxy. After many challenges, the SEC’s powers were finally sustained in the 1947 case, SEC vTransamerica, when judge John J. Biggs Jr. ruled, “a corporation is run for the benefit of its stockholders and not for that of its managers.”
It took until 1988 for a shareowner proposal by Richard Foley to finally get a majority vote. Rights, which have taken many decades to win could be gone very quickly if we simply do nothing to defend them. The SEC’s rules are not self-enforcing but depend on shareowner vigilance. “All that is necessary for evil to triumph is for good men to do nothing.” While we aren’t sure who said it first, Edmund Burke or Leo Tolstoy, we all know it to be true.
Schlumberger, one of the stocks in my portfolio of about 50 companies, has an Apr 06, 2011 Annual Meeting coming up. I’ve decided to vote early this time, since I’m in New Orleans and may be too busy to research much while there. I checked in with MoxyVote.com, ProxyDemocracy and OTPP.
MoxyVote had no recommendations as of 3/29, as I post this, but I expect they will soon. OTPP voted against the proposal to increase authorized common share capital. I voted with them on that issue. At ProxyDemocracy I see that Trillium voted against all directors. Maybe they’re doing it because Schlumberger is second only to Halliburton in providing fracturing services to natural gas companies? I don’t know.
Florida SBA voted against Tony Isaac and K. Vaman Kamath. AFSCME voted against Chairman and CEO Andrew Gould. I went with these recommendations. Maybe it is just me but $9 million in options awarded to Gould last year on top of the rest of his pay for a total of about $15 million just seems over the top.
For say when on pay, I went with annual, along with disclosed votes by CBIS, Florida, Trillium and AFSCME. When I checked on 3/27 ProxyDemocracy was showing that CalPERS voted with management for a frequency of every two years. However, after contacting CalPERS I learned they actually voted for annual voting on SWOP. Both parties looked into the glitch and as of 3/28 it was fixed.
I also voted against the officers compensation proposal. As I said before, $15 million for Gould seems over the top to me. I’m not sure where the cut-off point is for reasonable pay but as long as shareowners approve such packages the averages will keep ratcheting up and the disparity between the top 1% and the rest of us will continue to grow. We need to ratchet down the Lake Wobegon effect.
For all other proxy items, I voted with management using the MoxyVote platform.
Regarding CEO pay, Nell Minow recently wrote, “there is a little flicker of light at the end of the long, dark tunnel of outrageous pay.” Her signs of hope:
- Required advisory “say on pay” (SOP) vote. Last year after a “no” vote, Occidental Petroleum’s board reduced the pay package for CEO Ray Irani and announced his retirement. Shareowners have voted down pay plans at several companies already. Additionally, “Some companies are adjusting their pay plans in anticipation of a new level of scrutiny by shareholders, tightening pay-performance links and getting rid of especially unpopular compensation components like “gross-ups” (paying the executive’s taxes).”
- Shareowners at four of seven companies proposing a triennial say when on pay (SWOP) vote instead voted for an annual vote.
- The UK may soon require new additional disclosures.
- “Groups like Public Citizen are working to remove further legislative and regulatory obstacles to shareholder oversight on pay and disseminating information on the bonuses of bailout-company executives.”
- The FDIC is moving forward with rules to requiring pay-performance links in bank executive compensation as part of insurance risk assessment.
“These are all welcome signs that compensation is finally being seen as an essential element of securities analysis and risk management, and that’s what markets are all about.” (The Days of Outrageous CEO Pay May Be Ending | BNET, 2/14/2011).
High CEO pay is symptomatic of a host of issues. An important one for me is income inequality. It seems to me that a disappearing middle class is not good for America. This seems to be a concern of many, but we still seem to be heading in the wrong direction. For some interesting research on American opinion in this area, see The Return of Dan Ariely: The Survey Results Are In (ChrisMartenson.com, 2/7/2011). His conclusion:
Taken as a whole, the results suggest to us that there is much more agreement than disagreement about wealth inequality. Across differences in wealth, income, education, political affiliation and fiscal conservatism, the vast majority of people (89%) preferred distributions of wealth significantly more equal than the current wealth spread in the United States. In fact, only 12 people out of 849 favored the US distribution. The media portrays huge policy divisions about redistribution and inequality – no doubt differences in ideology exist, but we think there may be more of a consensus on what’s fair than people realize.
From Eagle Rock Proxy Advisors, most companies are generally recommending that shareholders vote for say-on-pay votes once every three years. Here is a snapshot of overall board recommendations/ intentions for recommendation at the beginning of the season:
As we previously reported, shareowners are pushing for the annual option, so I expect many more rejections of triennial proposals. See “Say on Pay” to be Annual. Timothy Smith, Senior Vice President, Director of ESG Shareower Engagement at Walden Asset Management recently sent out an e-mail noting he is among many strongly opposed to the triennial proposals by management and is “frustrated that we even had to have a frequency vote (thanks to Idaho Senator Crapo’s midnight amendment).” But the surge of votes for annual say when on pay SWOP is “helping investors pay more attention to the value and use of SOP votes. In the end this frequency vote may help solidify the importance of SOP to investors vindicating the initiative AFSCME, Walden and others started 6 years ago.”
Yes, with SOP and SWOP votes this year and companies reporting the ratio of executive pay to the average of all employees for the first time, the topic of CEO pay may come into focus more this year than in the past and shareowners will now at least have the power to voice their opinion.
However, I see little evidence that any of the current measures address the “Lake Woebegone” effect documented by Rachel M. Hayes and Scott Schaefer. According to those researchers, “no ﬁrm wants to admit to having a CEO who is below average, and so no ﬁrm allows its CEO’s pay package to lag market expectations.” (CEO Pay and the Lake Wobegon Effect, December 11, 2008, Journal of Financial Economics (JFE) Their analysis suggests SOP votes might be counterproductive. Before SOP was required by Dodd-Frank, many voices warned it would simply provide boards and managements with cover for a continued upward spiral. Hayes and Schaefer offer up a “potential solution to the problem of shareholder myopia.” Delegate pay decisions to directors and motivate them through contracts “to take a longer-term view.” But isn’t that what we’ve been trying all along? Clearly, something more is needed.
India’s Sonia Jaspal does a good job of citing some of the more more relevant papers and issues that have received too little attention to date. (The Negative Impact of CEO Pay & Power on Corporate Culture and Governance, 2/15/2011) Jaspal’s concern was apparently set off by a recent study conducted by Economic Times of India, which showed that in 2009-2010 CEOs of top companies earned 68 times the average pay of employees, up from 59 times their prior year. To Americans facing a pay disparity of 264 (with a high point of 558 in the year 2000), the differences in India may seem paltry. (Mind the Compensation Gap, Portfolio.com, 1/26/2011)
Many of us “feel” an injustice when CEOs earn so much more than average workers, but Jaspal points to academic studies that show the potential impacts are more harmful to society than simply hurt feelings.
When Executives Rake in Millions: Meanness in Organizations. ”Higher income inequality between executives and ordinary workers results in executives perceiving themselves as being all-powerful and this perception of power leads them to maltreat rank and file workers.” Some powerful executives perceive those with lesser power as sub-human. They demonstrate reduced empathy, being inclined to objectify and dehumanize others through behaviors such as sexual harassment and an increase likelihood of unethical and corrupt behavior.
Jaspal also points to another real impact of this dehumanization, “the fact that CEOs who fired the maximum number of employees during recession in US, received the biggest pay packets.” They apparently felt little remorse in benefitting from the tragedy they impose on others. “The social and psychological consequences of income disparity are borne by the society” and the consequences may be greater in the United States than it is in India because of the much larger average disparities.
An article published by The Economist titled The psychology of power: Absolutely looks at experiments that appear to confirm Lord Acton’s dictum that “Power tends to corrupt, and absolute power corrupts absolutely.” According to the studies, “The powerful do indeed behave hypocritically, condemning the transgressions of others more than they condemn their own… It is not just that they abuse the system; they also seem to feel entitled to abuse it.” Researchers conclude that “people with power that they think is justified break rules not only because they can get away with it, but also because they feel at some intuitive level that they are entitled to take what they want.”
Of course The Economist comes to a different conclusion than many of us would: “Perhaps the lesson, then, is that corruption and hypocrisy are the price that societies pay for being led by alpha males (and, in some cases, alpha females). The alternative, though cleaner, is leadership by wimps.” I’d say the lesson, instead, highlights the need to ensure leaders remain accountable, knowing corruption and hypocrisy will not be tolerated.
We keep Searching for a Corporate Savior in our CEOs but ending up with charismatic narcissists, with too many focused on short-term profits when we know we should be promoting CEOs from within to move from Good to Great.
Fraudulent Financial Reporting 1998-2007- An Analysis of U.S. Public Companies by the Committee of Sponsoring Organizations of the Treadway Commission found that CEOs were involved in 72% of the 347 alleged cases of fraudulent financial reporting listed with SEC during 1998-2007 period. The average period of fraud was 31.4 months. Why Do CFOs Become Involved in Material Accounting Manipulations? shows that 46.15% of CEOs involved in fraudulent activity benefitted financially from accounting manipulations. “CFOs are involved in material accounting manipulations because they succumb to pressure from CEOs, rather than because they seek immediate personal financial benefit from their equity incentives.” Since CEO performance and benefits are measured by financial numbers submitted to the stock market, CEOs rationalize the need to report fraudulent financial numbers to protect their own positions.
Based on this analysis, Jaspal makes the following recommendations (I’ve taken liberty to reword some slightly.):
- The law should place a limit on the number of times CEO pay can excede the pay of average workers. This will ensure some balance is maintained.
- Because studies show that some powerful people tend to dehumanize their underlings and studies on emotional intelligence indicate that emotionally intelligent people are aware of their own and others emotions and drivers, we should explore methods to keep CEOs emotionally connected.
- Since research found that women are less likely to feel a sense of entitlement or power we should appoint more women CEOs to maintain a balance and keep senior management grounded.
- Independent board members should be included on compensation committees. “This will ensure that a realistic view is taken of CEO and other top executives’ salary. Basing salary structures on performance rather than favorable circumstances is required.” (This is already the norm in the United States; unfortunately, it doesn’t appear to “ensure a realistic view.”
- Employees may be empowered by forming trade unions and using whistle blowing lines inside and outside the organization. (Again, we have this in the United States and the whistle blowing tools are improved under Dodd-Frank.)
- Last but not the least, the public should play an active role in curtailing income disparities. The issues should be brought to government and media attention. (Name and shame seems to have little impact but perhaps heightened awareness of the issues will lead to real sanctions.)
It is a nice list. I certainly agree with the idea of keeping CEOs emotionally connected, appointing more women CEOs, and getting the government involved in reducing income gaps. However, for the most part Jaspal’s recommendations don’t provide much guidance for shareowners entering the proxy voting booth. The one exception is placing a limit on the number of times CEO pay can exceed the pay of average workers.
Institutional investors have developed a plethora of guidelines and scorecards for voting down CEO pay. For example, section 3 of the CalPERS Global Principles of Accountable Corporate Governance, which contains too much to cover in this brief post but here are a few examples:
- To ensure the alignment of interest with long-term shareowners, executive compensation programs are to be designed, implemented, and disclosed to shareowners by the board, through an independent compensation committee.
- Executive contracts be fully disclosed, with adequate information to judge the “drivers” of incentive components of compensation packages.
- A significant portion of executive compensation should be comprised of “at risk” pay linked to optimizing the company’s operating performance and profitability that results in sustainable long-term shareowner value creation.
- Companies should recapture incentive payments that were made to executives on the basis of having met or exceeded performance targets during a period of fraudulent activity or a material negative restatement of financial results for which executives are found personally responsible.
- Executive equity ownership should be required through the attainment and continuous ownership of a significant equity investment in the company.
- Equity grant repricing without shareowner approval should be prohibited.
- “Evergreen” or “Reload” provisions for grants of stocks and options should be prohibited.
We can find many more lists, but again they don’t seen to be too helpful for the average investor who isn’t going to hire a proxy advisor or put a lot of time into analyzing the proxy. Last year, the Council of Institutional Investors issued a brief paper, Top 10 Red Flags to Watch for When Casting an Advisory Vote on Executive Pay aimed at addressing this issue. “Many investors, however, lack the time and resources to do deep dives on compensation at each of the hundreds of companies in their portfolios. They need rules of thumb to identify executive pay programs that are ticking time bombs.” That statement might even ring truer for retail investors holding a dozen or fewer companies. Again, even CII’s ”top 10″ are too extensive to list here because many items are broken into multiple items. Here are the top 10 with much of that elaboration stripped away:
- Do top executives have paltry holdings in the company’s common stock and can they sell most of their company stock before they leave?
- Does the company lack provisions for recapturing unearned bonus and incentive payments to senior executives?
- Is only a small portion of the CEO’s pay performance-based or is the basis a single metric?
- Are executive perks excessive or unrelated to legitimate business purposes?
- Is there a wide pay chasm between the CEO and those just below?
- Stock options should be indexed to a peer group or should have an exercise price higher than the market price of common stock on the grant date.
- Did the CEO get a bonus even though the company’s performance was below that of peers?
- Does the company guarantee severance or change-in-control payments not in the best interest of shareowners?
- Does the disclosure fail to explain how the overall pay program ties compensation to strategic goals and the creation of long term shareowner value?
- Does the firm advising the compensation committee earn much more from services provided to the company’s management than from work done for the committee?
Key to the the usefulness of CII’s advice is how easily answers can be obtained by individual retail shareowners. A second major concern is even if all this advice is followed, how will we ratchet down the Lake Woebegone effect and decrease the growing disparity between the rich and the rest of us? That seems important if we are to move from a culture of narcism, where many of the rich feel entitled to break the law and treat underlings with disrespect.
Members of the United States Proxy Exchange will soon begin working on a paper to address the issue of CEO pay. I think it is likely to revolve around the issue of what pay packages to vote down. Most retail shareowners don’t subscribe to ISS, Glass Lewis or other services that can rapidly assess pay packages. We need simple metrics so that we can gather all the information we need to vote in just a few minutes. Three possible examples:
- Pay that is over 100 times average pay.
- Pay that takes more than 5% of a company’s net profit.
- Majority of those disclosing votes in advance on ProxyDemocracy.org recommend against.
For less than $4 a month, your voice can be heard by joining in this important effort.
As the press release from Boston Common Asset Management below reports, Cisco Systems made a deceptive announcement of vote results because they used two different methods to calculate proxy results announced at the annual meeting. They reported their own proposals as a simple ratio of those voting but included not only abstentions in the ratio for proposals put forward by shareowners, but all outstanding shares.
Of course, that is different than the simple formula used by the SEC to determine if a proposal is eligible for resubmission and it makes it look like shareowner proposals have much less support than they actually do. The deception moved support for a Boston Common proposal down from 34% to 19%. I’ve reported on similar deceptions by other companies previously. (Hat tip to Adam Kanzer of Domini. I had earlier reported Cisco had only included abstentions, not all outstanding shares… a huge difference, when reporting the vote on shareowner proposals.)
The SEC adopted new rules recently requiring that voting results be reported on a Form 8-K within four business days after the end of the AGM or other meeting where vote are held. Item 5.07 of that form doesn’t require companies to include voting percentages, so one reading would allow companies to report the voting percentages to the public as they wish, as long as they report the raw voting data as required.
Unfortunately, it appears that shareowners, including us, were asleep with regard to this issue during the rulemaking process. None of the questions asked by the SEC in its proposing release addressed the issue of reporting ratios consistently. According to Broc Romanek at theCorporateCounsel.net, nor did any comments from shareowners, at least not to his knowledge.
Complicating the matter further is the fact that state laws govern how to calculate whether a proposal is passed (some require counting those “present,” including abstentions) and a company’s bylaws can also come into play. (An Emerging Hot Topic? Whether to Disclose Voting Result Percentages, theCorporateCounsel.net/Blog, 5/5/2010) But “passage” actually has little consequence for most shareowner proposals, since they aren’t binding and I’m relatively certain no state laws require reporting voting results on management proposals using a different formula than reports on shareowner proposals.
Cisco is obviously trying to influence the perception of shareowners, particularly individual shareowners and small institutional investors who don’t subscribe to proxy advisory services.
Large institutional investors are unlikely to be fooled. Risk Metrics, for example, reports vote results under the formula use by the SEC in Rule 14a-8(i)(12) to determine eligibility for resubmission. That method is FOR/FOR + AGAINST without counting abstentions or broker votes in the denominator. They use the same formula when applying their policy to recommend a withhold-against vote against directors who fail to respond to two majority-supported proposals. See 2011 US Audit/Board Policy: Frequently Asked Questions (Question 1 under the Board Responsiveness). Hat tip to Ted Allen for informing me of their policies.
However, Risk Metrics doesn’t have a policy to withhold support from directors at issuers that report vote results one way for management and another way for shareowner proposals. Those who subscribe to their services may want to propose such sanctions in the future.
The Council of Institutional Investors has a policy that “Boards should take actions recommended in shareowner proposals that receive a majority of votes cast for and against. If shareowner approval is required for the action, the board should seek a binding vote on the action at the next shareowner meeting.” Therefore, they are looking at the percentage as a percentage of cast votes, excluding abstentions. Again, members of CII might want to urge some sanction on deceptive reporting practices, such as those used by Cisco.
One could argue that reporting voting results of management and shareowner proposals using differently formulas could be considered a misleading statement under Rule 10b-5 that is arguably material, since it may influence vote decisions in subsequent years. If the company’s spin could be considered making false statements in order to drive up or sustain share prices we might have a case.
However, I’m reminded of Soviet reporting (or was it simply our own propaganda on their reporting?). The story I heard as a kid was that Pravda reported that the USSR placed second in a race, whereas the US place next to last (There were actually only two in the race. The US came in first; the USSR second.)
They may be deceptive but Cisco’s statements aren’t false. However, As Glyn Holton indicates in the press release below, Cisco’s actions speak “volumes about management’s attitude towards their own shareowners.” (Disclosure: The publisher of CorpGov.net, James McRitchie, holds investments in Cisco Systems.)
Boston Common Asset Management, LLC has divested of its holdings in Cisco Systems, Inc. stock (NYSE: CSCO) due in part to the company’s weak human rights risk management and poor response to investor concerns. Cisco’s deceptive announcement of vote results on proxy items at the 2010 annual shareholder meeting has raised further alarm about the company’s commitment to transparency.
Since 2005 Boston Common has led a growing coalition of investors, representing over 20 million Cisco shares, in asking Cisco management to ensure its products and services do not stifle human rights. Cisco has testified before federal law makers twice since 2006 over questions on its human rights record, including its marketing of equipment to the Chinese Ministry of Public Security.
“Boston Common’s decision to divest comes after years of campaigning Cisco for greater transparency and accountability on key human rights and business development concerns,” stated Dawn Wolfe, associate director of environmental, social, and governance research at Boston Common Asset Management. “Freedom of expression, privacy, and personal security are all critical elements in maximizing network traffic. Politically and socially repressive policies related to speech and privacy has a chilling effect on users and violates universally recognized human rights. When pressed for details on how Cisco addresses these risks, they come up short.”
At the November 18, 2010 annual meeting of shareholders, Cisco did not answer yet another request for engagement with shareholders. This followed a September 30, 2010 letter to independent board member and Stanford president John Hennessy requesting his assistance in establishing a meaningful dialogue between Cisco and shareholders on human rights. Similar to previous attempts to engage the Board as a whole, Hennessy did not respond to the request.
“As technology becomes more prevalent in the world, we expect human rights related concerns will become more, not less prominent,” said Nevin Dulabaum, president of Church of the Brethren Benefit Trust, a long-time shareholder of Cisco Systems and active participant in the investor-driven human rights campaign. “For all its talk about the ‘human network’ and adherence to the United Nations Universal Declaration of Human Rights, Cisco has not demonstrated in any concrete way that it fully recognizes its potential impact on human rights around the world.”
Boston Common’s ESG Team recommended the removal of Cisco Systems from its portfolios because of strong reservations about its human rights performance and poor shareholder engagement on the issue.
Deceptive Vote Tallying Behind Proxy Results Announced at Annual Meeting
In an apparent attempt to downplay votes in favor of shareholder sponsored proposals on the proxy ballot, Cisco used two different methods to calculate proxy results announced at the annual meeting—one for proposals put forward by its own management and a second for proposals sponsored by Cisco shareholders which served to dilute support.
“If management is reporting votes one way for their own proposals and another way for shareowner sponsored proposals, that is deceptive. It speaks volumes about management’s attitude towards their own shareowners — a flashing red light. Ignore it at your peril,” stated Glyn Holton, executive director, United States Proxy Exchange.
Boston Common’s human rights proposal was supported by 34% of voted shares when calculated using the standard SEC method, the one Cisco used to calculate support for its own proposals, including the advisory vote on pay.
If Cisco used the same method based on all outstanding shares to calculate support for its own proposals, not just those sponsored by shareholders, its executive compensation package would have received support from just over half of its shareholders.
“The voice of shareholders fall on deaf ears at Cisco,” stated Wolfe. “About a third of Cisco Systems shareholders voting their proxies have supported our proposal over the years, voting in favor of greater disclosure on issues of censorship and privacy. Cisco’s deceptive tallying practices in 2010 do not change that. The investor coalition will march ahead, and perhaps one day Cisco will wake-up and realize how dedicated these shareholders are to the company’s success. Until then, significant questions remain about its ability to manage risks it is reticent to recognize.”
Dawn Wolfe, Associate Director of ESG Research, 617-720-5557. email@example.com
About Boston Common Asset Management
Boston Common Asset Management is an investment manager specializing in sustainable and responsible equity and balanced strategies. We pursue long-term capital appreciation by seeking to invest in diversified portfolios of high quality, socially responsible stocks. Through rigorous analysis of financial, environmental, social, and governance (ESG) factors we identify attractively valued companies for investment. As shareholders, we urge portfolio companies to improve transparency, accountability, and attention to ESG issues. Our focus is global; we manage U.S. and international portfolios, customized to the needs of institutional and individual investors.
During the next several months, most corporations will be sending out their proxies (ballots) and holding their annual meetings. Individual shareholders own about 30% of the stock in US markets but few bother to participate, even though we often feel corporate managers have too much power and too little accountability.
When we fail to vote, we essentially turn our assets over to management. Most of us feel we should vote but we also think voting is too complicated and time consuming. Since we only hold a few shares, we often think that failing to vote won’t have any consequences.
Recent changes allowing corporations to e-mail and post proxy materials on the internet have dramatically reduced the proportion of shareholders voting to as little as 5%. (Apparently, it is easier to ignore a stack of e-mails on your computer than a stack of paper on the dining room table.) However, the internet also makes it much easier to vote in corporate elections and to vote intelligently.
There are literally thousands of sites for investors (here’s a few), ranging from brokers to associations to scam artists. Mostly, they focus on
- stock picking,
- allocating your investments, and
- when to sell.
While these are important issues, what’s new are sites on how to be an owner. Voting is how we hold corporate directors and managers accountable. Obviously, shareholders haven’t done a great job, especially at the banks. Voting is the cornerstone of good corporate governance. All the rules of Washington can’t save us from future Enrons and stock bubbles if shareholders don’t start acting like shareowners instead of gamblers.
Some say shareowners should leave everything to trusted financial advisors. What, like Bernie Madoff? Or we could just trust in the management of the companies we invest in… but their interests are often different from ours. We may not approve of the $6,000 shower curtain at Tyco or the unprotected derivative bets at AIG.
Institutional investors own about 2/3 of the market. Should we just leave voting up to them? After all, they have a fiduciary duty to vote and they have the resources to investigate the issues. Unfortunately, many also have potential conflicts of interests. For example, mutual funds don’t want to vote against corporate managers who may decide who will run the company’s 401(k) plan. That’s potential business a mutual fund doesn’t want to lose.
Additionally, the average turnover of stock, mostly by institutional investors, is huge. For NYSE listings it was 130% in 2008 and 250% in 2009, meaning the average stock was bought and sold 2 ½ times in 2009. Owning Intel 30 times in 10 years isn’t really being what I’d call a long-term owner. Most of us hold our stocks longer.
We’re usually in for the long term but since we generally only hold a small portion of the stock in any one company, we lack the economic incentive to buy expert advice or spend the time ourselves analyzing complicated proxy issues like shareowner proposals, board elections, executive compensation, mergers etc.
Until recently, being an actively involved shareowner was impractical for most of us but just like social media sites like Facebook are bringing people together, several new internet sites are making proxy advice obtainable for free. Here are five sites worth exploring:
1. Corpgov.net is my blog. For over 15 years I’ve discussed major trends and have provided links to dozens of activist or aggregator sites so that investors can join forces or research what other shareowners are doing.
2. ProxyDemocracy.org aggregates, displays and automatically e-mails to subscribers proxy votes announced in advance by respected activist funds like CalPERS, CalSTRS, Calvert, CBIS, Domini, Florida SBA, AFSCME, Trillium and others. Using ProxyDemocracy.org, you can copy the voting behavior of these trusted “brands.” The site also rates funds on how they vote on issues involving: director elections, executive compensation, corporate governance and corporate impact. So, if you know what issues concern you, you can use that information to help you decide whose votes to copy and which mutual funds to buy.
Another feature of ProxyDemocracy.org is that they will tell you when they have collected votes for upcoming proxies on the stocks in your portfolio (if you give them your e-mail address and name the stocks). Because of the breath and depth of the activists funds it follows, you’ll almost always be able to see how at least some funds are voting. Unfortunately, you can’t vote your shares directly on ProxyDemocracy.
3. Moxyvote.com has dozens of “advisors,” mostly socially responsible mutual funds, unions, environmental groups and public interests groups who take a stand on various proxy issues. At Moxy Vote you can actually get voting advice and vote on the same site, using the pin number you get from your broker. Easier yet, you can also have your broker deliver your proxies directly to Moxy Vote.
If you choose that route, you can even set up voting defaults based on the recommendations of your chosen advocates. That way if you don’t vote your proxy or override your defaults, the system will automatically vote with your advocates. For example, mine are set up to look first to the Investor Environmental Health Network, if they haven’t taken a position on the proxy item, my vote will be cast per the Center for Political Accountability. If they don’t have a position it moves to my third choice and on down the line. Unfortunately, many of the advisors on Moxy Vote are focused narrowly and hold few stocks. They won’t give you advice on every stock you hold or on every issue at the companies where advocates have taken positions.
4. Shareowners.org is an advocacy site aimed at getting shareownrs to lobby Congress on various issues. Advice on voting at specific companies is limited but like Facebook, it is a great place to share announcements and commentaries with others.
5. The United States Proxy Exchange (proxyexchange.org or USPX), like Shareowners.org, is an advocacy site. However, USPX not only involves members in lobbying efforts, it also involves them in analyzing developing policies. Want to learn how to file resolutions? Present resolutions at local companies? Put your expert skills to good use? USPX provides training and multiple points of entry to baby-boomers and young people alike who would like to see their ideals put into action.
Sparton will hold its annual meeting in Schaumberg IL on October 27, 2010. Proposals to be voted on include two that further improve Sparton’s corporate governance to best practices as follows:
- Proposal #3 includes the adoption of a Majority Voting standard for election of directors, and
- Proposal #4 includes the de-classifying (de-staggering) of Sparton’s board where all directors will be elected annually for 1 year terms, starting in 2011.
Lawndale Capital Management, Sparton’s largest shareholder, will be voting FOR both of these good governance proposals. Both deserve the support of all shareowners. (Disclosure: Publisher James McRitchie is an investor in Diamond A Investors L.P., a group member with Lawndale Capital Management Inc.)
As many of you know, I petitioned the SEC last year to change the rule that allows blanks on a partially filled proxy or voter instruction forms (VIFs) to go to management. (see 4-583 at http://www.sec.gov/rules/petitions.shtml)
The way I read Dodd-Frank SEC.957, it appears to prohibit broker voting for say on pay, directors and “any other significant matter, as determined by the Commission, by rule.” I think that language gives an additional impetus for the SEC to deny both broker votes and blank votes that go to management for all proxy items. After Enron, who can say that even voting on the auditor isn’t significant?
With proxy plumbing and Dodd-Frank, this is the perfect time to ask the SEC to amend Rule 14a-4(b)(1) to do away with both broker and blank votes going to management altogether and to require VIFs to meet the same requirements as proxies.
I’ve attached a draft of my comments below but would very much appreciate scrutiny by others. Are there other rules that need to be changed to accomplish this? Are my suggested amendments reasonable? I don’t want to jeopardize the ability of shareowners to be able to assign proxies or to implement an open client directed voting system, such as that being developed by MoxyVote.com. Does my saving clause protect those abilities?
Please e-mail me at firstname.lastname@example.org with suggestions and/or leave comments here. If we can get rid of blank votes going to management, we’ll win more elections. This is one more change needed to create a level playing field.
Attachment: Draft Letter blankvotes&VIFs10-9.doc
ProxyDemocracy.org was very helpful, with several funds reporting their votes in advance. Also very helpful was CalPERS’ site, which provided reasons for their votes. I voted for most of the directors, along with most of the funds who reported voting in advance on ProxyDemocracy. However, I joined with CalPERS in withholding my vote from the following two, since I found CalPERS’ reasons compelling:
Director Andrew N. Liveris – I joined with CalPERS in voting against Liveris, since he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place. Additionally, Mr. Liveris is a current CEO while serving on an excessive number of public company boards.
Director Judith Rodin – Like Liveris, he served as members of the audit and risk committee prior to the financial crisis when there was a failure to ensure appropriate corporate governance practices pertaining to risk management were in place.
Along with most of the funds, I voted to ratify the auditors, support the omnibus stock plan, and approve TARP repayment shares. I voted against the Advisory Vote to Ratify Named Executive Officers’ Compensation, since CalPERS believes the company does not adequately disclose the process by which executive compensation is determined.
Along with most of the funds, I voted to Amend NOL Rights Plan (NOL Pill). Generally, I vote against such plans, but CalPERS believes the poison pill is in shareowner best interest. Additionally, the company has indicated the adoption is not for anti-takeover purposes.
I joined with the funds to Approve Reverse Stock Split. I voted with most of the funds in favor of Affirm Political Non-Partisanship, a proposal by Evelyn Y. Davis. CalPERS voted against it. They believe the proposal is unnecessary because Citigroup indicates it adheres to all state and federal regulations on this matter. That doesn’t seem like a convincing reason to me but I’m not very firm in my support. In glancing at the proposal, it may well be that everything in the resolution is already covered by law. If so, it does no harm to vote in favor of it.
Along with most of the funds, I voted in favor of all the shareowner proposals. Report on Political Contributions, by the Firefighters’ Pension System of the City of Kansas City. CalPERS believes this proposal poses no long-term harm to the company. According to MoxyVote.com, the Center for Political Accountability also supports this proposal.
Report on Collateral in Derivatives Trading, by the Sisters of Charity of St. Elizabeth. CalPERS believes this proposal poses no long-term harm to the company. It seems to me this has the potential to reduce risk. That’s better than posing no long-term harm. In fact, if shareowners had listened to the Sisters of Charity and members of the Interfaith Center on Corporate Responsibility there is a good chance we would have missed the Great Recession. See this 2008 press release about ICCR sounding the alarm for 15 years. Why weren’t shareowners and management listening? Rev. Seamus Finn, director, Justice, Peace & Integrity of Creation, Missionary Oblates of Mary Immaculate and an ICCR board member, said:
The U.S. government controls over a quarter of outstanding Citigroup shares today. It has an extraordinary opportunity here to send a clear message to Wall Street that more derivatives disclosure is vital. Even more to the point, the Treasury Department really has no choice other than to support our resolution since a failure to do so would directly undercut its campaign for critical financial reform.
ICCR Executive Director Laura Berry said:
To adopt an inconsistent posture at this critical juncture on derivatives disclosure would be disastrous both in terms of how Wall Street reads the signals from Washington and how seriously Congress sees the Obama Administration as being in its support of vital financial services reform. (Shareholders: Treasury Should be Consistent on Capitol Hill and on Wall Street by Voting Citi Shares for More Derivatives Disclosure, press release, 4/16/2010)
Ability to Call Special Meetings, by William Steiner. CalPERS believes shareowners should be able to call special meetings. So do I. I’ve even submitted proposals myself on this issue and, like William Steiner, I often work with John Chevedden on these submissions.
Proposal Regarding Stock Retention, by AFL-CIO. CalPERS is a firm supporter of stock ownership guidelines that require executives to satisfy minimum levels of ownership after leaving the company. It should be noted the proposal mandates that executives hold 75% of their equity awards for two years after retirement or termination. CalPERS prefers that guideline specifics be designed and implemented through the company’s Independent Compensation Committee. I favor holding most equity awards until after retirement.
Shareholder Proposal Regarding the Reimbursement of Expenses in a Contested Election, by AFSCME. CalPERS believes this proposal poses no long-term harm to the company and would be a benefit to shareowners. I think this proposal could increase the ability of shareowners to have additional influence on nomination and election of directors.
I voted using MoxyVote.com. I you agree or disagree with my votes, you can leave comments here on CorpGov.net or on my wall at MoxyVote, search James McRitchie. If you use ProxyDemocracy, keep in mind that you can post how you’ve voted or any other advice regarding a company right on the site. For and example, see the bottom of the Citigroup page. When it becomes technologically feasible, it would be great if sites like MoxyVote and ProxyDemocracy can tell users who sponsored each resolution. Having to look that information up on the proxy takes an extra minute or so. Just as many will vote with various funds because of their “brand” reputation, we will also vote based on the brand of the sponsor.
“In many ways, 2010 is the Foundation Proxy Season. By next year, the world will be changed. It is likely that both say-on-pay and proxy-access measures will be mandated. Directors will undoubtedly face greater scrutiny and more challenges than ever before. As a result of these impending challenges, boards must use the 2010 season to lay a strong foundation that prepares them for the future. That means building relationships with investors and strengthening management teams and boardroom rosters.” (This Proxy Season: Bowling for Ballots, Directorship, 2/11/10) Like always, Patrick McGurn provides the best insights into this year’s proxy season.
For companies trying to figure out how to address the new disclosure requirements related to board qualifications, leadership structure, risk oversight, etc., Broc Romanek has you covered, offering up samples at TheCorporateCounsel.net Blog. (Samples: Companies Complying with the SEC’s New Rules, 2/11/10)
Ceres, in collaboration with Bloomberg and UBS, launched a new benchmarking study today called “Murky Waters: Corporate Reporting on Water Risk.” The report (available here) ranks 100 publicly-traded companies in 8 water-intensive sectors on their water risk disclosure: beverage, chemicals, electric power, food, homebuilding, mining, oil & gas, and semiconductors.
Senate Bill 1007, by Democratic Sen. Loni Hancock of Berkeley, would require candidates for board seats with the California Public Employees’ Retirement System and the California State Teachers’ Retirement System to file ongoing campaign contribution and spending reports during and after an election. (Bill would boost CalPERS, CalSTRS election transparency, From The Capitol, 2/10/10)
First, a precautionary note about this post. These are strictly my impressions. There is no intention here to present juicy findings with regard to any corporation, fund, individual etc. My purpose is simply to help facilitate dialogue and understanding. Keep this in mind as you read my notes, as well as the following. One of the panelists from a government agency began with the standard disclaimers about how what he said was his opinion alone and did not necessarily reflect the views of his agency. Ted Mirvis, a partner with Wachtell, Lipton, Rosen & Katz interrupted, as I recall, saying something to the effect that he not only disavows the applicability of any of his statements to his firm, he also disavows their applicability to himself. That got a laugh, but says it all. The conference was the perfect venue for throwing out ideas and seeing what sticks… what resonates with those attending. We can learn a lot from that. Of course, there were also plenty of hard facts.
Your comments and especially your corrections are welcome. To comment directly on the blog, you’ll need to register first. Just press the “No comments” button and it wil step you through registration, if you aren’t already registered. (This process cuts down on spam.) If you don’t want to bother registering, you can always e-mail your comments directly to email@example.com. Your feedback on my coverage, the topics and the conference itself are important to me.
Prior to the dinner, there was a networking reception held outside the Joan B. Kroc Institute for Peace & Justice… a wonderful facility in a beautiful setting overlooking the northern part of San Diego. My little point and shoot camera can’t do the place justice. I’m sure the Forum will have much better photos on their site, perhaps on the Conference Materials page where you will find a wealth of studies, books and other resources.
Keynote: The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery.
At the dinner to kick off Directors Forum 2010, Strine’s main point seemed to be that we can’t expect corporations to act in the long-term interest of shareowners if most investors are rewarding short-term performance. He looks at corporations as republics, rather than direct democracies. Regarding proxy access, he appears to favor the opt-in option to encourage innovation without imposing a government mandate. Shareowners who propose changes should have long-term holdings, whereas most activists hold only a short time. They should have a substantial positive interest and disclosure should be required so we know they aren’t shorting.
Adolph Berle discussed separation of ownership from management and control but now we have separation of ownership from ownership. Too many fund managers are looking out for their own interests, rather than those of beneficial owners. Hedge funds are turning over their shares three times a year. Active mutual funds are holding only for a year on average. At the NYSE turnover was 130% in 2008 and 250% in 2009. Owning Intel 14 times in 10 years isn’t being a long-term owner by Strine’s measure. Institutional investors have been too little concerned with risk management and utilizing leverage. Too many are focused on getting rid of takeover defenses, stock buy-backs and replacing CEOs who don’t yield the highest short-term returns. We’ve been driven to the point that 280 out of the S&P 500 spent more on stock buy-backs than on investments.
Strine ended by quickly throwing out some reform ideas to consider. I didn’t get them all down but here are a few:
- Pricing and tax to discourage short-termism.
- Build fundamental risk analysis into corporate governance measures.
- Compensation of investment managers based on the horizons of beneficiaries and beneficial owners.
- 401(k) and college plans consistent with those time horizons.
- Indexes should act and vote consistent with long-term
- Limitations on leveraging and disclosure by hedge funds
- Fixing the definition of “sophisticated investors.” Many trustees are sophisticated investors and shouldn’t be able to take their funds into unregulated pools. If pools dry up, that may lead hedge funds to disclose, since they need that capital.
- We need to know more about hedge funds – your positions, your voting policies, etc.
- Investors should focus less on leverage and gimmicks, more on real cash flow and perfecting business strategies. Let’s get away from checklist proposals.
See also Overcoming Short-termism: A Call for a More Responsible Approach to Investment and Business Management, The Aspen Institute. Also of note is Governance at Fortune’s 100 Best Companies to Work For, The Corporate Library Blog, 2/5/10. Most of the companies which excel in the employee satisfaction are privately held. Among those that are public, company founders or families have a disproportionate ownership stake. These firms feel less pressure to meet quarterly expectations and can take more of a long-term perspective.
Welcome & Introductions from Linda Sweeney, executive director, Corporate Directors Forum; Larry Stambaugh, conference program chairman, Corporate Directors Forum. I must say, Linda, Larry, Cyndi Richson and Jim Hale have built this conference into a premier event.
Plenary Session: Shareholder Hot Topics
Moderator Cynthia L. Richson, president, Richson Consulting Group; former member, PCAOB Standing Advisory Group, former head of corporate governance, OPERS & SWIB. Panelists – Patrick S. McGurn, special counsel, RiskMetrics Group , ISS Governance Services; Jennifer Salopek, chairman, Charlotte Russe Holding, Inc. principal, ARC Business Advisors LLC; Andrew E. Shapiro, president, Lawndale Capital Management, LLC; John Wilson, director, Corporate Governance, TIAA-CREF.
Again, there was some focus by panel members of long-term vs. short. Are compliance driven measures and the use of compensation consultants driving oversized compensation? Some seem concerned that directors are more focused on compliance and in developing a plan that can be explained than they are in coming up with the best package. Also of concern, last year’s rally may lead to out-sized awards implemented last March or April.
As several others at the conference also pointed out, options are a vestige of the tax system… better to see restricted stock granted as performance targets are met. The feeling expressed by many is that the tax system shouldn’t be driving the form of C-Suite pay. There is also a tendency by a shareowner elite to focus on exit that leads many companies to underinvest in strategy, R&D, and management systems.
Shapiro sees a wave of management led buyouts on the horizon as well as activism by creditors to address over leveraged balance sheets and liquidity problems. He is buying up debt that can be converted to equity… reamortizing balance sheets. He expects this to continue for several years because of limited economic growth. Management is likely to see the light at the end of the tunnel first and will use that advanced knowledge to look for private buyout opportunities. He sees too many no-shop clauses, rights of first refusal and other deal protectors that give a control premium to management. In these situations, independent directors should seek real competition through an auction.
John Wilson was asked about how proxy access would be impacting TIAA-CREF. He responded that ideally they will have access rights and never use them. Just having that power should lead to more dialogue between shareowners and companies. They will look at each situation individually and may side with as access filer or management.
Pat McGurn said these types of contests will be management’s to lose, not to win. RiskMetrics will need to be convinced of the need for change. It will be something of a last resort, like just vote no campaigns. Many are likely to settle out before proxies are finalized, either through trade-offs or board enlargement. He also noted that out of 12,000 board candidates up for election last year, fewer than 100 didn’t get elected. Many such contests are coming at companies that don’t have majority vote requirements.
Shapiro and others pointed out the real impact of proxy access may be overblown, since not much will be saved by having a universal proxy card. Challengers will still need to campaign and that costs money. Additionally, many hedge funds won’t use it because of the change-in-control exclusion.
Asked about liquidity, Wilson said at TIAA-CREF it is driven more by economic conditions than any growing net-flow of baby boomers out of the workplace. Companies should see long-term shareowners as their allies, not those who acquire rights just before the proxy vote. Again, emphasized the need for constant communication.
Salopek said one of the advantages she has found in having a split chair is increased dialogue with shareowners. Shareowners find it more difficult to talk about concerns, such as about CEO pay, when the CEO is also the chair.
Shapiro emphasized the need for communication, citing its lack as the biggest reason for escalation by funds like his. He also sees that interaction as part of director responsibilities around “duty of care.”
Another panelist cited a university of Santa Cruz study that showed even one woman director on a corporate board led to greater board independence and better financial reports. (sorry, I did a quick search but didn’t find the study) That led to discussion around diversity and the need to apply thinking more broadly. I know that CalPERS and CalSTRS are working to build a pool of potential candidates for proxy access nominations. Diversity will play a large part in developing the list.
Shapiro gave some advice concerning annual meetings, pointing to Warrn Buffett’s practice of calling on individual committee chairs to report their respective parts of the annual report. Also some discussion around virtual meetings with Intel pulling back on their virtual-only meeting, but that web broadcast would allow many more to participate and would make them a real event that could generate a lot of publicity and positive dialogue. (see my posts on this from 1/20/10 and earlier same day)
Wilson’s final advice included papering in a day or two of engagement for directors with shareowners before the meeting. Shapiro similarly recommended calling your top 10 shareowners to hear their concerns… actually check in with several types. Keyword for the panel — communication. Further reading: Activist Shareholder Dialogue, Andrew Shapiro.
Plenary Session: Shareholder Rights AND Responsibilities
Moderator The Honorable Leo E. Strine, Jr., vice chancellor, Delaware Court of Chancery. Panelists – Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz; Brandon J. Rees, deputy director, office of investment, AFL-CIO; Lynn A. Stout, professor, Corporate and Securities Law, University of California, Los Angeles School of Law; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.
We were reminded that individuals still own about a third of all shares, mutual funds and ETFs are the next largest holders with pensions coming in third with about 20%. Turnover by all seems to be going through the roof. While it was about 150% in the early 2000s, it accelerated to 200% and last year 300%.
Among the most pressing issues this season for labor are “say on pay” and proxy access. Compensation plans aligned with long-term interests and holding. Restricted stock awards should be held for five years and preferably beyond retirement. When chasing return and trying to beat the market, active managers are likely to be little concerned with corporate governance or proxy issues. Yet, ideally these should factor into investment decisions. Labor would like to see reforms in the tax code and a very small transaction tax to discourage turnover.
Turner was largely in agreement with Rees up until that transaction tax. He sees the need for taxreforms, greater transparency and much more dialogue, as well as a heightened fiduciary duty that would include better disclosure of conflicts of interest. All funds should have to disclose votes and policies. He also sees too many funds voting for poorly performing corporate directors. As I heard this last point, I couldn’t help thinking, “Yes, but how do we know which are the poorly performing directors?” Maybe the new disclosures required by the SEC will begin to give clues.
Ted Mervis noted a 2003 Conference Board report that investment fundsshouldn’t compensate on a quarterly basis. Yet, that isn’t likely, because funds with the highest returns this year attract the most capital next year… even if there is no correlation in the performance for both years. Perhaps sharowner democracy amounts to “faith-based” corporate governance, since there is so little evidence that shareoweners are really in it for the long-term.
There was some mention that corporations are more likely to talk to activist funds than indexed funds, even though they are less permanent shareowners. I presume this is because activist funds are more likely to spend time and money analyzing the issues, whereas indexed funds, wanting to minimize expenses, may do less.
Stout said there is decades of evidence that trading eats up about 1.5% of return each year. The greater the sharowner power, the higher the issuers turnover.
Rees said he supported indexing, long-term investing, defined benefit plans, disclosure of proxy voting and a reassessment of securities lending practices and rules.
Mervis thinks too many directors may be knowing each other “by name tags” because of increased turnover and less collegiality.
Strine seemed to put forth the idea that shareowner rights aren’t inherently good. In fact, maybe we should embrace shareowner ignorance. Increasing leverage to chase returns can lead to ruin. He agreed with Stout, we need higher fiduciary standards for investors.
Stout seemed disposed to a small transaction tax and thought ERISA standards are needed to limit what funds can invest in. It is also time that companies looked at adopting bylaws limiting those who can file bylaw proposals to those without certain conflicts and derivative positions… maybe shareowners should have to hold for two years. That got a lot of attention from directors in the audience who virtually swarmed Stout at the panel’s conclusion.
For further reading see The Mythical Benefits of Shareholder Control (Stout, 2007) Fiduciary Duties for Activist Shareholders (Iman Anabtawi & Lynn Stout, 10 April 2009) Find more reading from several of the panelists on the Conference Materials page. Personally, Lynn Stout is one of my favorites. I don’t always agree with her conclusions, but she is certainly a creative and stimulating thinker.
Plenary Session: The Fast Changing Regulatory Landscape: Judicial, Congressional and Executive Developments
Moderator Theodore N. Mirvis, partner, Wachtell, Lipton, Rosen & Katz. Panelists Rhonda L. Brauer, senior managing director, corporate governance, Georgeson; Byron S. Georgiou, of counsel, Coughlin Stoia Geller Rudman & Robbins LLP, Financial Crisis Inquiry Commission member; Robert Jackson, Jr., deputy special master for executive compensation, Department of the Treasury (aka deputy “pay czar”); Frank Partnoy, George E. Barrett Professor of Law and Finance; director, University of San Diego Center for Corporate and Securities Law.
Mervis went over the pending proxy access proposal and discussed legislative push for separating board chair and CEO, push against staggered boards, mandatory risk management committees and enhanced disclosures. Some boards are getting ahead of the ball by passing their own measures granting shareowners a say on pay but limiting it to every three years.
Brauer advised boards to be ready with their own proxy access proposals.What alternative does your board want if given and opt out option. Be ready for that possibility and check with your shareowners first.
Jackson advised to look at how your compensation policies might be incentivising risk. Have a discussion before the fact with your shareowners and disclose the process you use to think about risk. Too many financial intermediaries are making decisions that extend over years but are paying bonuses based on only yearly returns.
Partnoy thinks reviewing a “worst case” scenario might be a useful exercise for most companies in developing a risk profile. Partnoy expressed his desire to see financial institutions treated differently.
Georgiou noted the Financial Crisis Inquiry Commission got an enormous volume of google searches during its first hearing. Regulators can’t keep up with innovation and need market mechanisms to enforce behavior.
One key reform might be a requirement to have underwriters hold a portion of the securities they create. They should be required to eat their own cooking, maybe also institute clawback provisions for their earnings. Capitalized gains and socialized losses doesn’t work. The issuer paid model is faulty. Even CEOs recently asserted no one should be too big to fail. Discussion around a resolution authority to take down such companies without risk to the larger economy. Problems at seven or eight firms shouldn’t be allowed to infect the whole system.
Lunch Panel: Bad Loans, Gatekeepers and Regulators – Is change on the Horizon or just a Mirage?
Moderator Lynn Turner, managing director, LECG, former chief accountant, SEC; trustee, AARP, Colorado PERA. Panelists – Charles Bowsher, former Comptroller General of the United States & Head of the GAO, director, the Financial Industry Regulatory Authority (FINRA); Kristen Jaconi, former senior policy advisor, for Domestic Finance, US Department of Treasury, former senior counsel to Michael Oxley, US House of Representatives; Barbara Roper, director, investor protection, Consumer Federation of America, member, PCAOB Standing Advisory Group.
Bowsher sees at least part of the problem stemming from traders getting essential control of several banks, like at Enron. Safe and sound banking is important to reestablish. Favors a risk regulator with real stature but is worried that legislation that is 1700 pages long fails to focus.
Roper sees the idea of an individual systemic risk regulator as a reform in name only, since they wouldn’t have the tools to do the job. They need to have the staff, tools and the authority, otherwise reform will be a mirage. See her testimony to Congress here. What we need, if anything is to be accomplished, is a fundamental shift in how we see regulation.
Jaconi says we aren’t thinking big enough. The center of arbitrage is London, not New York. We need to be thinking on the scale of the IMF. Another point she emphasized was the importance of inspections and examinations. Training inspection staff will be critical but there is little notion of that in current proposals.
The consensus of the group seemed to lean in the direction of mostly mirage with some substantive reform. The public has embraced say on pay but watered down derivative regulations appear likely to mostly miss the mark.
Plenary Session: Risk Management: Monitoring for Known and Unknown Risks Moderator James Hale, former EVP, general counsel & corporate secretary, Target Corp.; director, The Tennant Company. Panelists Heidi M. Hoard Wilson, VP, general counsel & corporate secretary, The Tennant Company; Stephen A. Karnas, director, Mars, Incorporated; Lynn Turner, managing director, LECG; former chief accountant, SEC; trustee, AARP, Colorado PERA.
Wilson discussed their extensive process at Tennant, from weekly meetings, board involvement, measuring probability and potential costs, disaster recovery plans, their ranking process, supply chains, etc. She discussed the need to pay special attention to sole source suppliers. You need to know who to turn to if they go bankrupt.
Karnas described his experience at Mars and their use of a chief risk officer primarily functioning as facilitator. Their process is top down as well as bottom up, a little different than that of their recent acquisition, Wrigley, which views risk primarily from a centralized perspective. He discussed how each work and how they are likely to be integrated. Interestingly, the Mars board gets very involved, apparently traveling on a bus, during quarterly Board weeks, to their factories so they can view the production process and operations and become very familiar with risk at the core business level.
Turner discussed his approach as one of finding out keeps them up at night. Ask your external auditor what are the top five risk areas at your company and at the competition. Ask the executives the same and note differences. What are the key trends in marketing, spending rates… key dashboard issues. How do you get to know risks that don’t get communicated? He stressed the need for a bottom up process, as well as top down.
The consensus of the group was that risk is an issue that should be addressed by the full board, not shuffled off to an individual committee… although it may be important for the board to get input from multiple committees.
Plenary Session: A Compensation Committee in Action (A Socratic Dialogue)
Moderator Larry Stambaugh, chairman & CEO, Cryoport, Inc., principal, Apercu Consulting. Panelists – James Hale, former EVP, general counsel & corporate secretary, Target Corp., director, The Tennant Company; Garry Ridge, president & CEO, WD-40 Company; Anne Sheehan, Director of Corporate Governance at CalSTRS; Matthew T. Stinner, senior managing director, Pearl Meyer & Partners.
This was an interesting play-like exercise that was so much fun, I failed to take notes. However, I do recall the pretend CEO using that famous line, “It depends on what the meaning of the word ‘is’ is,” in response to a question from the compensation committee. It was a good discussion of the factors of what goes into pay for performance and the importance of what gets left out that isn’t recognized until after the fact.
Key points: Most companies don’t factor in consideration of performance relative to peers or even the market… and they probably should. Plans should be simple and easily understood but driving compensation based on a single metric, like net income, probably results in too narrow of a focus. Payouts should be held for 3-5 years to emphasize longer term thinking. Further reading: Compensation Committee topics on BoardMember.com and Compensation Season 2010 (Wachtell, Lipton, Rosen and Katz)(PDF).
Dinner and Keynote Speaker; John J. Castellani, president, Business Roundtable
Castellani asserted there is a cultural divide between public thinking reflected by Congress and that of business leaders that is not unlike the divide between C.P. Snow’s scientists and nonscientists. The public wants many thing from business: high quality, employment, good stewardship, earnings, shared sacrifice. They see little difference between finance and other sectors… lumping all large businesses together. Board attention is generally more concentrated on good earnings and stock performance.
Congress suffers from ignorance regarding how businesses work. They think boards are constituent based. They think boards operate like Congress does. The prevailing view is that directors are rubber stamps of CEOs. Yet, the truth is that CEOs are practically an endangered species (my term, not his)… going from a tenure of 8 1/2 years in 2006 to 4.1. He sees most of the reforms like “say on pay” and separating CEO and chair positions as a “relief valve” for American frustration with bigness and fears there will be unintended consequences.
We need to help politicians understand how businesses work. He noted that the costs and performance of the U.S. health care system have put America’s companies and workers at a significant competitive disadvantage in the global marketplace. (see Business Roundtable Health Care Value Comparability Study) People hate insurance companies and banks. They are looking for shared sacrifice. For further reading: John J. Castellani’s blog entries on the Huffington Post.
Plenary Session: Insider’s View of Surviving a Proxy Contest
Moderator Karin Eastham, director, Amylin Pharmaceuticals, Inc., Illumina, Inc., Genoptix, Inc., Geron Corporation. Panelists – Daniel M. Bradbury, president & CEO, Amylin Pharmaceuticals; Daniel H. Burch, chairman, CEO & co-founder, Mackenzie Partners, Inc.; Suzanne M. Hopgood, director of board advisory services, National Association of Corporate Directors director, Acadia Trust Realty, Point Blank Solutions Inc.; James P. Melican, senior advisor, Ridgeway Partners, former chairman, PROXY Governance, Inc.; Alison S. Ressler, partner, Sullivan & Cromwell LLP
One discussion during the session was the problem that during a proxy fight, particularly in a three card proxy fight, shareowners can split their vote between cards, picking the best directors from each advocate. However, that opinion was not universal. The opposing viewpoint was that slates are good because they are more likely to result in an integrated board and directors with complimentary vetted skills.
It was a very informative session focused mostly around Amylin Pharmaceuticals, in addition to several experiences of Ms. Hopgood. Aside from three proxy cards at Amylin, the company also had three previous CEOs on their board, one as chairman. Takeaway points for me were as follows:
- Things generally go worse when the company refuses to talk. Earlier is better.
- RiskMetrics doesn’t seek to review a strategic plan from dissident slates unless they are seeking a change of control.
- Most dissident groups are giving more thought to their director candidates these days… no longer mostly relatives.
- Hire a good proxy solicitor.
- Review corporate governance practices and consider eliminating those that are unpopular with media, like shareholder rights plans (poison pills). If you are going to make changes, do it before the contest.
- Identify possible conflicts of interest all around.
- Don’t retain CEOs on the board after they leave.
- Pay close attention to board skill sets and succession planning.
- Learn what shareowners are thinking.
- Dissidents shouldn’t assume they’ll get the votes if the stock price tumbles.
Plenary Session: What is the Director’s Job Today, and How Does He or She Prepare for It?
Moderator Kenneth Daly, president & CEO, National Association of Corporate Directors. Panelists – John T. Dillon, director, Caterpillar, Inc., Kellogg, Company, DuPont; Matthew M. Orsagh, director, Capital Markets Policy, CFA Institute Centre for Financial Market Integrity; Margaret M. Foran, VP, chief governance officer & secretary, Prudential; Richard H. Koppes, director, Valeant Pharmaceuticals International, former general counsel, CalPERS.
Ken Daly explained that NACD had worked with CII, ICGN, AFL-CIO, BRT and others to develop 10 principles, which they have posted on their website and on the Conference Materials page. He urged all directors to download the principles, review them and provide NACD with feedback. The idea is to empower boards to lead the way in restoring public and investor confidence. “If we don’t act, lawmakers will do so with prescriptive rules and regulation.”
One interesting finding from a recent survey was that board members are less happy with agendas than CEO/Chairmen. Strategy is top priority for boards in the coming year. Interestingly, the conference made use of their ability to rapidly survey those in attendance regarding various topics. We simply pressed numbers on a little remote control type gadget and in seconds they displayed the results. This worked smoothly until this panel where there was one glitch. Asked if information received from management engages the board’s expertise in planning and executing strategy, the graph makes board members seem a little more satisfied than they really are, since there isn’t much difference between 51% and 49%.
Aside from the fun with numbers, I noted the following takeaway points:
- Boards want to discuss strategy before it is fully baked; strategy is job #1.
- Directors shouldn’t play the role of gotcha. Trust and respect are essential to board functioning. Dissent should be accepted.
- IT expertise and succession planning deficient on many boards.
- Balancing long and short-term strategies is key… see Aspen Principles.
- Put something in your proxy regarding succession planning.
Further reading: The New and Emerging Fiduciary Duties of Corporate Directors by Elizabeth B. Burnett and Elizabeth Gomperz.
Keynote Speaker: William A. Ackman, founder and managing partner, Pershing Square Capital Management LP. Apparently, Ackman was on a recent edition of Charlie Rose, so Frank Partnoy couldn’t resist beginning the interview as if he were Charlie Rose.
With all the talk about the need for long-term holders, that was one of the first questions. Pershing Square typically holds for about 2.5 – 3 years. Ackman described his process, which mostly involves picking stocks that are undervalued (spread between price and value) and then he works on a strategy to get the market to recognize that value.
He described his efforts at Wendys, which owned Tim Hortons. The chains weren’t really a great fit because of differences in how they operate and management styles, so he worked to get Hortons spun off… yielding a hefty profit. Ackman believes competition for board seats will give us better candidates and will cause boards to do more self-examination. Choice will force board to adopt term limits to keep fresh.
He says boards should invite their largest holders and short-sellers to discuss any issues or concerns they may have. Try your best to understand your harshest critics. You’ll probably learn something. Asked how he’d do that, he suggested issuing a press release inviting the company’s biggest critics to call in and schedule a confidential meeting.
Another case he discussed extensively was Borders, which he believes had been consistently mismanaged and is now finally facing a possible turnaround, even though the CEO that helped them regrow the company had just resigned the night before for a better offer… with no warning.
One factor that appears to keep him invested for a longer term is reputation. If he bails out too quickly with a loss, his reputation suffers more than if he keeps a company for longer but ends up making something.
Where’s the next crisis? Akman thinks it is likely to be failed municipalities.
Pre-Conference Bonus Sessions – “Legal Issues in the Year Ahead: What Directors and General Counsel Need to Know”
Session 1: “What to Expect in Regulation,” presented by Frank Partnoy, director of USD’s Center for Corporate and Securities Law.
The sun was shining outside our beautiful auditorium at the University of San Diego but Professor Partnoy’s prognostications inside the hall were gloomy with his comparisons of the current financial crisis and the Great Depression. “This is 1931,” he said, noting that markets recovered from the 1929 crash but then turned down again. Because of the recovery (like the little bear market in 1930), he doesn’t see strong demand for reform. Like then, banks say they will reform themselves. Like their Pecora Commission, our Financial Crisis Inquiry Commission is mostly political theater. Pecora didn’t even arrive at the commission remembered for him until 1933. Our efforts could be similar. If history is a guide, it will take a couple of years.
Partnoy doesn’t see real reform on the horizon until more revelations of wrongdoing. He predicts the Volker rule will be watered down and sees an absence of commonsense in the process.
Proxy access is coming but there are still some vestiges of a federal versus state law battle. Delaware incorporated companies may already adopt bylaws and many may do so to preempt the proposed federal default rules. (Elsewhere at the conference the advice was more to be ready, once we know what the rules will be.) Partnoy described the basic outline of the proposed default, with its thresholds ranging from 1, 3 and 5%, depending on size – the 25% limit on board members so nominated and the one year holding period.
Broker nonvotes won’t count this year and that has hedge fund activists excited. They don’t care much about proxy access because the new rule can’t be used for a change in control, and that’s what hedge funds seek. Derivative and credit rating reforms may be the most important reforms on the horizon for 2010. However, strong action appears unlikely. Yes, they’ll probably pass something but there won’t be a central clearing platform for the derivatives that really matter. Banks don’t like the idea of open source disclosure of all contracts, even on a lag basis.
Partnoy thinks the Fed will have to raise rates at some point and when they do, we may see derivative contracts implode. Institutional investors who actually depend on rating agencies to grade risk are being naïve or irresponsible. He cited several commonly know examples where the rating agents gave companies high marks… even as companies tumbled into bankruptcy. Perhaps on of the more important provisions will be to expose credit rating agencies to legal liability. See additional discussion at Proposed Credit Rating Reforms May Empower an Embattled Moody’s (HuffingtonPost, 1/4/2010) and Why Rating Requirements Don’t Make Sense (WSJ, 1/18/2010)
Session 2: What to Expect in Litigation, facilitated by Fran Partnoy. Panelists included Leo E. Strine, Jr., Vice Chancellor of the Delaware Court of Chancery; Darren J. Robbins, Coughlin Stoia Geller Rudman & Robins LLP; and Koji Fukumura, Cooley Godward Kronish LLP.
Initial discussion focused around the issue of individual director liability and the fact that many funds are pushing for that. They want individual directors to feel the pain, not just be covered by D&O insurance. So far, it appears that most of the money that has come out of director pockets has come from CEOs who also chair their boards. Cases were down in 2009 because the market is up. Companies have spent up to $80 million to defend two directors. Strine offered up a bit of speculative advice. Separate director’s insurance from officer’s insurance. Officers get most of the focus, often depleting the coverage available. Options backdating and earnings smoothing created a culture of corruption that led to the move by public funds to go after individual directors. See discussion at Insurance for A-Side D&O Exposures after Enron—A Riskier Proposition?, IRMI.com and Recent Developments in D&O Insurance, HLS CG&FR Bog.
There was also discussion around the fact that many disclosure only cases filed in state courts are abusive. They are filed as soon as any action happens, like an agreement to sell. Several cases discussed. Strine also cautioned to watch shortcuts regarding tax avoidance and don’t sign consents of action after the fact… like documents where management fills in the blanks later. Gimmicks are gimmicks and should be avoided. Also some discussion around a case where the company tried to sue its own internal auditors for malpractice but couldn’t.
We Own You!: How technology can help stockholders take control of the corporations they own, Slate.com, 1/12/10. Eliot Spitzer writes, ”Twitter, text messages, YouTube, and other technology transformed politics in 2008. This success raises a compelling question: Can the same technology awaken the more dormant world of corporate democracy?… Could proxy voting in 2011 generate the same enthusiasm as actual voting did in 2008?” It just might if we can get a few people with Spitzer’s star power to focus attention.
Good to see Eliot Spitzer talking up use of ProxyDemocracy.org, MoxyVote.com and Shareowners.org. He gets his facts slightly wrong, Both ProxyDemocracy.org AND MoxyVote.com intend to be neutral information providers. MoxyVote.com labels its information sources as “advocates” but that doesn’t mean MoxyVote.com agrees with them.
Both work on the concept of trusted brands to help shareowners vote more easily and more intelligently. In the case of ProxyDemocracy.org, their “respected institutional investors” spend considerable resources investigating not only resolutions but also director nominees. By announcing their votes in advance, they allow retail shareowners to benefit from their research and they create brands with a larger following than they would have voting alone.
Spitzer says there are at least two critical hurdles that still have to be overcome:
- “First, most shareholders don’t vote because they assume their votes don’t matter; shareholder votes are almost never close.” However, this year that is changing. With most of the Fortune 500 using majority vote requirements to elect directors and with “broker votes” no longer allowed when retail shareowners fail to vote within 10 days of the annual meeting, your vote counts more than ever. We are sure to see several directors turned out of office. That doesn’t stop them from replacing tweedle dee with tweedle dum, but its a good start.
- “There is no water cooler for corporate democracy. A presidential or mayoral race prompts conversations among friends and colleagues and generates daily press coverage. A corporate proxy vote doesn’t. We don’t all own the same shares, and even if we did, we probably wouldn’t talk about it.” That’s where sites like Shareowners.org and my own blog come in. People should be talking about how they are voting. It would be great to have TV shows like the Nightly Business Report actually providing analysis of the issues facing owners, rather than tips for the next bet. If PBS doesn’t do it, Spitzer could do it through Slate.com.
Of the two problems, the second is more important. When shareowners start talking to each other about how they’re voting, more will vote… and, more will vote intelligently. We will also start taking on more of the issues that currently send the system off balance.
For example, this morning I received a copy of a letter from Goldman Sachs to the SEC referencing my resolution to allow shareowners to ask the board to amend the bylaws, allowing owners of 10% of the company’s stock to call a special meeting. Management at Goldman Sachs wants to omit the resolution from the proxy on the basis that they intend to submit a proposal to the 2010 annual meeting to allow shareowners of 25% to hold a special meeting.
They argue that Rule 14a-8(i)(9) allows them to exclude the proposal from its proxy, since the proposal directly conflicts with their proposal. In the past, the SEC has allowed such exclusion based on confusion that would reign if shareowners passed both resolutions. That is nonsense. If both pass, the lower threshold applies. If we can ever get the “water cooler” discussions going around corporate democracy, shareowners won’t stand for a system that tips the balance of power to management at every turn. We will see if the SEC under Mary Schapiro acts to protect shareowners by allowing the resolution, or if they protect management by issuing a “no action” letter.
“Street name registration” undermines our culture, turning investors into gamblers by providing them “security entitlements,” instead of real ownership rights. Just as poker chips allow us to play under rules which often favor the house, those holding “security entitlements” do not acquire the rights of share owners. For example, one right sharowners have is to receive a proxy, whereas those of us registered in street name receive a voter instruction form (VIF). SEC rules guarantee certain rights to proxy holders but not, it is argued, to those voting through VIFs. (see
Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.
On January 13th I will post a draft petition to the SEC that I have been working on with Glyn Holton, of the United States Proxy Exchange, and others to convert from “street name” to a system of direct registration. I hope you will consider signing on as a co-filer. Can we change voting behavior? Yes, we can! Just give us the rights of ownership and see how democracy transforms the world of corporations.