Tag Archives | The Corporate Library

3D Advisory Panel Named

CalPERS and CalSTRS are working with an Advisory Panel of leading corporate governance experts to develop a new digital resource devoted to finding untapped diverse talent to serve on corporate boards.

The Diverse Director DataSource, known as “3D,” will offer shareowners, companies and other organizations a facility from which to recruit individuals whose experience, skills and knowledge qualify them to be a candidate for a director’s seat.

“The Diverse Director DataSource is an important tool for finding untapped, experienced Continue Reading →

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Airgas: More Reasons for Proxy Access

The Airgas situation demonstrates that continued investor engagement is needed in order to assert shareholder power in the hostile takeover setting. Popular perception holds that classified boards and poison pills are both in sharp decline, and there is some truth to this notion at large-cap US firms. However, nearly 90% of US firms have charter provisions that allow their boards to adopt a pill at any time, without shareholder approval. Classified boards, moreover, are far more common at smaller companies and recent IPOs than at established large-cap firms. For more on the implications of the Airgas/Air Products battle for US governance reform, see my report, available as a free download from the GovernanceMetrics online store.

via Lessons from the Airgas Battle – The Corporate Library Blog.

The report concludes:

Shareholders, especially those with holdings outside the S&P 500, are left with one option if they wish to retain power in the hostile takeover setting: use the tools available, including proxy voting, shareholder proposals and “vote no” campaigns against directors, to work toward the elimination of the classified board.

Similar sentiments earlier this year at theRacetotheBottom [Delaware Validates "Just Say Never:" Air Products v. Airgas (The Need for Shareholder Access) (Part 3)]

Airgas in conjunction with Selectica and Yucaipa have as a practical matter mostly eliminated the market for corporate control. Without the market for corporate control, management becomes even more entrenched. These decisions, therefore, make it even more important that shareholders have a mechanism to remove directors who do not respond to shareholder interests. Cases like Airgas all but prove the need for shareholder access.

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Proxy Season Foresight #3

The two big items on the governance proposals front this year, according to The Corporate Library are, management proposals:

  • the advisory vote on executive compensation (SOP), and
  • the advisory vote on the frequency of the advisory vote (SWOP)

So far, only two companies have received majority votes against approval of executive pay, those at Jacobs Engineering and Beazer Homes…

One of the earliest votes was Monsanto, with 35.08% of shareholders disapproving of executive pay. “We won, ‘soy ’ there,” said Monsanto. But to describe this as a “victory”, once you’ve “rounded up” (sorry, you can’t not, can you?) the nay sayers, it’s a bit of a Pyrric victory…

However, there have been four other annual meetings more recently with votes against Say on Pay in the region of 47% to 49%…via Proxy Season Foresight #3 (From remarks for a BSR webinar 16 March) – The Corporate Library Blog.

Tomorrow, I’ll post my vote at Schlumberger. Frankly, I just can’t bring myself to vote in favor of $15 million in pay for anyone. There has to be a limit to this craziness. We’ve got to stop the bracket creep.

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2010 CEO Pay Survey

Corporate Governance Research Reports. A new report from The Corporate Library found that the value of CEO perquisites at S&P 500 firms declined by a median of 18% in 2009. Most notable was a clear drop in the number of CEOs who received tax gross-ups. The report titled, “The Corporate Library’s 2010 CEO Pay Survey,” is available for $125 from The Corporate Library’s online store and also examines the pay packages of the top ten highest-paid CEOs of 2009.

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Corporate Accountability, Web 2.0 & CorpGov Functions at Public Funds

Bill Baue and Marcy Murninghan have authored a recent working paper that deserves wide circulation and thoughtful consideration. The Accountability Web: Weaving Corporate Accountability and Interactive Technology can be downloaded from the website of the Corporate Social Responsibility Initiative at the Harvard Kennedy School of Government. Since I’m trying to get you to read the paper, I’ll provide just a small taste. Then I’ll show how it might be applied to the corporate governance functions at public pension funds, as an example.  Let’s start with a very abbreviated version of the introduction in the Executive Summary:

Corporate accountability and Web 2.0 share a common thread: both are rooted in interaction and thrive on engagement. This overlap creates opportunities for corporate accountability and Web 2.0 to join forces to create mutual benefits for firms and their stakeholders. However… current business use of Web 2.0 tools focused more on improving performance and increasing efficiencies inside the firm, and on brand management, customer relations, or crisis management outside it.

At a time when our economy is navigating a crisis, and public trust of business activity is in short supply, the intersection of concerns about corporate sustainability, accountability, transparency, and ethics with the proliferation of Web 2.0 communication tools offers an opportunity for new forms of collaborative leadership and participation… an evolution in the concept of who is “inside” and who is “outside” the organization.

Accountability 1.0 is marked by one-way proclamations, campaigns, and PR communications. Accountability 2.0 rests on the assumption of two-way communication, cooperation, and mutual engagement.

Almost anyone will find the tale they weave informative, even entertaining. For example, from a section titled “The Progression of Corporate Accountability,” they start with what may be the first case of stakeholder activism, soon after the Dutch East India Company launched their initial public offering.

Dutch religious pacifists, appalled by the reliance of the company’s business model on the “generous application of warfare, blockade, piracy, assassination, imprisonment, plunder, terror, slavery, [and] bribery,” campaigned by lamplight house-to-house to gather signatures for a notarized public petition, to boycott investment, and to make a show of selling shares in protest (Baue 2008; Davis et al. 2006:175-6).

Let’s take a quick look at the paper’s recommendations, greatly abbreviated here:

  1. Adapt, Don’t Just Adopt. Don’t just extend your existing model, use Web 2.0 for engagement/dialogue to enhance accountability.
  2. Cultivate Participation. Build community and technology in parallel; don’t assume if you build it, they will come.
  3. Develop Clear Terms of Engagement. Electronic media is susceptible to misunderstanding. Set guidelines for critiquing practices and policies, not people. Use assessment and feedback mechanisms to identify keys to success and flag problems.
  4. Foster Mutual Accountability. Model self-accountability, when asking other parties to hold themselves accountable, to create a culture of mutual accountability.
  5. Use Blended Engagement. Augment Web-based communication with face-to-face meetings, choosing the medium based on which is most likely to serve the objectives.
  6. Broaden the Media Palette. Social networking, augmented reality (AR) and wikis tools may be pushing the envelope too quickly, try them internally first to unfreeze thinking.
  7. Build Communities of Inquiry and Practice.  Utilize experts with experience in building communities of inquiry and practice to convene, facilitate, moderate, and/or curate online engagement.

Like corporations navigating the financial crisis, public trust of public pension funds is also in short supply. Many have suffered scandals around placement agents, face huge deficits because of falling portfolio values, are resented by taxpayers who have lost their own defined benefit plans, and are always vulnerable to funded attack by money managers who want the profits that would incur if public employees were converted to defined contribution plans.  The most powerful adversaries of public pension fund might be organizations, like the Business Roundtable and the US Chamber of Commerce, that represent top corporate managers. The more coordinated and powerful shareowners are, the likely directors will represent their interests in corporate boards rather than acceding to every whim of management. The percentage of the profits taken by top management has gone from about 5% to 10%. It isn’t hard to imagine they want to keep it and public pension funds have taken a leadership role in weakening the power of the imperial CEO… for example, by advocating the roles of CEO and board chair be split.

Public employees want to keep their defined benefit plans. They know their pension funds are under attack but they often have little understanding of how corporate governance plays a role in the earnings of their plans or the dynamics of initiatives, legislation and other attacks that may be orchestrated by forces not easily identified, especially after the Supreme Court’s decision in Citizens United. Web 2.0 and Accountability 2.0 could offer public funds a way to integrate their corporate governance concerns about sustainability, accountability, transparency, and ethics with their own internal governance.  These tools offer an opportunity for new forms of collaborative leadership and participation with their own stakeholders… an evolution in the concept of who is “inside” and who is “outside” the organization. By utilizing such tools, funds may not only increase the understanding of stakeholders (which might expand beyond unions and direct members to taxpayers and others) but they may also benefit from what Baue and Murninghan call “cultivating communities of inquiry and practice.”

Now let’s try to apply these recommendations to the corporate governance functions of public pension funds. At some funds, these functions may be largely contracted out or carried out by one individual. Other funds may have dozens of contractors as well as dozens of in-house staff. Therefore, I’ll divide them into basic and expanded activism practices. Most of these practices will be Web and Accountability 1.0 but some will move into 2.0 and be informed by the paper. I’m drawing heavily for large portions of the list from Council of Institutional Investor (CII) publications.

Basic Activism Practices

  1. Obtain useful information necessary to make activism decisions;
  2. Commit staff time to implementing an activism strategy;
  3. Adopt proxy voting guidelines that follow or improve upon a recognized corporate governance framework (see those of  CII and CalPERS, for an example);
  4. Make the proxy voting guidelines available for public comment prior to adoption… using a 2.0 strategy, provide for and cultivate interactive comment and discussion, reaching out to unions and other interested parties who are also connected with members and taxpayers;
  5. Make sure fund proxies are voted by fund staff or by a specialized proxy voting service in accordance with the fund’s proxy voting guidelines;
  6. Adopt a process to handle “No” votes on directors;
  7. Provide for an override mechanism so the fund can vote individual proxies on a case-by-case basis, even if voting is otherwise delegated;
  8. Factor into share lending practices a mechanism to retain voting rights on a targeted basis;
  9. Obtain and post on the web an annual report on the fund’s proxy votes… using more of a 2.0 strategy, facilitate comment and discussion again after the fact, since there are often unanticipated proposals each year and we often learn a lot during proxy season;
  10. Disclose the fund’s proxy voting guidelines on the web site, or alternatively on CII or other web site;
  11. Go public with issues or views on proxy votes through press releases, Twitter, a blog or other mechanisms that move toward 2.o;
  12. Withhold votes from directors of specific companies and/or committees;
  13. .

    Expanded Activism Practices

  14. Develop a methodology and strategy for communicating and engaging with portfolio company directors or executives… making use of pre-season webinars and other 2.0 mechanisms as forms of blended engagement to reach out to more companies efficiently;
  15. Coordinate action with, or support the actions of other shareowners through international networks like ICGN, national networks like CII, as well as state and local networks like the Los Angeles Area Pension Trustees Network;
  16. Weigh in with Congress, the SEC and others to improve investors’ legislative and regulatory environment… use or work with constituent groups to use web-based tools for electronic messaging and other advocacy efforts;
  17. Monitor the discretionary voting by investment managers of shares held for other clients to ensure alignment;
  18. File binding and/or precatory shareowner proposals… foster mutual accountability by modeling self-accountability before introducing proposals that are also applicable to fund governance;
  19. Solicit support (not proxies) for shareowner proposals or opposition to management proposals;
  20. Disclose shareholder initiatives to stakeholders and the public… solicit feedback and dialogue from stakeholders though surveys, webinars and other methods before filing to ensure support or at least acquiescence;
  21. Use contract provisions based on standards of behavior to ensure that financial advisors are responsive to corporate governance principles;
  22. Employ managers and investment consultants who build shareowner value by emphasizing corporate governance reforms as part of their investment strategy;
  23. Use the legal system, such as filing class-action suits under the “lead plaintiff” provisions of the Private Securities Litigation Act of 1995 (see On Beyond CalPERS: Survey Evidence on the Developing Role of Public Pension Funds in Corporate Governance by Stephen J. Choi & Jill E. Fisch);
  24. Work with CII members and others to develop a backbench of potential director candidates with a wide variety of skill sets;
  25. Disclose proxy votes in advance of AGMs on web site, through RSS feeds, ProxyDemocracy.org, MoxyVote.com, and other such sites as the develop;
  26. Develop your reputation as a voting “brand” (see Proxy Voting Brand Competition at http://votermedia.org/publications). One way to enhance your brand is to provide a brief reason for your vote. As sites compiling votes become more popular, canned votes and reasons will sway fewer votes as disclosures become more sophisticated and value their brand following;
  27. Develop education tools and games to help members with investments to supplement their pensions making use of mutual fund activism comparisons like those available at ProxyDemocracy.org;
  28. Use Twitter and/or a blog to broadcast votes and invite discussion, especially from stakeholders;
  29. Build communities around fund activism that will provide feedback, identifying success and flagging problems;
  30. Run a short slate of directors;
  31. Campaign to deny management a quorum in especially circumstances where the rules or procedures are inherently unfair (see Guest Commentary From Glyn Holton: Emergency at Intel and Intel Virtual Mtg Out for 2010 But Exploring Future with USPX
  32. Utilize corporate governance measures as part of an overall investment strategy. For example, GMI and The Corporate Library have both done studies showing that an index of funds weighted by certain corporate governance measures (mostly measuring risk) should lead to outperformance over traditional indexing;
  33. Work with the SEC to encourage the development of proxy advisory firms (PAFs) by amending rule 14a-8(i)8 to allow shareowner proposals that would allocate corporate funds to PAFs that undertake to offer proxy voting advice, including advice on director nominees, that is made freely available to all of a companies shareowners. See examples from Mark Latham that could be substantially modified based on more recent experience with university and municipal governance to make them more easily implemented. For more recent language, click here (Consider that RiskMetrics probably spends an average of less than $4,000 researching each proxy and think about how much more company specific recommendations can be made if $50,000 is allocated to PAFs by shareowners, partially from corporate funds.);
  34. Model self-accountability to your own stakeholders in ways similar to how you think corporations should be responsible to shareowners by transitioning from one-way communication to two-way or multi-directional interactivity.
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Sustainability Reporting

The Corporate Library has a new free report well worth downloading, Ten Myths About Sustainability Reporting. Kimberly Gladman explains how the UN’s GRI has become mainstream.

  • According to SIRAN, almost all S&P 100 companies disclose some sustainability informaon either in reports or on their websites.
  • UNI’s principle to “seek appropriate disclosure on ESG issues by the entities in which we invest” has have been endorsed by more than 700 investors represenng approximately $20 trillion in capital.
  • Growing evidence suggests a posive relaonship between strong ESG performance and equity returns.
  • Increasingly, external auditors verify company reports.
  • Comparisons among companies are facilitate by GRI, Corporate Register, Ceres, and Carbon Disclosure Project.

Want to get your company involved? Gladman’s report offers suggestions on your next steps and who to contact.

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

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

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

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

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

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

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

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

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

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The Corporate Library's Governance Ratings and Equity Returns

Research on the relationship of governance ratings systems to investment performance has shown mixed results, and the significance of particular governance features to equity returns is widely debated. A recent study by The Corporate Library suggests their ratings system, focused on the identification of agency problems rather than supposed best practices, can contribute significantly to generating excess returns.

TCL backtested a model portfolio benchmarked to the Russell 1000 that excluded companies they rated “high” or “very high” risk in board, compensation and/or overall governance. Unlike “best of class” studies, TCL didn’t hesitate to underweight entire industries where poor governance is widespread and risk is higher.

In comparison to the benchmark Russell 1000, the model TCL portfolio with the strictest standards had a smaller weighted average market-cap ($42 billion, vs $79 billion) and a slight growth tilt (P/E ratio of 20.3 vs 18). It was persistently underweight in financials and energy, while overweight in technology stocks. Annualized performance was 6.91%, compared with 4.16% for the benchmark for the 2003-2010 period.

Download the study for free from TCL.

I consider studies such as this one extremely important. We can shout from the rooftops about the need for corporate governance reforms until we’re blue in the face, but once a few funds have been initiated that make excess returns using corporate governance indices to overweight or underweight issuers, the walls of resistance will really come down. Please let me know of additional studies and especially of any funds using corporate governance strategies.

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Free Webinar: Director Elections 2010 – A Shareowner's Guide

Join The Corporate Library on April 28 for a free webinar with Chief Analyst and co-founder, Ric Marshall. New SEC proxy disclosure rules and changing director election standards have greatly expanded the ability of shareholders to influence election outcomes for individual corporate directors, but for many investors they have also increased the complexity and uncertainty of the voting process.

Current subscribers of The Corporate Library’s Board Analyst database will benefit by learning more about the individual director screens employed by our top analysts in evaluating individual director and board effectiveness, while non-subscribers will have an opportunity to better inform their own analysis and decision-making by learning more from these same insights. Time: 1:00 – 2:00 PM EDT. Register; I certainly did.

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Annual Meeting Reports

I don’t get out to attend many annual meetings but I would like to encourage anyone who does to report on what happened. Matthew Rafat, who writes for Seeking Alpha, is the only one I know of who routinely writes up his impressions of these events.

On April 14, Rafat wrote Notes From the 2010 Brocade Shareholder Meeting. I see management had two governance proposals on the proxy. One to declassify the board. The other to end supermajority requirements. Since these both came from management, I suspect they got the votes required for adoption. However, I would be interested to know if there was any discussion at the meeting of these proposals and their importance. Rafat’s discussion of Brocade’s strategy is good. I wish he would discuss governance concerns more frequently but at least he is out there giving us some idea of what happens.

John Chevedden reports that a shareowner proposal by Patricia Shaw of Scarborough, Maine, submitted by Ram Trust Services of Portland Maine won 55% support at Weyerhaeuser this morning in spite of management opposition. The proposal was item 6 and advocated for a right for 10% of shareholders to call a special meeting. I see that, as reported by ProxyDemocracy.org, Green Century, CalSTRS, CBIS, Florida SBA, and AFSCME all voted in support. In addition, Chevedden tells me that probably as a result of a shareowner proposal last year to end supermajority requirements that won 85% support and a 2005 proposal from CalPERS that won 73% to declassify the board, management put forward a proposal this year to not only  end supermajority requirements but also to declassify the board, allowing annual election of all directors. That important measure passed as well.

According to an e-mail alert from The Economist, “Nearly 40% of shareholders at UBS opposed a plan on executive pay in a consultative vote. The Swiss bank earlier forecast a pre-tax profit for the first quarter, but investors are furious at the huge losses it has previously incurred. Kaspar Villiger, the chairman, said he understood the anger, but that UBS had ‘cut back too much last year, causing us to lose entire teams, their clients and the corresponding revenue.'” (4/15/2010)

Fair Pensions reports, their resolution on BP’s controversial plans in the Canadian tar sands (also known as oil sands) won support or abstention from 15% of shareowners, despite a strong company recommendation to oppose. Many, even some of those voting with management, agreed that BP had not provided sufficient assurance that tar sands plans are financially robust, and that the greater level of transparency called for in the resolution is still required.

Those attending the meeting raised questioned the companies’ use of demand projections that assume no change in governments’ climate change policies & imply catastrophic climate change. They also questioned, how adequate control of outsourced projects can be asserted and expressed concern over health impacts on local communities and the overall impact on BP’s finances. Catherine Howarth, CEO of FairPensions said:

Shareholder resolutions are primarily a means to draw attention to an issue of concern to investors. The vote today is only one outcome of a wider process, which has catapulted tar sands risks to the top of BP’s agenda, and has become a major topic of debate in the City. The task for investors now is to make the most of the disclosures made to date, and continue to robustly engage with BP into the future. This will be matched by an unprecedented level of scrutiny from campaigners, politicians and members of the public.

The resolution was filed by over 140 individual and institutional investors from around the world including The Co-operative Asset Management, Boston Common Asset Management, the Ecumenical Council for Corporate Responsibility (ECCR), the UNISON Staff Pension Scheme, Rathbone Greenbank, and other fund managers, foundations and faith groups. The resolution asks the company to commission and review reports setting out the assumptions made by both companies in deciding to proceed with tar sands projects regarding future carbon prices, oil price volatility, demand for oil, anticipated regulation of greenhouse gas emissions and legal and reputational risks arising from local environmental damage and impairment of traditional livelihoods. The resolution asks that the findings of the report and review should be reported to investors in 2011.

Votes cast at the AGM have yet to be counted, but figures for votes cast in advance and announced on the day indicate that 15% of shareholders either voted for the resolution (5.6%) or abstained (9.2%). Total advance votes are as follows:

For: 622,272,418
Against: 9.497,638,714
Withheld / abstained: 1,020,301,075
Total Shares: 11,140,212,207

On a somewhat related note, a new proxy voting guide from The Corporate Library has just been released by The Corporate Library and is available for free download. Proxy Voting on Labor Standards: A Case-by-Case Guide.

The second principle of the UN PRI commits signatories to active ownership with regard to environmental, social and governance (ESG) issues. “Proxy voting is an important means of exercising active ownership but can also be challenging to execute,” said Director of Research and Risk Analytics Kimberly Gladman, author of the voting guide. “Investors must not only understand the topic of the resolution, but also determine whether it deserves support at a particular company.” Although this guide focuses on labor standards, guidance on all ESG issues is similar.

Investors who conclude that a resolution is germane to the company’s business and that the company’s board and management are not yet adequately addressing the business risks and opportunities it poses are likely to support the resolution. Those who conclude that the issue is not significant for the company, or that it is significant but the company is already taking adequate steps to address it, may oppose the resolution. Some investors in the later group, however, may also choose to abstain on the resolution, in order to signal support for investor abstention to the issue in general, even if it does not seem pressing at this particular company at this time. Some investors also oppose or abstain on resolutions they believe are overly prescriptive or poorly constructed, even if they agree that the issue is important.

Abstentions, in the case of BP, may indicate the many investors want BP to do more, but aren’t necessarily ready to back this specific proposal. How many investors have the time to sit down and properly read and analyze the proposal? That where, in future, “branded” voting advice becomes ever critical. Who do you trust? Mark Latham’s Proxy Voting Brand Competition remains a critical read.

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Medium CEO Pay Declines

Median total annual compensation for North American CEOs declined for the second straight year, according to a preliminary CEO pay survey from The Corporate Library.

The study analyzed CEO compensation data for fiscal 2009 drawn from 823 proxy statements filed in the United States between July 1, 2009, and March 25, 2010.

The report titled The Corporate Library’s Preliminary 2010 CEO Pay Survey, is available for $45 from The Corporate Library’s online store. According to Paul Hodgson,

The decrease marks the first time since The Corporate Library began publishing its annual CEO pay survey in 2002 that the median change in compensation has declined for two consecutive years.

Median total annual compensation for all CEOs in the study declined by 2.78 percent from 2008 to 2009.

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Goodyear Vote and the Timeliness of Analysis

The Corporate Library Blog today carries a great post, Inflated CEO pay at Goodyear Tire. Good puns and even better information on CEO Robert J. Keegan’s “maximum payout for a net loss.”

Mr. Keegan received four separate stock option grants. The largest of the four market-priced grants, almost 500,000 of them, was at $4.81. Less than six months later he’d made $6.23 million worth of notional profit on that. This is just irresponsible, and it’s taking advantage of a super-low stock price to grant any stock options at all in such circumstances. It’s virtually impossible NOT to make money in such a situation.

This is Paul Hodgson writing in excellent form, including his conclusion that “it might even be time to vote against Denise Morrison, Rodney O’Neal, Craig Sullivan and Thomas Weidemeyer,” members of Goodyear’s compensation committee.

I’ve only got one complaint. The meeting is tomorrow; for many, voting has already ended. Hopefully, those who subscribe to “Board Analyst,” or other services at The Corporate Library, got this analysis earlier. However, I see, as reported by ProxyDemocracy.org, CalSTRS voted in favor of compensation committee members, so I’m left wondering if timeliness is a frequent issue during the busy proxy season.

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Dodd Bill: Majority Vote Provisions

Senator Dodd  finally introduced his bill. I’m sure it will get a massive coverage and comment. I will have little to add. Find a quick overview at The Corporate Library (Dodd’s Bill, 3/15/10). The Dodd Bill: Weighing In at a Portly Six Pounds, by Broc Romanek at TheCorporateCounsel.net/Blog provides the best guide I’ve seen.

However, I would also draw your attention to Restoring American Financial Stability Act of 2010: Reforming the Independent Director Standard and Federalizing Executive Compensation and other posts by J. Robert Brown at theRacetotheBottom.org, 3/16/10. Brown brings to our attention a couple of good “sleeper” provisions that may help override provisions now controlled by exchanges and Delaware. However, he also points with disappointment to a requirement for listed companies that directors be elected by majority vote in uncontested elections.

The legislation would merely require directors not receiving a majority to resign.  The board would then have the discretion to reject or accept the letter.  As RiskMetrics has noted, somewhere around 100 directors in 2009 did not receive a majority vote and none of them lost their position because of this failure.

In many cases, companies did not have a majority vote provisions in place.  But where they did (Axcelis and Pulte), the companies did not accept the letters of resignation.  In other words, these provisions do not provide shareholders with any additional rights or protections.  Directors lose but the board doesn’t remove them.  The provisions are, therefore, a myth.

I hope CII and others will take up this issue. Brown writes, “Real reform would provide that directors who do not receive a majority lose and cannot take office.” I’m willing to concede there may be circumstances where that could create a problem. However, if a board doesn’t accept a resignation, they should be required to immediately find a replacement and do so within six months.

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0.3% of Directorships Voted Down in 2009: Will 2010 Be Different?

The Corporate Library announced a new enhancement to its Board Analyst® product:  the ability to visually flag specific areas of potential concern for individual directors. (‘Director Flags’ Zero In On Potential Areas of Concern for Individual Board Members, The Corporate Library Blog, 3/8/10)

With the end of “broker voting” for directors and the adoption by many firms of majority vote requirements, shareowners finally have an opportunity to make a difference. However, doing so is difficult because board activities still go on inside what amounts to a black box. In 2009, only 95 directors out of 30,000 positions covered by Board Analyst® failed to get a majority vote. Reviewing area of possible concern, they found the following:

  • 2,712 individuals who are over 70; 283 who are over age 80; and 10 who are over age 90.
  • 4,588 directorships whose tenure is greater than 15 years and 1,187 whose tenure is greater than 25 years.
  • 1,257 directorships where the individual director is over 70 AND his or her tenure is greater than 15 years.
  • 3,468 directorships where a director with more than one year of tenure holds no shares in the company, including 1,108 where a director with more than five years of tenure holds no shares.
  • 93 directors who sit on more than four corporate boards, and thus may be over-boarded.
  • 187 CEOs who sit on more than two corporate boards, and thus may be over-boarded.
  • 3,461 directorships categorized as “Outside Related”, indicating a possible conflict of interest.
  • 272 directorships where the individual has previously failed to meet minimum attendance standards.
  • 95 directors who did not receive support from a majority of shareholders at 2009 elections.
  • 1,070 directors who sit on two or more boards assigned a D or F rating by The Corporate Library.
  • 702 directors who have been flagged by The Corporate Library as having been involved in a previous corporate bankruptcy or other failure, including 21 who have been involved in more than one such failure.

No one is saying all these directors should be turned out of office but surely there must be more than 95 out of 30,000 director positions that don’t deserve an A or B and who wants mediocre directors representing shareowners? What excuse can any director have for not holding any shares in their company after five years on the board? Will 2010 be a turning point? The Corporate Library is offering tools that help, if only institutional shareowners would use them. Better yet, they should vote and announce their votes, and the reasons for their votes, two weeks before the annual meeting, so that retail shareowners can copy their brand.

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CorpGov Bites

“Bank of America persuaded the SEC to drop “proxy access” provision as they negotiated a $150 million settlement of a lawsuit tied to the takeover of Merrill Lynch & Co… The U.S. Chamber of Commerce, which represents more than 3 million companies, has said “activist shareholders” would use proxy access to hijack elections to pursue “political or social issues.”” (SEC Said to Push BofA Proxy Rule in Enforcement Case, Bloomberg.com, 2/18/10)  “SOX substantially beefed up the obligations of the audit committee, at least for Exchange traded companies.  See Section 301 of SOX.  The committee was given the direct authority to supervise and to hire/fire the outside auditor.  The committee was also given the authority to hire counsel without full board approval.” “In the proposed settlement with BofA, the SEC is seeking to augment the authority of the audit committee one more time.  The Commission is giving to the audit committee (not the full board) the authority to hire counsel.  Counsel must not only review filings but must discuss possible deficiencies with the audit committee in executive session, without the presence of the non-indpendent directors.  The latter restriction is significant.” (The Board of Directors and a Review of Corporate Disclosure, theRacetotheBottom.org, 2/17/10)

Interesting, Bloomberg failed to get the Chamber’s new line. “Late last month, for the first time in more than a decade, the US Chamber of Commerce changed the boilerplate language that appears at the bottom of its press releases. The nation’s largest business lobby no longer claims to be “representing more than 3 million businesses and organizations of every size, sector, and region.” Instead, it claims to be “representing the interests of more than 3 million businesses” (emphasis added). The smallness of the tweak masks its major significance: Representing somebody, which strongly implies a direct relationship, is very different from representing their interests. The Chamber is in effect acknowleging that the “3 million” businesses aren’t actually its members… It was forced to admit that its true membership isn’t the 3 million businesses that it has claimed, but something on the order of 300,000.” (Chamber of Commerce No Longer “Represents” 3 Million Businesses, Mother Jones, 2/12/10)

I guess we at CorpGov.net should be claiming to represent the interests of the approximately 100 million Americans who own stocks or mutual funds… but why stop at Americans, since we occasionally cover corporate governance issues in other countries as well?

Apple, lags industry peers on sustainability reporting and has not made public greenhouse gas reduction commitments. Apple shareowners are beginning to vote their proxies on Moxy Vote, based on recommendations from Calvert Investments to support a resolution on on sustainability reporting. (Is Apple green enough?, Mac News)  The problem is there is another proposal seeking a bylaw requiring a board committee on sustainability… and there are all those directors to vote for or against. While I love Moxy Vote and own Apple stock, at this point, in Beta form, I’m disappointed the site has no one to advise me on how to vote the other issues or on the directors. So, I turn to ProxyDemocracy.org and even they have collected no votes in advance of the 2/25/10 meeting from “ten institutional investors that are particularly engaged in corporate governance.” I’ll wait until next week to vote.

Eric Jackson does a nice job interviewing John Gillespie and David Zweig, co-authors of “Money for Nothing.”  Gillespie says we won’t have real change until the old players like Bernanke, Geithner and Summers leave. Zweig says, “corporate governance needs a new name to encourage change, maybe corporate democracy.” (Corporate Governance Role in Meltdown, TheStreet.com, 2/17/10) See my review under the heading Fix the Boards – Fix the System. Buy the book.

“Advocates of genocide-free investing won another important victory this week, when American Funds, a family of mutual funds with more than $775 billion in investments, decided to divest virtually all its holdings in PetroChina. Before a shareowner meeting held on November 24, American Funds owned 167 million shares in PetroChina, worth $190 million.”  “Investors Against Genocide advanced a resolution asking that the Board of American Funds “institute procedures to prevent holding investments in companies that…substantially contribute to genocide or crimes against humanity.” American Funds opposed the measure, and affirmative votes for the proposal ranged from 8.5% to 11.8% at the meeting.” (American Funds Sells PetroChina Holdings, SocialFunds.com, 2/18/10) The showing on their resolution would have probably been much higher had voting instructions issued by Broadridge actually complied with the requirements for proxies to clearly indicate the voting topic instead of simply referencing “a shareholder proposal described in the proxy statement.” Broadridge could get away with it because that the language the issuer wanted and since Broadridge uses a voter information form, they don’t feel they are bound by SEC requirements that apply to proxies. (see our coverage of that issue at Investors Against Genocide Fighting American Funds, Broadridge and Vague SEC Requirements: More Problems Solved Using Direct Registration.

Corporate governance advisory firm PIRC made history again. In January 2009 they took a radical step, and began publicly disclosing via their website the voting recommendations they make for company meetings. Now they have set out have set out six best practice principles for corporate governance advisors, as follows:

  • Clear voting policy guidelines should be made available to clients, the companies whom the adviser is monitoring and to the market;
  • Clear audit trail and explanation of the process for assessing companies and making voting recommendations should be available to clients and the companies monitored;
  • Possible conflicts of interest should be disclosed to clients and to companies monitored and, where necessary, to market regulators (i.e. paid consulting with companies);
  • Companies monitored should be given reasonable opportunity to comment on voting recommendations made and the basis of such recommendations;
  • Voting agencies should routinely report to clients on actions taken on their behalf;
  • All voting recommendations made by a voting adviser should be publicly disclosed post-meeting. (Corporate governance agencies: the need for transparent voting decisions by Tom Powdrill on Responsible Investor, 2/18/10)

The Securities and Exchange Commission Investor Advisory Committee will meet in DC on February 22 at 9 a.m. The agenda for the meeting includes consideration of a Committee recusal policy, a report from the Education Subcommittee, including a presentation on the National Financial Capability Survey, a report from the Investor as Purchaser Subcommittee, including a discussion of fiduciary duty and mandatory arbitration, a report from the Investor as Owner Subcommittee, including recommendations for the Committee on Regulation FD and proxy voting transparency, as well as reports on a work plan for environmental, social, and governance disclosure and on financial reform legislation, and discussion of next steps and closing comments. I’ll be tuning into the webcast if time permits.

The Conference Board issued a new report, Directors’ Duties under the New SEC Rules on Disclosure Enhancement, available to members. From my quick review, the report appears comprehensive but written clearly and in an easy to understand format. Highly recommended for directors, their advisors and monitors. Additionally, the SEC posted six new Compliance and Disclosure Interpretations 116.07, 117.05; 119.21, 119.22 and 119.23, which offer guidance on disclosure under Items 401, 402(a), and Item 402(c) of Regulation S-K. Staff also added new question 121A.01 related to Exchange Act Form 8-K, which explains calculation of the four-business day filing period for disclosing the results of a shareholder vote. See also  guidance on the new requirements from Compliance Week issued in January and December as well as the original rule. Additional guidance from the Altman Group, Walking the Tightrope – New Proxy Disclosures on Director Qualifications, Board Risk Oversight and Board Diversity – and new Climate Change Disclosures for the 10K.

The Corporate Library’s ‘2010 Proxy Season Foresights #3: The Growth of Clawback Provisions, ($15) found that the number of companies with clawback provisions continued to increase in 2009, and almost half of such companies are smaller-cap firms outside the Russell 1000.

The Centre for Corporate Governance Research (CCGR) is organising its 8th International Corporate Governance Conference on Wednesday 23rd June 2010, to be held at the University of Birmingham, UK.  The theme of the conference is ‘Corporate Governance and Sustainability’. Keynote speakers include Colin Melvin (Chief Executive, Hermes Equity Ownership Services Ltd), Dr Michael Blowfield (University of Oxford) and Dr Beate Sjåfjell (University of Oslo). Sir Adrian Cadbury, the CCGR’s External Advisor, will be attending the event. Papers are invited on issues relating to any area of corporate governance and sustainability. Papers should be sent as an electronic copy in PDF format, by 31st March 2010 to Karen Hanson.

Moxy Vote is running a series, Here’s to the many pioneers!, Part 1 includes yours truly, Jim McRitchie, along with Mark Latham, Andy Eggers and Matt Keenan. Part 2 will include Glyn Holton, Nell Minow, and the Social Investment Forum. I’m blushing to be in such company. Thanks to Mark Schlegal and to all the fine work at Moxy Vote for facilitating involvement by retail investors and providing advocates such an important pipeline of influence.

The Council of Institutional Investors (CII) published a White Paper, The OBO/NOBO Distinction in Beneficial Ownership: Implications for Shareowner Communications and Voting, authored by Alan Beller and Janet Fisher of the law firm Cleary Gottlieb Steen & Hamilton LLP.  Mr. Beller is a former Director of the SEC’s Division of Corporation Finance. From the Executive Summary:

The SEC is likely to be cautious in seeking to change the current framework in significant ways, at least in the near term. Defining the objective is critical to developing a proposal. If the goal is to increase the ability of shareowners and companies to communicate directly, a number of incremental steps may be taken to address the OBO/NOBO distinction and facilitate direct distribution of proxy materials, without discarding the current distribution platform. Such an approach could lead to meaningful improvements, without seriously affecting the interests of many of the participants in the current framework, and we believe it has a greater chance of widespread support than more radical alternatives… On balance, we believe that the immediate interest of shareowners and companies in better communications would be better and more effectively served with an incremental approach that promotes less reliance on — or eliminates altogether — the OBO/NOBO distinction and otherwise increases the potential for direct communications.

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