CorpGov.net

The Future of Corporate Reform, Laguna Beach, California, Sept. 14-16/2010. 200 directors, managers, and trustees will share knowledge and tools to create long-term value, shape corporate reform and repair markets. Sponsored by The Corporate Library. (Sticky post)

Social Investment Forum Symposium 2010: Public Policy and Sustainable Portfolios, September 22, 2010 at the Pew Charitable Trusts (a LEED-certified property), Washington, DC.

ICGN autumn conference, Financial Sustainability: restoring market stability, corporate value and public trust. San Francisco – 6-7 October. Agenda. Registration.

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The Council of Institutional Investors published an independent assessment of client directed voting, a topic that is under consideration by the Securities and Exchange Commission (SEC) as part of its wide-ranging review of the U.S. proxy system.

The paper was written by Alan Beller, Janet Fisher and Rebecca Tabb of the law firm Cleary Gottlieb Steen & Hamilton. While the paper will inform the comment letter that the Council plans to submit to the SEC on its concept release on the proxy system, it is an independent study and does not necessarily reflect the views of the Council or its members. The white paper on client directed voting is posted here on the Publications page of the Council’s Web site.

I gave it a quick read. At least they clearly see the danger in a likely reversion back to broker votes if going with the proposal from Stephen Norman. I don’t see much likelihood of support for changes that will help fund vehicles leading to more informed voting and I’m not real happy with the characterization of a single page from Broadridge being labeled “The most advanced thinking.” (page 6)

The report gives voting in elections substantially more force than voting in the market by buying or selling shares. I’m not sure that’s true.

Disclosure and conflicts of interest would appear to be issues that need to be addressed as we discuss in Part IV. Second, if an investor who has not made informed investment decisions (or whose agent does not) loses money, other investors and the company generally do not suffer the consequences. The same may not be true in the exercise of voting rights insofar as a substantial uninformed vote (or misinformed vote, if the voting mechanism failed to protect against fraud or conflicts of interest) can influence the outcome of a ballot item. (page 9)

Interesting discussion of Rules 14a-1 and -2. Looks to me like changes are needed. According to the report, “A robust CDV model is likely to have a long gestation period.” Better to leave it alone while systems build than to implement a closed system with limited options. See An Open Proposal for Client Directed Voting, HLS Forum CorpGov & FinReg, 7/14/10 and Investor Group Releases Paper on Client-Directed Voting, RMG, Ted Allen, 9/1/10.

Keith Bishop begins to address at least one of the issues raised by J.W. Verret (Defending Against Shareholder Proxy Access: Delaware’s Future Reviewing Company Defenses in the Era of Dodd-Frank) but in a much more positive manner.

What happens when a shareholder nominates someone who doesn’t meet the qualification requirements of the bylaws?… One approach is for the chairperson to rule on whether a nominee’s name can be properly brought before the meeting for a vote.  This approach is entirely consistent with the idea that a person who does not meet the qualifications for service as a director is not entitled to be elected.  This approach appears to be in accord with case law.  Waterbury v. Temescal Water Co., 11 Cal. App. 632 (1909) (applying former law).

If the corporation allows a vote on the unqualified candidate and the candidate receives a sufficient number of votes to win a seat on the board, then there is likely to be even more confusion because the General Corporation Law does not specify any mechanism for “seating” board members.

California does provide an expedited judicial process for determining the outcome of elections in Corporations Code Section 709.  However, that process must be initiated by a shareholder “or any person who claims to have been denied the right to vote”.  By its terms, therefore, the procedure is not available directly to either the corporation or a nominee who is not also a shareholder. (Proxy Access & Director Qualification Requirements)

CalPERS announced that Kurato Shimada resigned yesterday to focus on “personal matters.”

“It’s with sadness that I accepted Kurato Shimada’s resignation from our Board today,” said Rob Feckner, CalPERS Board President. “We appreciate his desire to focus on personal matters and wish him well.” CalPERS will be scheduling a special election to fill his vacant seat. Press Release, August 31, 2010.

Shimada occupied one of two “at-large” seats on the CalPERS Board. Earlier in the day, the Sacramento Bee reported focused on former Board member Charles Valdes, who for many years, occupied the other at-large seat. From that Bee report:

In court papers, the state introduced written testimony from Buenrostro’s ex-wife Melissa Nevis, who said Villalobos once gave $500 in casino chips to Valdes and either of two other men: CalPERS board member Kurato Shimada and former board member Robert Carlson…

Questioned by a state lawyer, former board member Charles Valdes invoked his Fifth Amendment right against self-incrimination 126 times in closed-door testimony this month. Former CalPERS board member refuses to answer questions (SacBee, 8/31/10)

Today, the Bee provided further clarification, stating that “Shimada hasn’t been accused of any wrongdoing in the pension fund’s bribery scandal.” CalPERS board member with ties to Villalobos resigns, SacBee, 9/1/10.

Shimada served two separate stints on the board. The first ended in 1999, and a year later he went to work for Villalobos. The two pitched an investment deal to CalPERS in 2000 on behalf of Los Angeles real estate firm CIM Group. CalPERS eventually invested $400 million with CIM, which paid Villalobos’ firm a $9.6 million fee. Called to testify in July in Villalobos’ bankruptcy case, Shimada said he earned more than $40,000 on the deal. Shimada rejoined the CalPERS board in 2002. He served a total of 21 years.

And there’s this from the LATimes (Villalobos bankruptcy judge is skeptical that state’s suit won’t get in the way, 9/1/10)

On Tuesday, the state Legislature passed a bill to regulate placement agents and their fees for directing public pension money to investment firms. The investment industry at first strongly opposed the bill but later withdrew its objections.

That bill, AB 1743 (Hernandez), will require placement agents with respect to public retirement systems to register as lobbyists.  This would have many disclosure and economic consequences for placement agents and their employers.  One of these consequences will be a ban on contingent compensation. (Placement Agent Bill Passes, calcorporatelaw.com)

CalPERS earlier enacted regulations regarding placement agents but they weren’t adopted according to the legal requirements of the Administrative Procedure Act. Southern California attorney, Keith Bishop, filed for a determination with the Office of Administrative Law to invalidate the underground regulations.

I also filed in support of that petition. However, OAL took the position that CalPERS’ certification of non-enforcement of the May guidelines deprived them of any ability to take action, since they can only rule on underground regulations that an agency intends to enforce. See past determinations (bottom of page) made by OAL at my request.  At least this time CalPERS appears to be following up their underground regulations with real regulations.

I’ve probably run for the Board at CalPERS more than anyone else who never got elected. Each time it was very frustrating trying to get the attention of the press. They always seem ready to jump on any scandal at CalPERS but none of them have ever vetted or endorsed candidates prior to the election. Here’s something I wrote for a guest commentary in the Sacramento News & Review (Don’t overlook CalPERS election, 9/14/06):

When I asked the Sacramento Bee to consider making an endorsement, it told me the fall elections would “demand our full attention during the political season.” The paper only had time to focus on elections of importance to its readers.

When I’ve given talks in Shanghai or London about corporate governance, no one questions the importance of CalPERS. Yet, neither our local nor our national press seem to think CalPERS elections are important enough to cover. Perhaps that’s one reason why the number of candidates for office has dwindled. Years ago, almost one hundred candidates filed in a single year. This year, three seats were up for election. Only one seat is contested. Apathy is rampant, even as the press seems to carry more and more stories of problems.

CalPERS members need to give much more thought to how they vote in their elections. The press should also step up to the plate. Instead of sniping at CalPERS at every turn, they should live up to their responsibilities by not only investigating and endorsing candidates before elections but doing a much better job of covering Board activities throughout the year.

For the second year in a row, I’m co-sponsoring an opportunity for CalPERS members, concerned taxpayers and the press to meet and question Board candidates on the issues before they are voted into office. See 2010 Board Member Election & Candidate Forum.

I’m delighted to report that all candidates, including those with no opponents, have agreed to attend. I’m hoping it will stimulate more interest in and coverage of the election. I’m also hoping corporate directors will participate in similar forums when faced with proxy contests or proxy access director nominee challengers. Shouldn’t we be able to question potential directors before voting?

Given the continuing feeling of powerlessness, it seems to be harder for voters and investors to stand up and say “yes, we can!” However, if we don’t, our situation may only get worse.

In the wake of the SEC’s approval of management proxy access for three percent shareholders, it’s quite surprising to note the vehemence of the remaining opposition to such action. For example, the Wall Street Journal in its lead editorial on August 30, 2010 entitled Alinsky Wins at the SEC, which in itself makes clear the extent of its opposition, states that the new rule will only “help activists and unions, not shareholders.” Similarly, an unnamed official of the U.S. Chamber of Commerce speaking on Yahoo Finance on August 25, 2010 states that it will fight this action “using every method available” because it is “a giant step backwards for average investors” and David Hirschmann, the Chamber’s President/CEO of its Center for Capital Markets Competitiveness, in the same place, characterized the new rules as ones that allow “the proxy process to be [used] to give labor-union pension funds and others greater leverage to try to ram through their agenda” which “makes no sense.”

Institutional investors and other proponents of improved governance should be prepared to respond in the media and elsewhere to such arguments.

Perhaps the most simple and compelling response is that the new rules permit nothing which was not already permitted – i.e. a change in board composition through shareholder vote. That is, any investor has been and remains able to wage a proxy fight for board representation to seek to “ram through” (or pursue) their agenda. While the new rules are intended to and will obviously lead to more minority representation by reducing the cost of its pursuit, it was already contemplated by all pertinent law. Investors have also had and retain the right under 1934 Act Rule 14a-8 to include on proxy cards many proposals for action not involving director elections.

Indeed, allowing proxy access to investors hardly guarantees them a board seat. They still must convince the holders of the requisite number of shares in the pertinent jurisdiction – none of which is being changed – to vote for their candidates. If simply allowing proxy access to minority holders of itself will greatly expedite their candidacies, what does this say about the level of shareholder satisfaction with management and its slates?

Even if a board seat is obtained by an investor, it is just that; a seat, and not a majority capable of imposing its own agenda. Given that proxy access for large firms with market caps exceeding $33 billion will require ownership of more than $1 billion of stock for more than three years, one wonders why there is so much concern. We are not talking about miniscule, “gadfly” shareholders with no real economic interest, only pursuing a social agenda. What is more a part of capitalism than allowing a meaningful voice to large investors in a company?

Apart from these somewhat mechanically-oriented, but still significant, arguments, lurks the ultimate consideration, namely the need for better governance, which can only be accomplished with real accountability for boards. When Jim McRitchie brought all of this to the fore 8-10 years ago through his writings and suggestions to the SEC, reasonable, knowledgeable people could argue about whether there was a general governance problem. In light of the numerous debacles over the last decade starting with Enron, few would want to take the negative side of this argument today. Many, including the author of this post, would argue about how to improve governance, but the “whether” part of the debate is a different story.

The status quo has not worked. In far too many cases, directors have been asleep at the proverbial switch while managements brought down companies and imposed huge costs on societies. One way or the other, there needs to be additional accountability for boards, and this initiative is quite modest, in that it does not change in any way the substantive standards to which directors are held. That is, the only accountability for even catastrophic decisions is removal from office – not financial liability. Commentators have lamented the modesty of this effort.

When called upon to defend the new rules, all concerned should keep in mind and remind the public, what they do and don’t do relative to the status quo, as well as why this action has been taken now.

Yesterday, Michelle Leder had an interesting post, Climate change, baked goods and Sara Lee … at footnoted.com.  ESG disclosures concerning global climate change are increasing in 10-k and 10-Q filings. Leder cites Molson Coors disclosure in its recent 10-Q:

While warmer weather has historically been associated with increased sales of beer, changing weather patterns could result in decreased agricultural productivity in certain regions which may limit availability or increase the cost of key agricultural commodities, such as hops, barley and other cereal grains … Increased frequency or duration of extreme weather conditions could also impair production capabilities, disrupt our supply chain or impact demand for our products. Climate change may also cause water scarcity…

See also, Beer, Cheesecake And Climate Change, NPR’s Planet Money, 8/30/10. Hat tip to the CEO of Sustainability Risk Advisors, Mark Tulay, who alerted me of Leder’s post through the Social Investment Forum. Listen to Tulay on Sea Change Radio: Socially Responsible Investment Community Reacts to BP Deepwater Disaster.

The Altman Group, a proxy firm founded by 35-year industry veteran Ken Altman, has revealed it will not accept new corporate proxy clients. Deep-pocketed competition in the US proxy space and an exodus of top talent have prompted the Altman Group to focus on other areas, including its main business doing proxy work for mutual funds and closed-end funds. Altman’s exit from the US corporate proxy business coincides with the entry of Alliance Advisors. (Altman shifts course away from US proxy, Inside Investor Relations, 8/19/10) We’ll miss them and hope Altman continues to lend his talents and opinions to important subjects like proxy plumbing reform.

Apparently, the SEC is going to hold a field hearing in California in late September… probably in the Bay Area. AFSCME is looking for people who lost money investing in municipal bonds (eg. Vallejo). They would like them to testify at the field hearing and can provide training on what to expect and how to be most effective. Contact Scott Adams. See SEC Steps Up to the Muni Plate, The Bond Buyer, 6/17/10 for additional background.

Janet Kissane, SVP & Corporate Secretary
NYSE Euronext Legal & Government Affairs

Dear Ms. Kissane:

Earlier this month the NYSE announced it intends to amend NYSE Rule 452 to prohibit members from voting uninstructed shares if the matter to be voted on relates to executive compensation, including “say-on-pay” proposals, at meetings occurring after July 21, 2010. An exception will be made for those meetings on which the NYSE has issued a “may vote” ruling prior to July 21. As you know, the driver for this amendment is Section 957 of Dodd-Frank, which also prohibits voting of uninstructed shares by member organizations in the election of directors (excluding companies registered under the Investment Company Act of 1940) and in other matters as determined by the Securities Exchange Commission (“SEC”). I would like the NYSE to recommend to the SEC that NYSE members be also be prohibited from voting all uninstructed proxy items on shares with some instruction.

Although the NYSE, NYSE Amex and NYSE Arca rules have already been amended, effective for annual or special meetings as of 1/1/10, to prohibit member organizations from voting uninstructed shares in connection with the election of directors, when retail shareowners vote using a voter information forum (VIF) and they leave directors or any other items blank, votes are automatically cast “on their behalf” in favor of those recommended by the company’s soliciting committee.  Current SEC rules grant them discretion to do so. As shareowners who believe in democracy, several of us filed a rulemaking petition with the SEC last year, suggesting amendments to take away that discretionary authority to change blank votes.

We believe that when voting fields are left blank on the proxy by the shareowner who has voted at least one item, they should be counted as abstentions. A similar recommendation from the NYSE would make the SEC more likely to address this issue and would be in the spirit of the intent of the recent Dodd-Frank provisions.

See two examples. At Interface, I voted only to abstain on ratification of the auditors. Yet, you can see ProxyVote automatically fills in my blank votes with votes as recommended by the soliciting committee. A second example, at Staples, shows much the same. Blank votes changed also include the shareowner proposal to reincorporate to North Dakota, even though such proposals are not considered routine and are not subject to “broker voting.”

Just as broker votes or nonvotes should be eliminated so that votes counted reflect the true sentiment of shareowners, the practice of converting blank votes to votes for management should also end.

In our petition, we also highlight a secondary concern. When shareowners utilizing the ProxyVote platform of Broadridge vote at least one item and leave others blank, the subsequent screen warns them that their blank votes well be voted as recommended by the soliciting committee. This provides an opportunity to the shareowner to change their blank vote before final submission, if they don’t want it to be voted as recommended.

Of course, if we are going to have a system that allows the votes of shareowners to be changed, it is salutary of Broadridge to provide advanced notice. We applaud them for that effort. However, we note that SEC Rule 14a-4(b)(1) requires that when a choice is not specified by the security holder, a proxy may confer discretionary authority “provided that the form of proxy states in bold-face type how it is intended to vote the shares represented by the proxy in each such case.” Broadridge uses small print, not bold-face type.

Broadridge says that shareowners using ProxyVote are communicating “voting instructions” to their bank/broker. They are not voting a proxy. Since Rule 14a-4(b)(1) pertains to “forms of proxy,” not the “voting instruction form,” there is no violation. However, subdivision (1) refers to the “person solicited” and the need to afford them opportunity to specify their choices. The person being solicited is the beneficial shareowner. Therefore, unless the subdivision applies both to a voting instruction and a proxy, the requirements to indicate with bold-face type how each field left blank will be voted loses meaning.

However the SEC interprets the current rule, we hope you will urge them to move forward with a rulemaking to remove discretion to change blank votes and to require blank votes to be counted as abstentions.

The Millstein Center for Corporate Governance and Performance released Voting Integrity: Practices for Investors and the Global Proxy Advisory Industry. While this important briefing was primarily focused at the proxy process for institutional investors, the need for integrity applies equally to the votes of retail investors:

At the heart of any discussion about proxy voting is the humble shareholder ballot. In its simplest interpretation, the ballot is arguably the principal method by which a company’s shareholders can, while remaining investors in the company, affect its governance, communicate preferences and signal confidence or lack of confidence in its management and oversight. The ballot is the shareholder’s voice at the boardroom table. Shareholders can elect directors (and, in several jurisdictions, have the right to remove them), register approval of transactions, supply advisory opinions and (increasingly) authorize executive pay packages, all through the medium of the ballot. It is one of the most basic and important tools in the shareholder’s toolbox… Safeguarding the intention of a voting instruction is of paramount importance to system integrity.

Co-filing with James McRitchie, Publisher of CorpGov.net, were:

• John Chevedden, Rule 14a-8 proposal proponent since 1996
• Glyn Holton, Executive Director, United States Proxy Exchange
• Mark Latham, Ph.D., VoterMedia.org
• Eric M. Jackson, Ph.D., Managing Member, Ironfire Capital LLC
• James P. Hawley, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary’s College of California
• Andrew Williams, Ph.D., Professor and Co-Director, Elfenworks Center for the Study of Fiduciary Capitalism, Saint Mary’s College of California
• Andrew Eggers, President, Proxy Democracy
• Bradley Coleman and Erez Maharshak, Proxy Democracy

This Week in the Boardroom generally has interesting videos every week. The 8/26/10 post, New Proxy Access Rules, featured TK Kerstetter, CEO & President, Corporate Board Member; Scott Cutler, Executive Vice President, NYSE Euronext and Stephen Lamb, Partner, Paul Weiss. Be sure to check out prior editions, such as the 8/5/10 interview with Kenneth Bertsch, Executive Director, Morgan Stanley Investment Management, providing institutional shareowner views.

Corporate governance’s last chance saloon: Peter Butler (FT, Jul 27 2010) Peter Butler says the UK’s new Stewardship Code offers a chance to get it right and if shareowners can’t do so it will open the door to heavy regulation and litigation. (4m 9sec)

I received the following from Andrew Shapiro, President, Lawndale Capital Management, LLC yesterday afternoon.

This morning, the SEC released and approved final rules relating to Proxy Access. These rules were a bit changed from earlier comment releases and greatly limit practical use of the new rule. The full adoption release (451 pages) can be found at http://www.sec.gov/rules/final/2010/33-9136.pdf.

I haven’t come close to reading the full release yet but several opinions come to mind.

First and foremost, I am most pleased with and grateful that the SEC passed rules making it easier for shareholders of companies to submit 14a-8 shareholder proposals providing for proxy access rules that can be stronger and superior to the minimal and weak proxy access standard the SEC has passed this morning. Of course it is important that state laws support and provide for any stronger proxy access rule passed by shareholders to be mandatory and enforceable, not advisory.

Criticisms of the minimalist SEC Proxy Access rule itself.

Criticism 1) The idea of exempting small company boards from the increased accountability that proxy access might provide shareholders is frankly #ssbackwards. Shareholders of smaller companies, having already lost corporate governance protections from various other small company exemptions (e.g. certain Sarbanes Oxley provisions, etc) are most in need of proxy access to offset the more prevalent dysfunction found in small company board’s governance.

Criticism 2) There are substantial fixed costs to conduct a traditional proxy contest to force accountability upon a poorly governed company’s board, regardless of that company’s size. This is a huge barrier to shareholders and entrenchment protection for bad boards and management’s of smaller companies. The costs saved for shareholders of smaller companies via the implementation of proxy access serve a far greater proportional savings and reform role than they do in larger company contests.

Criticism 3) One particular aspect of proposed exemptions from proxy access for smaller issuers is the definition often proposed for “small company” which measures “public float” [generally of less than $75MM.] Use of “public float” to measure an issuers size rather than straight market capitalization exacerbates the basic problem.

The more shares held by those “affiliated” with the issuer, the higher the overall market cap of the issuer that would gain the exemption and the more issuers that will be exempted from proxy access. Yet it should be quite obvious that the more shares held by affiliated parties, the greater likelihood of an insular, dysfunctional and completely unresponsive board.

Here’s how why or how this point works:

• Company A – $75MM market cap or lower (no matter what the “affiliated” ownership is – exempt from proxy access
• Company B – $80MM market cap and NO “affiliated” ownership – subject to proxy access;
• Company C – $110MM market cap company but with 35% “affiliated” ownership means market float of only $71.5MM (100-35%affiliated = 65% public times $110mm market cap)

Thus this larger small company is also EXEMPT. Yet with 35% insider ownership, the accountability mechanism of proxy access is most necessary.Note again – with such high insider ownership in Company C, above, passage of a shareholder 14a-8 proposal to establish an even stronger proxy access rule (where it would seem most needed) is almost impossible.

Criticism 4) The amount of director representation allowed under proxy access is limited to only 25% of a board rounded down. This means that, with boards of 7 or less directors, only ONE director can be nominated via proxy access. Note, with a director’s motion requiring a second to even get entered in a Board’s minutes, there is very limited influence a single director may bring to a board room, especially the most dysfunctional boards. The % membership cap should have been 33% or rounded up with a minimum of nominees always being TWO directors.

Criticism 5) This rule will not greatly alter the amount of disruption, economic and otherwise, that takes place with proxy contests nor meaningfully reduce the number of traditional proxy fights. It is not being duly considered that 50% of the vote is still required to elect alternative nominees, whether on the company proxy via proxy access or on an alternative slate proxy. When the limited amount of director representation allowed under proxy access is coupled with the access rule’s restrictions against subsequently seeking additional representation (even when the additional director numbers comprise far less than change of control), the benefits of proxy access are not compelling when compared to the board representation with no strings attached available for the same 50% majority vote.

The John Lewis Partnership’s 2010 Corporate Social Responsibility (CSR) report, A shared passion, summarizes the business’s progress during 2009/10 at

The report includes an update on the Partnership’s commitments to dealing fairly with suppliers, selling responsibly sourced quality products, making a positive difference to the communities in which it operates and reducing its impact on the environment. The examples of the co-owners’ shared passions, and the loyalty and support of customers, suppliers and business associates, help to demonstrate how the Partnership continues to offer a better and more sustainable way of doing business.

Highlights include:

• Waitrose and John Lewis exceeding targets to improve shop energy efficiency
• New Responsible Development Framework to govern and guide building projects
• Setting out its ambition to achieve an absolute reduction in carbon emissions by 2020, despite looking to double the size of its business during that time
• Reducing emissions from transport by 6.3%, relative to sales, since 2005/06
• Charitable and community contributions totaling £7.9 million, equivalent to 2.59% of pre-tax profitGRI
• Waitrose named UK’s most compassionate supermarket 2009/10
• John Lewis achieving its target to sell 100% FSC-certified garden furniture.

For the first time this year, the report is aligned with the Global Reporting Initiative’s G3 Sustainability Reporting Guidelines, at a self-declared Application Level C.

The John Lewis Partnership’s 70,000 permanent staff – known as Partners – own 29 John Lewis shops, 231 Waitrose supermarkets, an online business, a direct services company (Greenbee), a production unit and a farm, with a combined turnover of nearly £7.4 billion last year.

A model system for developing key performance indicators (KPIs) relevant to mandatory UK sustainability reporting has been put forward in a new research report which can be downloaded from Ethical Performance who also summarized the above report the the John Lewis Partnership.

The company was one of many I studied under a grant from the National Institute of Mental Health about 30 years ago, when I was looking for the ideal form of corporate governance. In the case of the Partnership, employees were very lucky to have a founder, John Spedan Lewis, who thought beyond his own family (much like Billionaires Giveaway: Who is Worthy?).

Lewis was careful to create a very forward thinking governance system, including a Constitution, that would allow the firm to be competitive and democratic, giving every Partner a voice in the business they co-own. Billionaires of today might leave a greater legacy by adopting democratic principles to govern their own companies rather than by donating their riches to charities that often address the externalized costs of businesses.

See also, csr-reporting, CSR Reporting: What Investors Want, and Sustainability and CSR Reporting: There’s An App For That. A Letter to SAP and the future.

Since filing the initial 21st century petition for proxy access in 2002 with Les Greenberg, I have written extensively on the need. With the 3-2 vote by SEC commissioners, as most expected, it will soon be a reality… in time for at least a portion of the 2011 proxy season. What we proposed back in 2002 was essentially what the Chamber, BRT and other rear-guard organizations have been calling “private ordering.” Let each company decide. Of course, ours was based on what shareowners would propose and pass, not simply on what an entrenched board and management might install without a shareowner vote.

As reported elsewhere, Proxy Access Is In (Lucian Bebchuk and Scott Hirst, Harvard Law School, 8/25/10).

Under the rule, a shareholder (or shareholder group) would need to hold more than 3% of the company’s shares for more than 3 years to be eligible to use the rule to place director candidates on the corporate ballot. These eligibility requirements, together with the rule’s procedural requirements, will place substantial limits on its use. (To illustrate, according to data put together by CalPERS, the 10 largest public pension funds together hold less than 2.5 percent at Bank of America, Microsoft, I.B.M. and Exxon Mobil.)

It should also be noted, the “First to File” rule was replaced with a “Size Matters” rule. As Bebchuk and Hirst indicate, “To the extent that these limits prove excessive, we hope that the SEC will reconsider the thresholds set today.” The limits are excessive but the SEC also voted to amend Rule 14a-8 to enable shareowners to include, on corporate proxies, proposals related to election and nomination procedures, like we could for many years until the SEC reinterpreted that rule, without a rulemaking or even notice, to prohibit such proposals. AFSCME v AIG led to a brief window of opportunity for shareowners when the court overturned that illegal action by the SEC. However, under Cox, the SEC they then changed the rule to prohibit private ordering by shareowners, even suggestions for private ordering, which is essentially what nonbinding resolutions do.

It is very important to have a base threshold. The new Rule 14a-11 puts entrenched managers and boards on notice that they are slightly more likely to be held accountable. Shareowners may be able to nominate and elect up to 25% of the board. While that doesn’t give them any real power to move the corporation in a different direction without the consent of the already entrenched, at least they’ll have a front row seat and will be able to make arguments, if they can get a second. Existing board members might just begin to get the feeling they are accountable to shareowners… not just fellow board members and the CEO.

One of the most important clarifications regarding the revised Rule 14a-8 is contained in footnote 674 of the release, concerning what is meant by a proposal under 14a-8 that may “conflict” with 14a-11.

Under the Proposal, Rule 14a-8(i)(8) would allow shareholders to propose additional means, other than Rule 14a-11, for inclusion of shareholder nominees in company proxy materials. Therefore, under the Proposal, a shareholder proposal that sought to provide an additional means for including shareholder nominees in the company’s proxy materials pursuant to the company’s governing documents would not be deemed to conflict with Rule 14a-11 simply because it would establish different eligibility thresholds or require more extensive disclosures about a nominee or nominating shareholder than would be required under Rule 14a-11. A shareholder proposal would conflict with proposed Rule 14a-11, however, to the extent that the proposal would purport to prevent a shareholder or shareholder group that met the requirements of proposed Rule 14a-11 from having their nominee for director included in the company’s proxy materials.

What the SEC has done is establish “private ordering” with a very high floor. Within a few years, we can expect to see 100s of proposals calling for more reasonable thresholds and holding periods, as well as allowing a greater proportion of shareowner nominees. Corporate governance activists have been given a new focus. Just as we have been struggling to obtain majority vote standards, we will now be fighting for more reasonable nomination requirements. To the John Cheveddens and Ken Steiners of the world I say, “Time to gear up; may a thousand access proposals bloom.” Start with small companies where the SEC has delayed implementation of Rule 14a-11 and where, on average, corporate governance reforms are furthest behind. Have an access proposal ready for next year? Please share it.

See also Pesky shareholder activists gain influence: After years of battling futilely to rein in corporate boards, ‘gadflies’ are winning votes, LATimes, 8/23/10; Speech by SEC Chairman: Opening Statement at the SEC Open Meeting; SEC Approves Final Proxy Access Rule, RMG, Ted Allen, 8/25/10; In 3-2 Vote, SEC Finally Adopts Proxy Access Rule, Compliance Week, 8/25/10; Social Investment Forum Welcomes Federal Proxy Access Rule, 8/25/10; press release, Shareowners.org, 8/25/10; ProfessorBainbridge, 8/25/10; The Conference Board blog, 8/25/10; S.E.C. Makes Access to Proxy Ballots Easier, NYTimes, 8/25/10; Jim Hamilton’s World of Securities Regulation, 8/25/10; Activist Shareholders Get a Louder Voice, Sarah Morgan, SmartMoney, 8/25/10; The SEC Adopts Proxy Access, theCorporateCounsel.net/Blog, 8/26/10; The Promise of Access, theRacetotheBottom, 8/5/10. And here’s a paper of mine published by the Corporate Board in July 2003, Toward Democratic Board Elections; Proxy Access & Shareholder Citizenship: The Quest for Inclusion, Marcy Murninghan, 8/26/10.

BetterInvesting, the nonprofit association serving the retail investor primarily through education and investment clubs, announced a strategic partnership with Moxy Vote. BetterInvesting will promote the use of Moxy Vote’s free online proxy-voting service. According to Kamie Zaracki, CEO of BetterInvesting:

We’re excited to work with Moxy Vote. Since 1951, our association has been advocating that investors aren’t simply holders of stock shares — they’re owners of companies who should participate in the ownership by voting their proxies. Moxy Vote makes this easier for retail investors by providing a single site for maintaining proxy information, voting and obtaining information on the issues from their 40 participating Advocate organizations. This partnership will help us fulfill our mission of providing sound education that helps shareowners make better investment decisions.

In their press release, Moxy Vote co-founder Mark Schlegel says:

BetterInvesting has served the investment education needs of more than 5 million people over its history and as a result brings a wealth of experience and insight on how Moxy Vote should market its services to retail investors. Moxy Vote wants to put more information into the hands of retail investors, who hold 30 percent of publicly traded shares, and give the so-called little guy a needed voice in the boardrooms of the companies they own.

This is an excellent development that could very well strengthen both organizations and the overall clout of shareowners IF the partnership is fully embraced by both. I have little doubt that Moxy Vote stands ready to serve but will BetterInvesting actually begin to stress the importance of proxy voting or corporate governance among its members. Do a search on their site for proxy voting or corporate governance and you find virtually nothing.

BetterInvesting has traditionally emphasized how to analyze and buy stock and mutual funds. Little effort has been devoted to what investors can do as owners. For example, I haven’t seen any evidence the organization spends any effort describing governance basics, such as analyzing CEO compensation, possible advantages of annual director elections, why the move to majority voting requirements, how to file a proxy resolution or even what resources are available to help you decide how to vote proxies. If investment club members begin to see themselves as owners, rather than speculators, the partnership could be truly transformative. We should all be watching to see how both organizations follow through.

I hope this is just the start. BetterInvesting could also form partnerships with groups like the United States Proxy Exchange (USPX) and VoterMedia.org. USPX, for example, is training members on how to present proxy proposals at annual meetings so that proponents don’t have to bear the expense of flying across the country to make a 2 or 3 minutes statement at annual meetings. If investment clubs took on this effort with USPX, we could soon have “field agents” at every annual meeting. Investment clubs could also rate and provide seed funding to bloggers and others who provide investor education. Those rated at the top would get the most funding. See prototype.

According to the press release:

Since 1951, BetterInvesting, the brand identity of the National Association of Investors Corporation, has helped over 5 million people become better, more informed retail investors. BetterInvesting, based in Madison Heights, Mich., helps its members build wealth through local, regional and national learning events as well as through Web-based tools, software, member publications and online resources. As the nation’s largest nonprofit organization dedicated to investment education, it provides investing knowledge and practical investing experience through local investment clubs, local volunteer chapters, online courses and an active online community. BetterInvesting and its subsidiary, ICLUBcentral, currently serve over 120,000 investors.

Moxy Vote offers a free online platform at www.moxyvote.com that simplifies the proxy voting process for retail investors. It does this by providing information on the issues at stake and offering the functionality to actually process a vote. Shareholder Advocates can rally like-minded shareholders to vote alongside of them for their causes.  Moxy Vote has been profiled in the Wall Street Journal, New York Times, Investor’s Business Daily, Kiplinger’s and a number of other publications. It has also received favorable reviews from industry experts such as Nell Minnow, Jim McRitchie and Mark Latham.

Several interesting articles in the current issue of Corporate Board Member. Nice to see coverage there of the Proxy Disclosure blog by Mark Borges, part of the CompensationStandards.com group. Borges spend four years as special counsel at the SEC’s office of rulemaking before joining the Mercer consulting firm. Regarding the new pay disclosure rules,

In the first year especially, it benefits you to be a little bit more explicit. Presumably, if you establish a strong baseline it will keep things in check.

In an article on Best- and Worst-Paid Boards Among the S&P 500, interesting to see Republic Services paid the highest and total shareowner return was 17% in 2009, whereas Fastenal paid the least and shareowner return was 22%. Thankfully, most of the five high paid runner up boards did better for their shareowners than did the five runner up low paid boards.

That article was followed by one by Bruce Ellig who argues that most board members aren’t paid enough. At least part of the basis of his argument is that directors should be paid something close to the same rate per day worked as the CEO. Ellig also argues agains paying board members in stock options, in part because the

terms are either too short for a meaningful measurement or longer than the company might wan to tacitly commit to a director’s continuing on the board.

One answer to a series of questions caught my eye. Who should approve director pay?

Shareholders—but they don’t. Instead, boards typically approve their own compensation, possibly after an analysis by an outside consultant that the board itself paid for. Doesn’t this seem strange? The CEO doesn’t approve his pay package, nor does anyone else in the company. Why should the board members?

The situation wasn’t always like this. Until relatively recently, company insiders were the big majority on boards, and they didn’t collect retainers. But they did vote on how much to pay the few outsiders among them. Reforms have reversed this to where unpaid insiders are few and the paid outsiders set their own pay.

They shouldn’t, of course. Shareholders should be asked to approve the package of director retainers, annual incentives, and stock awards, along with the formulas used to calculate them. This kind of transparency, the same that’s demanded by advocates of a say on pay for executive comp, should include a narrative in the proxy describing how the board put together its compensation figures.

Giving shareowners a say over the pay or directors makes much more sense than giving shareowners a say over CEO pay. Directors in a sense report to shareowners, CEOs do not.

Also interesting to me is the article How’s Your Company Really Doing? I’ve been a long-time proponent of measures like economic value added, EVA. Now “EVA Momentum” addresses some of the problems inherent in EVA like ratios that can be gamed and turnaround situations where companies are or were losing money. Of course past momentum doesn’t necessarily reflect what investors expect about performance going forward but it looks like a useful measure for both board and investors to consider.

Julie Connelly argues Proxy Access: Worth Little More Than a Hill of Beans. I wouldn’t go that far buy it is clear that proxy solicitors, attorneys, public-relations counsel and even pay for director candidates may cost a whole lot more than writing, printing and mailing your own proxies. Maybe so, but I think shareowners will actually be less confused by proxies that list more than one candidate for some positions than they are when getting two proxies for the same company. I think that may up the retail vote. Connelly notes,

Nickolay M. Gantchev, an assistant professor at the Kenan-Flagler Business School of the University of North Carolina at Chapel Hill, studied 1,492 campaigns launched by 200 hedge funds between 2000 and 2007. He discovered that fewer than 5% turned into actual proxy contests. Either the dissidents went away or the warring parties reached some kind of agreement.

Will proxy access encourage a significant increase in worthy board candidates? It could, because some portion of their expenses will be defrayed by the company. But board-nominated directors will still have the edge. The board’s real challenge is to put together the best team it can. And to extol the value of that team in, yes, the proxy.

Finally, one tidbit in a side-bar surprised me. In Mind Your Manners in China’s Boardrooms, Craig Mellow notes it is sometimes tricky for foreigners serving on Chinese boards to avoid sounding bossy. On the other hand, he quotes something refreshing from Susan Wang, who sits on the audit committee of Suntech Power,

They may not like pushy foreigners, but they’re freewheeling in offering dissent. “They’ll actually commit to paper a remark like ‘I totally disagree with this strategy,’” says Wang. “Directors are far more cautious on U.S. boards.”

That’s behavior I’d like to see more of here in the US.

VoterMedia.org is a website that helps a community connect with its elected leaders, by letting voters allocate community funds to competing blogs. It motivates the bloggers to become community media. In this video, students at the University of British Columbia talk about how VoterMedia has helped their student union, which is called the Alma Mater Society, or AMS. In the not too distant future, we hope to be viewing videos of shareowners discussing how VoterMedia and various bloggers have helped transform their companies.

No matter what you think of the following protest at a Target store, expect to see many more like it as a result of the Supreme Court decision of Citizens United. If anything good comes out of that decision it will likely be that it raises awareness of corporate influence over politics. Now, maybe many more will favor reforms to limit their influence. Until then, just as news programs are starting to divide between left and right, we can expect shoppers to channel their money to whichever side they believe is politically correct. See also, 3 shareholder groups call on Target, Best Buy to review political giving after Minn. donations, LATimes, 8/20/10.