Nell Minow of the Corporate Library recently wrote to the SEC to express her concerns a growing number of no action letters that make no sense. Her main focus is on a challenge made by Comshare based on the worthiness of the proponent. Nell Minow on Comshare Shareholder Proposal
Shareholder Efforts Recognized
“The last time someone voluntarily gave up power was in 1800, when George Washington did it,” said Les Greenberg. Greenberg wants shareholders of cafeteria operator Luby’s to vote in favor of removing anti-takeover devices, electing directors annually and canceling bonuses for management if sales, profits or the share price decline. Oh, and he’s also running for the board. Small investors are fighting back and dailies all over the country are picking up on the corporate governance revolution.
San Antonio Express-News writer Bill Day observes that “a decade after democracy finally sprouted in Russia, Eastern Europe and South Africa, it makes sense that a pro-democracy movement would be pushed in corporations, where leaders still choose their own successors and where shareholders often allow the company to vote for them.” (Democratic Shift: Shareholders demanding a larger role in the running of corporations, 8/26)
Seven Veterans Profiled
The Washington Post’s Kathleen Day quickly moves from the origins of Martin Stoller and Aaron Brown’s eRaider.com to profile corporate governance giants in Soldiers for the Shareholder, 8/27. What are they doing now?
Robert A.G. Monks, who created Institutional Shareholder Services and then went on to start activist fund Lens which returned 160.2 percent in the three years ended June 30, compared with a return of 71 percent for the 500. He’s leaving Lens to concentrate on moving nonprofits endowments to become active shareholders. Nell Minow, who joined Institutional Shareholder Services as general counsel and has been partners in corporate-governance ventures with Monks, left Lens to focus on the Corporate Library, the best internet resource corporate governance.
T. Boone Pickens Jr., thought of as a villainous corporate raider in the 1980s, is now remembered for his push to replace passive directors with shareholder advocates. Carl Icahn is still at it recently netting $600 million by forcing the sale of Nabisco. “I don’t think the corporate governance movement has done much of anything, and our economy eventually will pay a major price because of it.”
Sarah Teslik, head of the Council of Institutional Investors, recently railed against her own members’ inaction. Unless she can persuade them to nominate alternate slates, she’ll quit. “The balance of power is still 96 percent with management and 4 percent with shareholders.” James Heard, of Proxy Monitor, says companies that ignore nonbinding shareholder proposals are “shortsighted and stupid…many still view shareholders as a nuisance.”
Executive compensation expert Graef Crystal continues to hammer on excessive compensation. His most recent study finds that corporate performance explains 2 to 4 percent: “the rest largely depends on the size of the company.” Day ends her review with a warning from Crystal.
By 2015 the ratio of the average executive’s pay to that of the average worker will approach that which existed in 1789, when Louis XVI was king of France. “And you know what happened to Louis XVI,” he says. “And by the way, they got his wife, too.”
Securities Litigation Year 2000
The Corporate Directors Forum will present a debate between William Lerach, attorney with Milberg Weiss Bershad Hynes & Lerach LLP in San Diego, and Michael Torpey, partner with Brobeck, Phleger & Harrison LLP at the La Jolla Marriott from 5:30-7:30 p.m. on September 21st . The cost is $35. Contact Sally Gault at (858) 455-7930 or at [email protected]
Institutional Investors Differ
An American Enterprise Institute study prompted by the sea change in share ownership of U.S. Corporations offers the following:
First, while there is broad agreement among institutional investors about the importance of shareholder rights, effective boards, and efficient CEO compensation and succession for corporate performance, the true economic value of “good governance” and effectiveness of shareholder activism are still matters of debate. Mutual fund investors tend to believe there is no “one size fits all” approach to corporate governance and are therefore disinclined to impose any form of “best practices” model.
Second, while investors may refer to “corporate governance” in their monitoring and intervention, actions relate far more frequently to poor performance. Except in highly publicized cases involving allegations of excessive executive compensation, dysfunctional boards, or fraud, it is generally only after firms are identified as troubled or long-term underperformers that governance practices are given more than routine scrutiny.
Third, institutional investors view good governance as most valuable when a firm or its industry is in trouble. Despite somewhat differing views on the overall value of good governance practices, all investors in the survey sample agreed that having an independent board, solid succession plans, and shareholder rights unfettered by restrictive antitakeover measures helps to assure the fastest possible recovery for the firm and share values. (Institutional Investors and Corporate Behavior, R. Glenn Hubbard, Ehud Houminer and Gile R. Downes, Jr.)
Attorney’s Get $262 Million
Record-breaking awards in the Cendant securities fraud case were approved by a federal judge Monday in New Jersey: a $3.1 billion settlement and $262 million in fees to attorneys for the plaintiffs’ class. The most controversial component of the ruling by U.S.District Judge William H. Walls was his rejection of New York City’s contention that the fees of the injured investors’ lawyers should be cut to $186 million. (law.com, 8/22
Bigger is Better
A report by Dan Dalton and Catherine Daily, both of Indiana University, concluded there is a positive correlation between large boards and performance. They reviewed 27 studies published over the last 40 years coverning more than 20,000 firms. (Number of Directors on the Board and Financial Performance: A Meta-Analysis. Academy of Management Journal) (WSJ, 8/24)
Internet Resources for Board Members
Independent Director Initiative, run jointly by the UK Institute of Directors and Ernst & Young, to provide independent directors with online assistance. Their recent survey showed only 14% of companies provide training or support; the site aims to fill that gap. (Governance, 7/00)
Rice University to hold four hour broadcast on “The Basics and Beyond” for boardroom advice. Participants will interact in the moderator led discussion via phone, fax and e-mail. Mark 9/7 on your calendar and reserve your spot by calling 972-620-4015 or write to [email protected] (Director’s Monthly, NACD, 7/00)
Not just for directors is the upcoming iBullhorn.com which bills itself as “a collaborative community built to enhance relationships between corporations and their investors.” We will hear more from this somewhat mysterious group later but for now they say their mission will be accomplished by:
- Amplifying investors’ voices in corporate governance
- Promoting increased direct communications between Investors, Corporate Management, and the Board of Directors.
Wealth Through the Workplace Act (H.R. 3462)
In June, the House Education and the Workforce Committee approved Rep. John Boehner’s Wealth Through the Workplace Act (H.R. 3462) that would create a new “super stock option” for rank-and-file workers. The original bill would have required a company to offer the super stock option to 50 percent of its workers in order to qualify; the markup sets the requirement at 70 percent. Workers would get tax deferral until underlying shares are sold (as capital gains if held for a year after exercise). Employers would get a tax deduction for the increased value of the option upon employee exercise.
According to an analysis by Institutional Shareholder Services, which appeared in The Corporate Governance Advisor, taxpayers would pick up a small portion of the tab in the form of slower and lower tax receipts but existing shareholders would foot the “lion’s share” in the form of lower future earnings per share and lower risk-adjusted rates of return. “Perhaps foreseeing such objections, the Bill’s sponsors give shareholders little say in the matter. Under the legislation, boards could unilaterally approve Super Option plans unless corporate bylaws require them to put the plans to shareholder votes.”
Korea at Critical Juncture
“The next six months to one year is a crucial period for the nation’s economy,” said Finance Minister Jin Nyum at the Seoul Foreign Correspondents Club. Hyundai’s makeover and the sale of Daewoo Motor are key milestones to regaining investor confidence. Also of major importance are banking reforms which may come soon after October, when troubled banks must submit their own plans for rescue. The government continues to emphasize the need for transparency in corporate governance and accounting standards. (news.excite.com/8/23)
The Korea Exchange Bank, Hyundai main creditor, threatened to call its loans if Hyundai fails “make good on its pledge to improve its corporate governance structure by separating management from ownership and ensuring a system under which top managers should be responsible for their failures.” (The Corporate Library, 8/9-15)
Guylaine Saucier to Chair Canadian Governance Committee
In July, the Toronto Stock Exchange (TSE) announced they have joined with the Canadian Venture Exchange and the Canadian Institute of Chartered Accountants (CICA) in appointing Guylaine Saucier to head a committee to “review the current state of corporate governance in Canada, compare Canadian and international best practices, and make recommendations for hanges that will ensure Canadian corporate governance is among the best in the world.” TSE released a set of 14 guidelines five years ago based on recommendations of a corporate governance committee chaired by Peter Dey. A recent review concluded that although many have embraced the voluntary guidelines, others have not. Can Saucier move the pack? (Corporate Governance Review, 6-7/00) (Profile in caMagazine, 6-7/99)
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And, lo, it came to pass that the trader by the name of Abraham Com did take unto himself a young wife by the name of Dot. And Dot Com was a comely woman, broad of shoulder and long of leg. Indeed, she had been called Amazon Dot Com. And she said unto Abraham, her husband, “Why doth thou travel far from town to town with thy goods, when thou can trade without ever leaving thy tent?”
And Abraham did look at her as though she were several saddle bags short of a camel load, but simply said, “How, dear?” And Dot replied, “I will place drums in all the towns and drums in between to send messages saying what you have for sale and they will reply telling you which hath the best price. And the sale can be made on the drums and delivery by Uriah’s Pony Stable (UPS).”
Abraham thought long and decided he would let Dot have her way with the drums. And Dot said, “There will be a lot of banging in the land.”
And Abraham replied, “It is my most fervent wish that this be so.” And the drums rang out and were an immediate success. Abraham sold all the goods he had, at the top price, without ever moving from his tent.
But his success did arouse envy. A man named Maccabia did secret himself inside Abraham’s drum and was accused of insider trading.
And the young did take to Dot Com’s trading as doth the greedy horsefly to camel dung. They were called Nomadic Ecclesiastical Rich Dominican Siderites, or NERDS for short.
And, lo, the land was so feverish with joy at the new riches and the deafening sound of drums, that no one noticed that the real riches were going to the drum maker, one Brother William of Gates, who bought up every drum company in the land. And indeed did insist on making drums that would only work if you bought Brother William’s drumsticks.
And Dot did say, “Oh, Abraham, what we have started is being taken over by others.” And as Abraham looked out over the Bay of Ezekiel, or as it came to be known, “eBay,” he said, “We need a name of a service that reflects what we are.” And Dot replied, “Young Ambitious Helpful Owner Operators.”
“Whoopee!” said Abraham.
“No, YAHOO!” said Dot Com.
ICGN Push End to Broker Voting
The sixth annual International Corporate Governance Network held in New York included almost 350 delegates from over 22 countries. The group set a target date of July 1, 2001 for implementation of the ICGN Share Voting Principles aimed at knocking down hurdles to shareholder proxy voting in markets around the world. The four focus markets include France, Japan, Australia and the United States.
In France ICGN will try to overturn a law that requires signatures of beneficial owners on the proxy cards. In Japan and Australia, ICGN issues revolve around the length of time shareholders have to vote. In the US, ICGN members will fight to reverse rules which currently permit proxy vote practices that allow brokers to vote on certain corporate resolutions without first obtaining instructions from shareowners. The practice is a breach of ICGN Share Voting Principle #1, “The same voting rights should attach to shares regardless of how much equity a shareholder holds, or how geographically distant a shareholder may be from the company. Votes should be cast only according to instructions by the owner or the owner’s agent.”
ICGN elected 12 members to its board. Returning directors include: Andre Bladi (Baladi & Associates), Peter Clapman (TIAA-CREF), Sandy Easterbrook (Corporate Governance International), Claude Lamoureux (Ontario Teachers’ Pension Board), Pierre-Henri Leroy (Proxinvest), and Lars Millberg (Aktiesparana shareholder association). New members include: Peter Butler (Hermes), Stephen Davis Davis Global Advisors), Jon Lukomink, Ariyoshi Okumura (Lotus Advisory), Linda Selbach (Barclays Global Investors) and Dario Trevisan (Studio Legale Trevisan & Associates). (Corporate Governance Review, 6-7/00)
TIAA-CREF to Target Executive Compensation
Director’s Alert reports that TIAA-CREF is targeting excessive executive compensation in the upcoming 2001 proxy season. In 1980, average CEO pay was 40 times the average employee’s earnings. By 1998 it was over 400 times and by now it is higher still. Chief Counsel, Peter Clapman, says TIAA-CREF will meet with companies to build independent, educated compensation committees. “Many compensation committees don’t fully understand their role–or they don’t know how options really work,” said Clapman. If a company refuses to address the problem, TIAA-CREF may be prompted to withhold support for directors. (Director’s Alert, August)
Internet Voting Up Dramatically
That’s the usual headline, and its true. Between 1998 and 1999 there was a tripling of the number of accounts voting via the Internet, according to some estimates. However, that doesn’t mean anything like a majority. In fact, according to ADP, which processed about 88% of the total votes, only 3% of votes were returned online, whereas over 5% voted via telephone. (8/14, Investor Business Relations
Institutional Investors Want Boards With Internet Savvy
Successful Internet executives may have their pick of blue-chip boards to join, according to John T.W. Hawikings, leader of the board service practice of Russell Reynolds, global executive and director recruiting firm. A survey based on more than 400 institutional investors by Russell Reynolds found that 2/3 believe all boards should have at least one director drawn from Internet or technology areas. About an equal proportion of respondents favor pricing options so that recipients are rewarded for company performance only if it does better than the market. About 58% believed corporate governance guidelines should be voluntary, rather than required by regulatory authorities. (Pensions & Investments, 8/7)
Need for Good Governance, a No Brainer
An editorial in the July edition of Dr Matthew Gaved’s excellent publication “Governance” argues:
Good governance may or may not feed into the share price. What matters is that shareholders believe that it does. They are prepared to pay more for the stock of well governed companies. What more incentive to managers need? …Academics and others may continue to search for the Holy Grail of statistical linkage, but shareholders should be content with dropping out of the quest. For them, the McKinsey study is all the proof they need.
It certainly is a no brainer for me. However, the McKinsey study focused on turnarounds and it was clear from the international differentials that existing disclosure and shareholder protections also play a key role in setting the floor which is higher in the UK and US than in Latin America and much of Asia. I’m afraid the naysayers will go unconvinced.
Folks at McKinsey are saying that “if companies could capture but a small proportion of the governance premium that is apparently available, they would create significant shareholder value.” Whether or not good corporate governance will yield much that can be measured at the average company may still be a matter for the statisticians but international companies that meet US listing requirements are often revalued at higher prices. As for making over companies in trouble, the more funds such as Lens, Lawndale, Relational Investors and Hermes keep beating the indexes, the more likely it is that others will jump on the bandwagon. By shifting to independent directors, evaluating their CEOs and their own performance, by separating CEO and chair and by investing more of their own money in their companies, the work of the likes of Robert Monks and Peter Butler will get harder. (for more on the McKinsey study see our June news and the McKinsey site
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SEC Bans Selective Disclosure
Thanks to many of our readers and others who submitted 6,000 public comments, the SEC passed a slightly watered down version of their originally proposed rule which prohibits company officers from sharing market-sensitive information with analysts and institutions without providing the same information to the general public. See CBSMarketWatch.com, 8/10, Statement by SEC Chairman Arthur Levitt, Fact Sheet
The new regulation requires that when an issuer intentionally discloses material information, it must do so publicly, not selectively. The company may make the required disclosure by filing with the SEC, or by a press release. When selective disclosure of material information is made unintentionally, the company must publicly disclose the information through a method of wide distribution promptly.
Pax World Discloses Votes on the Internet
For nearly 30 years Pax World has used stockholder voting as a way to make shareholder voices heard. Since 1971, this socially responsible mutual fund has made their voting results available to shareholders upon request. Now, with the help of Proxy Monitor, Pax World has taken the next step, joining Domini Social Investments in posting their proxy voting decisions. (Thanks to Mark Latham for bringing this development to our attention.)
A June ISSue Alert editorial points out that Delaware’s new law allowing annual meetings to be held entirely in cyberspace came with “some strings attached,” strings which I must admit, I didn’t notice. According to ISS, before directors switch to e-meetings, they must implement 1) voter verification procedures, 2) measures to ensure shareholders can participate at the meetings through two-way communication and 3) the means to record shareholder votes in real time.
ISS argues shareholder meetings have become a “giant soapbox” with shareholders paying for the microphone. ISS uses their editorial as an opportunity to slam stock exchange rules which allow broker voting but suggests that “real time” voting at cyber meetings should boost turnout. Again, I don’t know of any shareholder activists who oppose allowing cyber broadcasting and participation…as long as the physical meetings continue.
The real problem, according to the ISS editorial, is the lack of shareholder participation and the quality of discourse, especially among small shareholders. ISS suggests that shareholders “look for new avenues for communication with their elected representatives– the directors” by requesting one on one meetings, attendance at investor road shows and quarterly analyst calls.
While I agree with ISS that shareholders should demand that directors show up and be responsive at these venues, the fundamental issue is still information and the ability to hold the board accountable. One step in that direction is the corporate monitoring proposal devised by Mark Latham, which I first introduced at Whole Foods. The proposal would allow shareholders to collectively hire a firm, such as ISS, to inform and advise them of proxy issues.
ISS did shareholder’s no service by recommending against the proposal, which could have been a major step in improving the level of participation and quality of discourse. ISS indicates this is the major problem, especially with regard to small investors. If they really believe this is the case, let’s hope they change their stance on Mr. Latham’s proposal during the next proxy season.
Seven Deadly Sins
The June ISSue Alert also carried an article on “Equity-Based Compensation: the Seven Deadly Sins,” with biting humor by Patrick S. McGurn and Jill Lyons. CEO pay at 362 of the largest US firms is up six times since 1990 to an average $12.4 million, so the first deadly sin is gluttony.
Sloth is listed next, with the rise in unrestricted stock which rewards recipients for their ability to remain “living and breathing” until the awards vest, according to Matt Ward ofWestWard Pay Strategies
Envy is coupled with “net envy” and the use of maga grants of options.
Lust is popularized through the TV show “Who Wants to be a Millionaire?” and broad based options now available at 30% of US firms.
Anger is how some companies have reacted to the difficulty of winning shareholder approval. The author’s note that New York was the last major corporate domicile to drop its mandate that shareholders approve stock plans but I’m sure companies will find other reasons to be mad at their shareholders.
Greed; Berkshire Hathaway’s Charlie Munger says director stewardship is like “putting a rat colony in a granary.”
Pride; few directors on compensation committees are willing to admit they need help.
Who says corporate governance devotees are a sour lot? I say you’ve got to have a sense of humor to remain in a field where all too many speak the language of democracy while acting to continue oligarchic practices.
Shapiro Strikes Again
San Francisco based Lawndale Capital filed a 13-D increasing its position to 7% of Earl Scheib Inc. (A-ESH), a nationwide operator of 169 auto paint and body shops. Attached to the 13D filing is a letter expressing concern over the reduced activity of ESH’s Board and ESH’s compensation arrangement with its Chairman.
Lawndale seeks to have the Company publicly disclose the agreement with its Chairman, Mr. Colburn and an explanation of how the board monitors Mr. Colburn’s performance. Lawndale plans to vote “withhold” on his reelection as Director, may vote to withhold on other directors, and is initiating a search for one or more new directors to replace Board members who are unable to be active or to supplement the Board.
Ford Family Wins: Shareholders Lose
Shareholders approved a plan to help the Ford family to retain 40% of the voting power, even as they reduce common stock holdings. Short term greed won over long term interests, with the plan for a special dividend that will give shareholders new Ford shares plus some $6 billion in cash. TIAA-CREF and CalPERS, which together own 2% of Ford’s stock, voted against the plan. Excluding the impact of the Ford family’s Class B shares, about 26% of the common shares were voted against the proposal even though the plan won with “86% approval.”
High Plains Bylaw
High Plains, an ethanol producer, announced the adoption of a bylaw that requires at two-thirds of their Board to be independent of management, consultants, and significant customers or suppliers. It also requires key committees to be comprised solely of independent directors, and assigns new responsibilities to Board committees. The real news is that several companies are adopting such bylaws in order to demonstrate their commitment to shareholders. This one came at the initiative of Lawndale Capital. (PRNewswire, 7/31
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Swiss Join Movement to Disclose
The Swiss Exchange is to build disclosure of director pay into the listing requirements. (see http://www.newsdirections.com/r/0008nzz.html, use the German to English translator at bottom of our front page.)
e-Board Strategy to Help Bush?
“The secret weapon behind the most promising E-commerce start-ups is a board of directors, especially a non-executive chairman, that serves as mentor to young, inexperienced and ambitious CEOs,” says Roger Kenny, co-author with Ram Charan of the recently published E-Board Strategies: How to Survive and Win. ”Mentors with years of experience in the rough and tumble business world can guide the way, helping the less experienced through the challenges. The Bush-Cheney combination is a textbook example.” (PR Newswire, 8/03
The Patterson Report
The Corporate Library now presents The Patterson Report by Dr. Jeanne Patterson, former professor at Indiana University, and author of a 1996 study on social investing and 1998 and 2000 reports for The Conference Board on this topic. Her report categorizes and summarizes the major empirical studies in corporate governance. A fantastic addition to valuable information on the Internet!
“The reviews in The Patterson Report will be continually updated. With the Internet, studies are coming at us at a great pace. We will be providing Internet links to the actual study whenever possible. We will also have an opportunity to add articles, correct mistakes, and respond to suggestions. We encourage our readers to help us to make the site useful by sending us studies that they develop or find useful.”
Shareholder Activists Compared
eRaider cofounder Aaron Brown compares 5 types of shareholder activists along a matrix of goals, tactics, typical shareholding, targets and corporate defenses. Then he indicates how he intends to blend the best characteristics of each. see http://eraider.com/commentary2.cfm?commID=209
Centre for Corporate Governance Research
Professor Christine Mallin of the University of Birmingham has established a new program for studies of company governance in the United Kingdom and other national settings. Housed at the Birmingham Business School, the “Centre for Corporate Governance Research” is focused on the relationship among directors, investors, and other stakeholders, and the impact of these relations on company strategy and performance.
The Centre has the following aims:
- Conduct and encourage high quality research in corporate governance;
- Engage in interdisciplinary and cross-border research through collaboration with contacts in the UK and overseas;
- Consult with professional bodies, corporations and other groups, on corporate governance issues;
- Disseminate the research of the Centre as widely as possible through published research, presentations at conferences and seminars.
Among the Centre’s research are studies of voting by institutional investors, the disclosure of directors’ compensation, and company compliance with the Cadbury and Greenbury recommendations for effective governance. It has also undertaken projects on the development of corporate governance in China, Malaysia, and Central and Eastern Europe. The Centre’s Administrator is Lesley Bodenham