ESG Gaining Acceptance


Since 2005, KLD has studied the S&P 100’s sustainability reporting practices for the Sustainable Investment Research Analyst Network, a working group of the Social Investment Forum. The 2008 Sustainability Report Comparison reveals encouraging news. Of the 100 largest U.S. publicly-traded companies, 86 maintain corporate sustainability websites and 49 produced sustainability reports in 2007. These numbers represent significant progress over the past three years.

Now, Watson Wyatt says ESG to be one of six major investment trends in next five years. (Responsible Investor, 7/31/08) The rise of integrating environmental, social and governance issues into investing will be predicated on four major trends:

  • demand for big institutional funds to apply responsible investing principles,
  • sustainability and climate change as mainstream or specialized propositions,
  • the impact of politically motivated activism, and
  • responsible investment becoming more personalized through defined contribution pensions saving.

CalPERS: The Opposite

“The Opposite” was a famous Seinfeld situation comedy episode where George Costanza decides that every decision he has ever made has been wrong and resolves to do the complete opposite of his normal instincts. He suddenly begins to experience good luck — getting a girlfriend, moving out of his parents’ house, and even landing a job with the New York Yankees. Maybe CalPERS should use the same tactic with regard to its own governance.

When it comes to advising corporations, CalPERS emphasizes transparency, getting input from shareowners and a wide variety of good governance measures. (As I began to write this, I got a press release from CalPERS on improving governance at La-Z-Boy.) I applaud these efforts, which have been widely credited with moving directors to action and increasing shareowner value. Yet, when it comes to their own governance, perhaps CalPERS should adopt the strategy of doing the opposite of what Board members want to do instinctively.

I’ve tangled with CalPERS over many internal governance issues, as documented at The latest involves AB 2940, scheduled for hearing in California’s Senate Appropriations Committee. The bill, authored by Kevin de Leon and sponsored by the New America Foundation, would set up a low-cost IRA option administered by CalPERS. The Program would facilitate the ability of millions of Californians to save for retirement, reduce future dependency on taxpayers, increase California’s tax base, and broaden the base of CalPERS stakeholders, thus decreasing vulnerability of the System to attack by those who have sought to reduce or eliminate our defined benefit plans.

The trouble is, as a condition of neutrality, CalPERS asked the author to amend the bill to permanently exempt the Board from contracting and rulemaking laws with respect to the Program. Unfortunately, de Leon was forced to accept those changes if he wanted to see his bill pass. In contrast to CalSTRS, which recently adopted regulations to guard against the appearance of “pay to play” on investment decisions, the proposed new law would open the CalPERS Board to the increased likelihood of such dishonest behavior.

In my letter of opposition for an otherwise excellent bill, I wrote, “One major ‘pay to play’ scandal involving a large sole-source contract could put the whole System in jeopardy, making CalPERS politically vulnerable. Additionally, what moral authority would CalPERS have in advising corporations to be transparent, if its own contracting procedures were suspect?” Additionally, “The language exempting the Board from the APA disenfranchises millions – ironically, the same Californians which the bill seeks to empower through an inexpensive and convenient savings program.”

For many years, CalPERS claimed California Constitution, article XVI, section 17, exempted the agency from the Administrative Procedure Act and other laws that apply to state agencies. That claim was thoroughly rejected by Connell v. CalPERS in appellate court. The APA offers an opportunity to comment and have those comments addressed in a legal framework that includes many protections for public involvement.

I understand the need to keep costs low, especially during start-up. I even suggested that initial contracts could be noncompetitively bid for up to two years and that initial rules could be adopted as permanent “emergency” regulations. However, any such exemptions should be temporary. These suggestions have been rejected by a Board that too often sees itself as above the law.

If successful, the new fund will quickly have assets in the millions, if not billions. Don’t sacrifice good governance for expediency. CalPERS Board members should consider a new mantra with regard to their own governance, “Do the opposite.”

CorpGov Bites

The final version of the AFL-CIO’s 2008 AFL-CIO Key Votes Survey scorecard is now available.

I’ve added implu to our growing list of Stakeholders. Find out about the comings and goings of corporate officers and directors. Plus, the site lists at least rudimentary contact information and sometimes you can even learn about their associations. Enter a list of companies or people and get automatic e-mail alerts.

A total of 70 federal securities class actions were filed during the first half of 2008, a roughly 17% increase from the total filings in the first six months of 2007. (Securities class actions increase in ’08, Investment News, 7/29/08)

Do Boards Pay Attention when Institutional Investor Activists ‘Just Vote No’? finds they do. “Boards take a variety of value-enhancing actions; 31% of these targets experience disciplinary CEO turnover and 50% of the remaining targets that do not dismiss the CEO make other strategic changes. Consistent with these board actions being value enhancing, post-campaign operating performance improvements are economically and statistically significantly higher in these sub-samples of target firms.”

Businesses must incorporate environmental, social and governance (ESG) factors into their management strategies, says Peter Kinder, President of KLD Research & Analytics, in Q&A with an Australian business reporter. (updated) ranks companies by industry from best to worst based on global research and campaign information regarding the impact of the largest corporations on human rights, social justice, environmental sustainability and more.

Gibson, Dunn & Crutcher LLP offer advice on “clawbacks” of executive compensation. What is your company doing in this area?

Subchapter S companies owned by their employees through ESOPs generate some 85,000 new jobs each year and create $14 billion in new savings for workers that otherwise would not have been earned. A study by Knoll and Freeman also found S ESOPs’ higher productivity, profitability, job stability and job growth collectively help ESOP companies amass $33 billion more in combined earnings than what they would earn if they were not ESOP-owned S corporations.


Sign-up online to gain free access. Articles in the Summer ‘08 issue include:

  • Non-Deal Roadshows: Latest Developments and Trends
  • Lessons Learned: How Funds Vote on Proxy Proposals
  • Hedge Fund Attacks: Eight Lessons Learned from the In-House Perspective
  • How Blogging Can Enhance Your Investor Relationships (and Your Career)
  • My Ten Cents: The SEC’s Coming Guidance on IR Web Pages
  • SEC Staff Says “No” to Non-GAAP Financial Statements

Written to aid the corporate investor relations function, is also a valuable resources for shareowners. Broc Romanek is doing a great job on this new offering.


Broc also posted a podcast interview with another of our favorites. Andy Eggers discusses his website, Their discussions include:

  • Where did you get the idea for the site?
  • How long did it take to launch?
  • What features does currently have?
  • Any plans to tweak things going forward?
  • What have been the biggest surprises in how the site is used so far?

Fraud Risk Guide

“Managing the Business Risk of Fraud: A Practical Guide” can be downloaded for free from the sponsoring organizations’ Web sites from sponsoring organizations – the Association of Certified Fraud Examiners (ACFE), the American Institute of Certified Public Accountants (AICPA), and The Institute of Internal Auditors (IIA). Principles for establishing effective fraud risk management, regardless of the type or size of an organization, are outlined in the guide.

According to the ACFE’s 2006 Report to the Nation on Occupational Fraud, U.S. organizations lose an estimated 5 percent of their annual revenues due to fraud. When applied to the estimated 2006 GDP, those losses added up to approximately $653 billion. Organizations with anti-fraud programs – such as fraud hotlines, internal audit departments, and anti-fraud training – lost approximately half as much as those without such programs.

Key principles for proactively establishing an environment to effectively manage an organization’s fraud risk include:

  • Principle 1: As part of an organization’s governance structure, a fraud risk management program should be in place, including a written policy (or policies) to convey the expectations of the board of directors and senior management regarding managing fraud risk.
  • Principle 2: Fraud risk exposure should be assessed periodically by the organization to identify specific potential schemes and events that the organization needs to mitigate.
  • Principle 3: Prevention techniques to avoid potential key fraud risk events should be established, where feasible, to mitigate possible impacts on the organization.
  • Principle 4: Detection techniques should be established to uncover fraud events when preventive measures fail or unmitigated risks are realized.
  • Principle 5: A reporting process should be in place to solicit input on potential fraud, and a coordinated approach to investigation and corrective action should be used to help ensure potential fraud is addressed appropriately and timely.

The new guidance provides a practical approach for companies committed to preserving stakeholder value. It can be used to assess or improve an organization’s fraud risk management program, or to develop an effective program where none exists.

We added a link to the paper from our small list of online articles, as well as a Team Performance Scorecard from Brown Governance for evaluating boards of directors. depends on input from readers to bring these resources to our attention. Thanks to Scott McCallum, of IIA ,and Dan Swanson of Dan Swanson & Associates.

Say on Pay Denial

Support for an advisory “say on pay” continues to grow, if more slowly than expected, rising from 41% last year to 42% in 2008. Directorship, reporting the results of a Corporate Library study, notes that “say-on-pay proposals received majority support at a total of 15 companies in 2007 and 2008. But not all of those companies are rushing to put the advisory vote in place. In fact, only five of those companies, or roughly two-thirds, have adopted the vote.”

Vote results are lower this year at financial institutions, where CEOs have been replaced with lower compensation packages. (Companies Ignore ‘Say on Pay’ Votes, 7/23/08)

Look for shareowners to increase the pressure on companies that filed to implement resolutions that obtained a majority vote (MV) next year. Board of Directors’ Responsiveness to Shareholders: Evidence from Shareholder Proposals by Yonca Ertimur, Stephen Stubben and Fabrizio Ferri investigated board responses to advisory shareholder proposals between 1997 and 2004. The frequency of implementation of MV proposals almost doubled after 2002, from approximately 20% (1997-2002) to more than 40% (2003-2004), “consistent with an increase in the cost of ignoring MV resolutions in the post-Enron environment.” “Directors failing to implement majority-vote (MV) proposals are often the target of ‘vote-no’ campaigns and receive a ‘withhold vote’ recommendation by ISS. Firms ignoring MV proposals end up on CalPERS’ ‘focus list’, receive lower ratings from governance services and attract negative press coverage.”

Perhaps more striking is that “implementation of a MV shareholder proposal is associated with approximately a one-fifth reduction in the probability of director turnover at the targeted firm.” In short, the market rewards those companies that follow the advice of shareowners.

Time will tell at Citigroup, which just named new chairs to its audit and risk, nomination and governance, and personnel and compensation committees. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced chairs would be rotated.

But will rotations be enough, especially when two of the three received significant withhold votes at Citigroup’s annual meeting. AFSCME’s Richard Ferlauto says the union sees little value in rearranging committee chairs. “What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business,” Ferlauto told R&GW. (Citigroup Names New Board Committee Chairs, RiskMetrics Group, 7/25/08)

Congratulations Race to the Bottom

Once of our favorite sources of legal commentary, TheRacetotheBottom, has been chosen by the Library of Congress for inclusion in its historic collections of Internet materials related to “Legal Blawgs.”

Aim’s Race to the Bottom

Speaking of a race to the bottom, a study released by PwC found that while 77% of the Aim’s top 100 comply with some aspects of the Combined Code, just 3% chose to fully adopt it. A record 28 companies were suspended, raising doubts about the exchange’s voluntary approach to governance. (Junior index must aim higher to improve reputation,, 7/24/08)

New Election Rules at CalPERS

New election rules take effect on July 26, 2008, thanks to action taken by publisher, James McRitchie. At McRitchie’s request, the Office of Administrative Law determined several CalPERS election rules were illegally adopted “underground regulations.” (see 2007 OAL Determination No. 1) The amended regulations clarify many election procedures and significantly reduce the risk of CalPERS members to identity theft.

Back to the top

Further information about the next three items and more at Corporate Watchdog Radio

Get the Lead Out and Protect Genitals

More than your money is at risk. Independent laboratory testing initiated by the Campaign for Safe Cosmetics in 2007 found that two-thirds of 33 sample lipsticks from top brands contain lead. The Environmental Working Group’s six-month investigation into the health and safety assessments on more than 10,000 personal care products found major gaps in the regulatory safety net. A recent government-funded study by Dr. Shanna Swan links linking phthalate levels with feminized genitals in baby boys. Independent laboratory tests found phthalates in more than 70% of health and beauty products tested – including popular brands of shampoo, deodorant, hair mouse, face lotion and every single fragrance tested. Have I got your attention yet?

If you own shares in a company that makes personal care products or just don’t want to use poison products, check the growing (600) list of those that have pledged to not use chemicals that are known or strongly suspected of causing cancer, mutation or birth defects in their products and to implement substitution plans that replace hazardous materials with safer alternatives in every market they serve. Several major cosmetics companies, including OPI, Avon, Estee Lauder, L’Oreal, Revlon, Proctor & Gamble and Unilever have thus far refused to sign the Compact for Safe Cosmetics.

Take action for safe cosmetics. Sign on to have Congress empower the FDA to ensure that cosmetic ingredients and products are safe before they reach store shelves. Disclosure: The publisher of owns stock in Proctor & Gamble and has requested they join the Campaign for Safe Cosmetics. Please make similar appeals to the companies in your portfolio.

Unfortunately, P&G sent a canned response. “I’m sorry you heard a report that caused you to question the safety of our beauty care products. The claims you’ve heard are completely false. Consumer safety is always our first priority and all our products are tested extensively before going to the market. We stand firmly behind their safety. It’s important to know that cosmetic products sold in the U.S. are regulated by the Food, Drug, and Cosmetics Act. We comply with all legal requirements wherever our products are sold.” Of course this misses the point that current laws are totally inadequate. When I brought this to their attention, investor relations wrote back with an oops; “I can understand your concern and I’m sharing your comments with our Health and Safety Division.”

Chamber Attacks Resolution Process

Members of the U.S. Chamber of Commerce should be questioning use of their dues money for a study that is so deeply flawed it would be laughable, if the money to pay for the study wasn’t coming out of your pocket.

The study, Analysis of the Wealth Effects of Shareholder Proposals by Navigant Consulting, purports to make the following finding: “Taken as a whole, these results provide little evidence that shareholder proposals increase target firm value.” What is the basis of the study?

First, Navigant (under the pay and direction of the Chamber), reviewed the academic literature from about a decade ago and found mixed results. “There is little evidence of measurable improvements in (sort-term or long-term) stock market or (long-term) operating performance in target companies as a result of shareholder proposals.” However, “Certain types of proposals, especially those concerned with removing companies’ takeover defenses, appear to be supported by the market.” Updated findings would probably be different, since their is increasing recognition by shareowners and the market that social and environmental factors can have an economic impact on the firm. Thus, the support for resolutions, such those to address a company’s carbon footprint, have been increasing.

Second, Navigant examined five resolutions for short-term impact and another five resolutions for long-term impact. How did they select these resolutions? Were they randomly selected from all resolutions during a specified period? No, they were picked by the Chamber! This would be like a drug company selecting 10 patients out of thousands to represent the efficacy of their product for FDA review. Even if the resolutions had been randomly selected, the samples would have been too small to have any statistical significance. However, the fact that they were picked by the Chamber, which has for years advocated doing away with the resolution process, completely destroys the potential validity of findings.

Additionally, that portion of the study uses deeply flawed statistical modeling based on “abnormal returns.” The implication is that stock price is predictable. If the academics who invented the Fama-French three-factor model were actually able to predict price, they wouldn’t be working at universities. Instead, they would be reaping huge financial rewards in the stock market.

The study then goes on to look at the cost of the shareowner resolution process and cites an estimate by Bainbridge of $90.654 million, based on an “implied cost” of $87,000 per proposal and the assumption that corporations seek to exclude all proposals. The study fails to note that with e-proxy, costs are going down, sometimes dramatically. (Thanks to William Michael Cunningham of Creative Investment Research, Inc. for providing a copy of his meeting notes and his analysis of the Chamber’s study. This article draws heavily upon those notes but the opinions expressed are those of publisher, James McRitchie.)

Businesses should ask their local and state chambers, which may be members of the US Chamber of Commerce, to seek new leadership at the federal level. Sure, shareowner resolutions and annual meetings are a bit of a pain in the ass and a circus, but they keep us in touch with what is coming. Social and environmental resolutions often seek to address “externalities,” the costs of business to society. Without such resolutions, shareowners would immediately seek regulations and legislation. The resolution process is an early warning system that allows us to gauge the popularity of a given issue. Often we can avoid regulations by working out less burdensome voluntary measures. Even when businesses fully adopt resolutions, the costs can be substantially less than complying with mandatory rules.

Tell your local chamber that the U.S. Chamber should spend its time and money on more important efforts. For example, they could push Congress to legislate higher margin requirements for speculators. That might lower the cost of oil. They could push for single-payer universal health insurance to put an end to our competitive disadvantage due to rising health care costs. They could also seriously address global climate change. Failure to resolve that issue will cost trillions of dollars and millions of lives. Fighting wildfires now takes nearly half of the U.S. Forest Service budget. That’s up from just 13% in 1991. Fighting shareowner resolutions pales in comparison.

About a million and a half people have already signed on to support Al Gore’s Challenge to Repower America. McCain said, “If the vice president says it’s doable, I believe it’s doable. Obama said, “I strongly agree with Vice President Gore that we cannot drill our way to energy independence, but must fast-track investments in renewable sources of energy like solar power, wind power and advanced biofuels, and those are the investments I will make as President.” Local chambers and the U.S. Chamber of Commerce should focus on fighting the real issues, not our own shareowners.

Improve Corporate Disclosure

A proposed accounting standard would require corporations to disclose more to investors regarding their potential losses due to product toxicity, environmental remediation and other liabilities. Investor input is critical on these issues, as the corporate lobby is expected to turn out in force to oppose expanded disclosure.

While the proposal is on the right track, it stops short of requiring full disclosure of risks that would impact investors, most notably long-term severe impact risks. The proposal may also allow corporate lawyers to routinely block disclosure of almost any information that they designate as prejudicial.

The proposed FAS 5 changes would be subject to three important exceptions and loopholes, which the Investor Environmental Health Network believes can be addressed by the following changes:

  • FASB should require a disclosure of “severe impact risks” deemed by the reporting company to be remotely possible and long term.
  • FASB should apply the new standard to asset impairments, not just legal liabilities.
  • FASB needs to eliminate or strictly limit this ”prejudicial” exception to avoid misuse.

Submit comments on the Exposure Draft entitled Disclosure of Certain Loss Contingencies to the Federal Accounting Standards Board (FASB) by August 8, 2008. Send them via email [email protected]. Put File Reference No. 1600-100 in the subject line. For more information, see the relevant FASB documents and IEHN’s Investor Alert and model letter and watch Sanford Lewis, Counsel to the Investor Environmental Health Network discuss the proposal.

CorpGov Bites

Eighty-six percent of companies on the Standard and Poor’s 100 Index have corporate sustainability websites, compared to 58 percent in 2005, according to the “2008 S&P 100 Sustainability Report Comparison” from the Sustainable Investment Research Analyst Network (SIRAN), a working group of the Social Investment Forum. (More S&P 100 Companies Reporting CSR Progress: Study,, 7/22/08)

ECOFACT has released a report listing the top ten most environmentally and socially criticized companies. The top ten companies were: Samsung, Total, Wal-Mart, China National Petroleum Corporation (CNPC), Shell, ExxonMobil, Citigroup, Nestlé, ArcelorMittal, and Chevron. The companies have been consistently and severely criticized by the world’s media and NGOs for issues including human rights abuses, severe environmental violations, corruption and bribery, and breaches of labor, health and safety standards. Rankings are based on the Reputational Risk Index (RRI), as measured by RepRisk in the first six months of this year. For a copy of the report, please contact Charlotte Mansson. Disclosure: The publisher of is happy to announce he owns none of these companies directly.

“Most big businesses now require directors to be elected by a majority of shareholders, giving board members incentive to court investor goodwill.” Joann S. Lublin, writing for WSJ (New Breed of Directors Reaches Out to Shareholders, 7/21/08) Lubin appears to credit this reform with the fact that more shareowner resolutions are being withdrawn. Think of how many resolutions would be withdrawn or would not even be submitted with a rise in proxy access.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. Boards are also meeting more frequently with investors. Yet, in reading RMG’sPreliminary U.S. Postseason Report, it appears many of those meeting may have been to simply cave on issues where they were likely to lose. For example, 47 of the 90 majority vote resolutions filed have been withdrawn by proponents because companies agreed to adopt their own bylaws. More than 72% of S&P 500 companies have adopted some form of a majority vote standard, according to Claudia Allen, a partner with the law firm Neal, Gerber & Eisenberg.

Highlights included the resignation of Mary Pugh, chair of the finance committee at Washington Mutual, after getting 49.9% opposition in a campaign by CtW. Overall support for “say on pay” advisory vote proposals increased marginally at U.S. companies. Other results:

  • Pay-for-performance proposals have averaged 27.4 percent support over nine meetings where results are known, as opposed to 29.5 percent support over 38 meetings last year.
  • Independent board chair proposals received record support this year–31.3 percent support over 20 meetings, 4.6 percentage points higher than last year, when they averaged 26.7 percent support over 43 meetings.
  • Resolutions asking firms to end staggered boards received slightly less support so far this year, with 60.2 percent average support at 16 meetings where results are known. This compares to 63.9 percent support over 38 meetings in 2007.
  • 2008 is on pace to shatter the all-time record for proxy challenges, although few contests have gone to a vote. Given the market meltdown, many boards have been willing to provide board representation to dissidents… including at Yahoo (Yahoo, Icahn Let Bygones Be Bygone, David Gaffen, WSJ, 7/21/08) and How I Spent My Weekend, The Ichan Report, 7/22/08)

Gretchen Morgenson’s Borrowers and Bankers: A Great Divide clarifies the current conventional wisdom. “Borrowers should shoulder the consequences of signing loan documents they didn’t understand, but with punishing terms that quickly made the loans unaffordable. But for executives and directors of the big companies who financed these loans, who grew wealthy while the getting was good, the taxpayer is coming to the rescue.”

“Might not the American people be better off with regulators who curb market enthusiasm — whether in the form of errant lending or voracious, ill-considered deal making — when it reaches manic levels, to protect against the free fall, and the bailouts, that ensue?” (NYTimes, 7/20/08)

Over the weekend, Jane Bryant Quinn also brought our attention to the question or whether or not the Public Company Accounting Oversight Board, created by Sarbanes-Oxley, is constitutional. The challenge to PCAOB revolves around whether the president rather than the SEC should appoint board members. Because the law lacks a “severability” clause, if one of its provisions is found to be unconstitutional, the whole law may go down. (Lawsuit Threatens Sarbanes-Oxley Act, Washington Post, 7/20/08)

Investors are responding to the sharp falls on equity markets around the world by shifting from what are now being seen as vulnerable emerging markets to relatively safer developed ones. State Street says the flows it tracks amount to a “safety first” mood… MSCI’s emerging market index has lost 0.6% in the past week. The developed market index has gained 1.9%. (See America first? Investors suddenly fleeing emerging markets, Financial Week, 7/21/08) Perhaps a rush to relative corporate governance quality?

Mandatory Reimbursement Bylaw Could Breach Board’s Fiduciary Duty

The Delaware Supreme Court ruled that CA shouldn’t be forced to pay for dissident shareholders’ proxy fights and the SEC issued a no action letter. (decision

Under a procedure established under Delaware law last year, the SEC asked the state’s Supreme Court to decide whether a bylaw proposal by AFSCME to CA, formerly Computer Associates, was “a proper subject” for shareholder action under state law. The bylaw would have required CA to reimburse a shareowner for proxy costs, including legal expenses, printings and mailings, if the shareowner unseats at least one CA director in a slate of candidates representing less than half the board.

The Court held that the bylaw was a proper subject for stockholder action. However, the Court also held that if adopted the bylaw would violate state law because “the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” (Del. Supreme Court rules for CA on shareholder issue, delawareonline, 7/18/08)

John Olson, a corporate-governance lawyer at Gibson, Dunn & Crutcher, is quoted in the WSJ saying, “The court is soundly affirming that shareholders have the right to propose bylaws relating to the process of electing directors. I think people will try to be creative in ways of using state law to get access to the corporate proxy.”

In the same article, Richard Ferlauto, director of pension investment policy for AFSCME, said discussions about shareholder election rights now focus on “the creation of an appropriate right of shareholder access at the federal level” through the SEC. (Delaware Court Rules for CA in Suit, 7/18/08)

With regard to the question of whether or not he AFSCME Proposal a proper subject for action by shareholders, the court wrote, in part:

The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election…That the implementation of that proposal would require the expenditure of corporate funds will not, in and of itself, make such a bylaw an improper subject matter for shareholder action.

With regard to the question of whether adoption of the bylaw would cause CA to violate Delaware law, the court wrote, in part:

As presently drafted, the Bylaw would afford CA’s directors full discretion to determine what amount of reimbursement is appropriate, because the directors would be obligated to grant only the “reasonable” expenses of a successful short slate. Unfortunately, that does not go far enough, because the Bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all. (footnotes omitted) (Supreme Court Decides SEC-presented Delaware Bylaw Issue, Francis G.X. Pileggi, Delaware Corporate and Commercial Litigation Blog, 7/17/08)

Getting into more of the details of the decision, analysis by Travis Laster, reported by Broc Romanek, explains that Section 109 gives stockholders the statutory right to adopt bylaws, which may contain “any provision, not inconsistent with law or with the certificate of incorporation, relating to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees.” However, Section 141(a) vests the power to manage the business and affairs of every corporation in the board of directors. Consistent with Delaware’s historic model of director-centric governance, the Supreme Court makes clear that Section 141(a) has primacy over Section 109.

An interesting discussion of implications and possible unintended consequences follows. For example, “A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis.” However, the court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year.” (CA v. AFSCME: The Delaware Supreme Court Giveth and the Supreme Court Taketh Away, Blog, 7/18/08)

AFSCME proposed a similar bylaw change at Dell. At the company’s annual meeting, management noted that a preliminary tally showed the proposal received 33.7% of the vote. A similar proposal last year garnered only 14% of shareholder votes. (Union loses proxy reimbursement battle, but may have won war, Financial Week, 7/18/08)

Much more commentary at Delaware Supreme Court Issues Opinion on Shareholder-adopted Bylaws(The Harvard Law School Corporate Governance Blog, 7/18/08), Delaware Supreme Court Rejects Reimbursement Proposal (Risk & Governance Blog) and in at least a 20 part series

If the SEC fails to adopt a proxy access rule this year, where will shareowners concerned with the lack of democracy in corporate elections turn in 2009? One possibility is to seek reincorporation in North Dakota. Such proposals bring up several issues that could be the subject of negotiations. Among the most significant features of North Dakota law are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

No Action Letters

The SEC posted the no-action letters relating to Rule 14a-8 that it processed during the recent proxy season. These letters include any responses provided by the Staff after January 1st of this year (and incoming request going back as far as October ’07). According to Broc Romanek, we should expect to see new 14a-8 no-action letters posted going forward – although not likely on a real-time basis during the proxy season. (Corp Fin Goes “Live” with Shareholder Proposal No-Action Letters, Blog, 7/17/08)

I wish they would have posted the letters using a database sortable by resolution type or searchable by word/phrase. If anyone dumps this data into a file and makes it available as a searchable database, please let me know. I’m sure it is available by paid subscription. I want to know if it is available for free. It would be a great resource for small shareowners and for a class I’ll be teaching in the fall.

What is Broadridge Thinking?

About 10 years ago Sona Shah and Kai Barret began filing complaints against their employer, ADP Wilco, now a subsidiary of Broadridge Financial Solutions, for discriminating against its employees based on their citizenship and immigration status. Amazingly, Wilco called its foreign recruitment program ‘Project Delhi Belly.’  Delly Belly is a derogatory slang term coined during the British occupation of India.  If an officer arrived in Delhi and had stomach problems it was called getting a ‘Delhi Belly.’  Why Wilco’s management thought this was an appropriate title for its recruitment of foreign programmers is anyone’s guess but it gives you some sense of their cultural sensitivity.

Their complaints went out to Immigration, Department of Labor, Department of Justice. Their campaign even led to Congressional testimony, press and blog coverage. They also filed with the EEOC and began the currently pending litigation.

The case progressed with usual ups and downs. Lawyers would come into the case attracted by positive publicity and press. Then when they saw how much work was involved they wouldd abandon their effort or seek to withdraw. In 2006 Shah attempted to settle the case but noticed her attorney may have committed fraud with both the settlement and the case.  Simultaneously, Wilco went through a corporate restructuring with Broadridge.

Four months ago Shah attempted a mutual discontinuance but Broadridge refuses. Instead, they continue to spend thousands of dollars on unnecessary legal expenses, with no apparent benefit to shareowners. The disputed settlement sought by Wilco/Broadridge basically pays Shah and her attorneys $100,000. Shah she says the settlement exposes her to tax consequences worse than if she had lost the case, so she opposes it.

Since it appeared that outside counsel seeks to continue the lawsuit simply to continue billing Broadridge, Shah wrote a letter to Broadridge’s CEO of her offer. When there was no response, she began contacting large shareowners, alleging that Broadridge was wasting money on a lawsuit she was willing to discontinue. (typical email) After several investors wrote to the company, Broadridge’s outside counsel then sought to enjoin Shah from communicating with Broadridge’s investors — a motion which the court summarily dismissed

Investors should ask Broadridge why the company continues to waste potentially hundreds of thousands of dollars defending a lawsuit which the plaintiff is willing to discontinue. For further background information Google Sona Shah or Shah v. Wilco. See also Stipulation to Discontinue

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Big Changes Coming

E.J. Dionne at (The Death of Reaganomics) writes, “This is the third time in 100 years that support for taken-for-granted economic ideas has crumbled. The Great Depression discredited the radical laissez-faire doctrines of the Coolidge era. Stagflation in the 1970s and early ’80s undermined New Deal ideas and called forth a rebirth of radical free-market notions. What’s becoming the Panic of 2008 will mean an end to the latest Capital Rules era.” Markets need regulated.

Stephen Davis and Jon Lukomnik, writing for Compliance Week, argue “by late next year the United States may well see two things happen that most boardrooms today consider impossible.” The first is “say on pay,” since both Obama and McCain favor it. Votes on resolutions may be lagging public opinion. Mutual funds, pensions and insurance companies that dominate the vote are more tolerant than the public, whose own economic pain adds to the strain. Davis and Lukomnik call say-on-pay in 2009 “a no-brainer, as it shows them (politicians) to be sensitive to the issue without imposing arbitrary caps antithetical to U.S.-style capitalism.”

The second change they see coming is the non-executive chairman. GMI has found that only a bare majority—52%—of companies in its U.S. database now still combine the chairman and CEO roles. Three years ago the figure was 62%. According to Spencer Stuart, 35% of S&P 500 companies separated the posts last year, compared to a 16% in 1998. “The ‘Chairmen’s Forum‘ is to debut with an Oct. 7 session in New York, aiming to adopt best practices and explore collaboration on common issues. The forum stems from a project initiated by the Millstein Center for Corporate Governance and Performance at the Yale School of Management, which will start off serving as secretariat to the group.” Stephen Davis is the project director. That change is expected to take a little more time. (Dreaming the Impossible Governance Dream, 7/8/2008)

Let Them Eat Bugs

Little to do with corporate governance, other than the growing disparity between rich and poor, but I couldn’t resist citing The Economist article with the above title (7/12/2008). “Bugs provide more nutrients than beef or fish, gram for gram.” Feed crops gobble up some 70% of agricultural land but crickets take up just a small space in the home.

E-Proxy Vote Bleak

Retail vote goes down dramatically using e-proxy (based on 468 meeting results); number of retail accounts voting drops from 21.2% to 5.7% (over a 70% drop) and number of retail shares voting drops from 31.3% to 16.4% (a 48% drop). (Broadridge’s “Near-Final” E-Proxy Stats for the Proxy Season, Blog, 7/14/2008)

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ICI Defends Mutual Fund Votes

With almost 30% US company shares and 90 million shareholders, how mutual funds vote is a matter of great public importance. That’s why many of us fought to have the SEC require disclosure of votes and policies several years ago. While ICI opposed the measure, they now claim to have embraced their new role and have recommended that Congress require that other fiduciaries also be required to make similar disclosures.

ICI President and CEO Paul Schott Stevens presented a comprehensive new study by the Institute on proxy votes cast by registered investment companies in an address, In the Shareholders’ Interest: Funds and Proxy Voting, at the American Enterprise Institute. Proxy Voting by Registered Investment Companies: Promoting the Interests of Fund Shareholders, examined more than 3.5 million proxy votes cast by funds in 160 of the largest fund families during the 12 months ending June 30, 2007. The study is the largest known examination of proxy votes cast by funds. Key Findings are as follows:

  • Funds play an important role in corporate governance. Proxy voting is one of several ways that funds promote stronger governance and better management, and in turn promote shareholder value. By law, funds must vote proxies in the best interests of funds and their shareholders.
  • Proxy proposals cover a wide range of governance and other issues. Proxy proposals can be initiated by company boards of directors (“management proposals”) or company shareholders (“shareholder proposals”). More than 80% of management proposals relate to election of company boards and ratification of company audit firms; most of the remainder concern fundamental changes that must be approved by company shareholders. Shareholder proposals cover a range of issues but tend to be sponsored by a small number of individuals and organizations. One-third of the more than 600 shareholder proposals that came to a vote in the year ending June 30, 2007, were sponsored by five individuals and three labor unions.
  • Funds and their advisers devote substantial resources to proxy voting. As part of this effort, they adopt and publish proxy voting guidelines. The guidelines of 35 of the largest fund families indicate that their funds generally support management or shareholder proposals that align the interests of company employees with those of shareholders or that bolster shareholders’ rights, including proposals to remove antitakeover devices such as poison pills or classified boards. Funds’ guidelines are often silent on, or indicate that funds will vote against, proposals on social and environmental issues.
  • Funds supported the majority of management proposals and voted in favor of shareholder proposals about 40% of the time, giving especially strong support to shareholder proposals calling for elimination of antitakeover provisions.
  • Funds’ votes are not outliers. In many areas funds’ votes mirrored the vote recommendations of proxy advisory firms.
  • Funds establish procedures to manage potential conflicts of interest in proxy voting. Academic research indicates that funds’ proxy votes are not influenced by the business interests of fund advisers. Funds’ votes are not swayed, for example, by their advisers’ management of 401(k) plans.

This report certainly represents a step in the right direction. Yet, ICI acknowledges that there are many funds “with broader investment purposes — including about 260 that pursue financial returns in tandem with social, environmental or other objectives, and whose advisers manage with these additional objectives in mind.” Unfortunately, it rationalizes most funds ignoring such issues because there goal is to “maximize financial returns.” Since they “do not have a mandate from their investors to engage portfolio companies on social, environmental or similar issues — valid as these may be,… they neither can nor should vote proxies simply on the basis of these considerations.”

However, many environmental and social issues have direct financial impact. Additionally, consider climate change. Even the wealthiest among us cannot escape the assaults of global warming and acidic oceans. As Robert Monks observes, “The primary thing that workers need for their retirement [is] money, but don’t workers also need a safe, clean, decent world in which to spend it. These ends are not economically exclusive…”

Environmental, social and governance (ESG) issues should be integrated into financial analysis. As Stephen Viederman notes, “There is no triple bottom line. There can only be a single bottom that offers positive social and financial returns against which all business decisions must be measured. Fiduciary duty… must give weight to how ESG factors, more broadly understood than at present, affect both risks and opportunities, now and in the future.”

A more fundamental criticism of the ICI’s methodology is that it only presents aggregated data. It reminds me of Robert Reich’s frequent quip that “basketball player, Shaquille O’Neal and I have an average height of over six feet.” By aggregating the data, voting patterns look normal.

More informative are reports at where, as its author Jackie Cook notes, “the most striking thing about the graphical representation of the data by fund family is the difference between fund groups’ voting profiles on various issues.”  “Most reports that criticize mutual funds’ proxy voting, including those mentioned in the ICI report) are more detailed with respect to who are the leaders and who are the laggards in particular areas of voting (for instance, why does one fund family support every board nominee at portfolio companies, whereas others support nominees less than 80% of the time, where the two might hold many of the same securities?), says Cook.  Not only does the ICI report fail to dissaggregate, it doesn’t even tell us which funds are included and which are not.

Unrelated to ICI’s report, but also of interest is a new Morningstar Inc. study which looks at how much managers invest in their own funds. The study looked at 6,000 issues and found that in 46% of the domestic stock funds surveyed, the manager hadn’t invested a dime. Nearly 60% of foreign stock funds reported no manager ownership, two-thirds of taxable bond funds have no managers with money in the fund, up to 70% of balanced funds have no manager cash and some 78% of muni bond funds have shareholder cash only. See table showing fund ownership. (No skin in the game, Chuck Jaffe, MarketWatch, 7/6/08)

Chuck Jaffe seems to believe the report shows Proxy voting (by funds is) more than a rubber stamp(Philiadelphia Inquirer, 7/13/08) However, he also notes that “At most large firms, fund managers still don’t sit on the proxy-voting committee. And so long as investors favor results to disclosures and returns to process – which is true in all funds except for those that pursue a social agenda – there will always be some lingering sense that fund firms don’t care that much about these issues. Further, there are no studies showing any kind of link between how funds vote their shares and how they perform.” Once those two threads are connected, we should see a lot more emphasis on voting. See also Shareholders’ Voices Hold Little Clout,, 7/14/08.

Lukomnik to Head IRRCi

The Investor Responsibility Research Center Institute for Corporate Responsibility (IRRCi) hired Jon Lukomnik as program director. Lukomnik will spearhead the Institute’s efforts to become the preeminent source of objective and relevant research examining the intersection of investments with environmental, social and governance issues.

“The Institute will encourage and support important research in the fields of corporate governance and corporate responsibility and will be a convener and coalescing force in this area of growing importance. Jon is the right person to lead us, and our board looks forward to working with him as he develops relationships with educational and other research organizations in these fields which are critically important in the securities markets and for the economy,” said Peter Clapman, Chair of the Institute.

“This is an opportunity of a lifetime – the chance to give back to the industry,” said Lukomnik. “If we do it right, the IRRC Institute will contribute to building the solid, independent research base which will affect how investors view and value corporations’ environmental, social and governance efforts for decades, even while allowing corporations to understand how to profit by being responsible. I envision the Institute as the go-to non-profit organization for such independent, objective research.”

Lukomnik is well-known globally for his corporate governance efforts over a quarter of a century. He is a founder and former Governor of the International Corporate Governance Network which now boasts 500 members representing some $15 trillion of assets under management, ex-chair of the executive committee of the Council of Institutional Investors, former Deputy Comptroller of New York City in charge of investing that City’s pension funds and treasury assets, a founder of GovernanceMetrics International, and co-author of The New Capitalists: How Citizen Investors Are Reshaping the Corporate Agenda (Bargain price of less than $10 for hardcover edition) Lukomnik will also continue as Managing Partner of Sinclair Capital LLC, a strategic consultancy for the asset management industry.


In a CFA Institute survey of1,956 investment professionals, 11% said they had seen a credit rating agency change a bond grade in response to pressure from an issuer, underwriter or investor.

Many respondents felt the most harmful conflict of interest results from the payment structure under which rating agencies such as Moody’s Investors Service and Standard and Poor’s are paid by the same issuers whose securities they grade. (Investors cite rating agencies’ conflicts of interest, Financial Week, 7/8/08)

An SEC report found that none of the rating agencies examined had specific written comprehensive procedures for rating residential mortgage-backed securities (RMBS) and collateralized debt obligations (CDO). Furthermore, significant aspects of the rating process were not always disclosed or even documented by the firms, and conflicts of interest were not always managed appropriately. (SEC Examinations Find Shortcomings in Credit Rating Agencies’ Practices and Disclosure to Investors) See also: Rating agencies in-depth, FT; SEC proposed rules

Procedural Error in SEC Request to Delaware Court

J. Robert Brown argues that the decision by the Delaware Supreme Court to consider the certified question re AFSCME’s Proposed Bylaw at CA violates its own rule. No action letters represent requests for “informal” advice from the staff of the SEC.  The advice is not attributable to the Commission.

The petition provides that the answer ”will determine whether the Division will ultimately concur in CA’s view that it may exclude the AFSCME Proposal . . . “  (emphasis added).  In other words, it will be the staff that rules once the answer has been received, not the entire Commission. The fact that a no action letter is not a position of the Commission means that it can be easily disavowed (by the Commission or the staff) and cannot be challenged as a final action under the APA. Procedures matter. [As Predicted: The SEC and the Further Denial of Shareholder Access (Delaware Supreme Court and the Lack of Jurisdiction)(Part 4),, 7/8/08)

TIAA-CREF Faces Pressure at Annual Meeting

Shareholders and advocacy groups will press TIAA-CREF officers on its investment in companies with socially irresponsible practices at its July 15 meeting. After years of pressure, TIAA-CREF agreed to become a shareholder activist on issues of social responsibility. Now it’s time for them to either put pressure on five industry leaders that consistently display egregious behavior or divest their stock, says the Make TIAA- CREF Ethical coalition, which includes Corporate Accountability International (formerly Infact), World Bank Bonds Boycott, Press for Change, Social Choice for Social Change, Canadian Committee To Combat Crimes Against Humanity (CCCCH) , Citizens Coalition (Frente Civico), Educating for Justice, National Community Reinvestment Coalition, Campaign to Stop Killer Coke/Corporate Campaign, Inc., Campaign for a Commercial-Free Childhood, and Sprawl-Busters. The Coalition urges that TIAA-CREF “reform them or dump them.”

  • Nike and Wal-Mart, condemned for selling products produced by overseas sweatshop labor;
  • Wal-Mart, widely criticized for its domestic labor practices, hurting local businesses, and promoting urban sprawl;
  • Philip Morris/Altria, responsible for Marlboro, the leading cigarette for youth;
  • Costco, which promotes police brutality in Mexico and the destruction of its cultural heritage and the environment;
  • Coke, with complicity in widespread labor, human rights and environmental abuses; exploits child labor and aggressively markets harmful products to children.
  • While TIAA-CREF did divest from harmful World Bank bonds, it should now pledge to buy “no more.”

According to coalition group representative Neil Wollman, a Senior Fellow at Bentley College in Massachusetts, TIAA-CREF claims that outside of their socially responsible fund, they cannot use non-financial criteria in their financial decisions. Yet, Wollman asks, “Would TIAA-CREF have invested in the production of Nazi gas chambers in World War II if it meant a healthy financial profit? It’s time for TIAA-CREF to answer that kind of question.” He adds, “Our coalition praises TIAA-CREF for changes over the years in its social responsibility practices often spurred by participant lobbying; but now they need to move on our companies of concern.” For further information, contact Neil Wollman, Ph.D., Senior Fellow (for the Make TIAA-CREF Ethical coalition): 260-568-0116. Disclosure: The publisher of is a Costco shareowner.

Audit Committee Practices recently conducted a survey and found that more than 90% review company earnings releases prior to their release to the media. Most hold a meeting by telephone a day or two prior to the release. (Survey Results: Audit Committees and Earnings Releases

Sweeping Resoution at Hain

Congratulations to Kenneth Steiner and John Chevedden for creating and submitting what is certainly one of the most innovative and important resolutions of 2008. The SEC Rules on Shareholder Resolutions (Rule 14a-8) limit shareowners to one resolution per annual meeting. Yet, Steiner’s resolution to the Hain Celestial Group covers a lot of territory simply by asking Hain to reincorporate in North Dakota.

RMG/ISS blog points out that the United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively. At least we know such proposal aren’t likely to be excluded by “no action” requests.

As RMG/ISS report, there is some dispute as to the benefits to be gained by reincorporation. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.” But being based at the University of Delaware, Elson is hardly be viewed as unbiased.

William H. Clark, Jr., who served as president of the North Dakota Corporate Governance Council, which drafted the statute, of course, sees things differently. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.” (Reincorporation proposal seeks to address “major issues in corporate governance,” 7/2/08)

Regardless of the merits of incorporating in North Dakota, the proposal brings up several issues that could be the subject of negotiations. Among the most significant are the following:

  • Majority voting in election of directors. In an uncontested election of directors, shareholders have the right to vote “yes” or “no” on each candidate, and only those candidates receiving a majority of “yes” votes are elected.
  • One year terms for directors.
  • Advisory shareholder votes on compensation reports. The compensation committee of the board of directors must report to the shareholders at each annual meeting of shareholders and the shareholders have an advisory vote on whether they accept the report of the committee.
  • Proxy access. The corporation must include in its proxy statement nominees proposed by 5% shareholders who have held their shares for at least two years.
  • Reimbursement for successful proxy contests. The corporation must reimburse shareholders who conduct a proxy contest to the extent the shareholders are successful. Thus, if a shareholder conducts a proxy contest to place three directors on a corporation’s board and two of the candidates are elected, the shareholder will be entitled to reimbursement of two-thirds of the cost of the proxy contest.
  • Separation of roles of Chair and CEO. The board of directors must have a chair who is not an executive officer of the corporation.
  • A “special meeting” shall be held if demanded by shareholders owning 10% or more of the voting power.

See text of the law and discussion, The North Dakota Experiment, at Harvard Law School Corporate Governance Blog, 4/23/07, Expect to similar proposals at a great many companies next year.Disclosure: The publisher of is a Hain Celestial Group shareowner and will be voting in favor of Steiner’s proposal.

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CorpGov Bits

Writing for FT, Kristin Gribben concludes Shareholder democracy is on hold (7/6/08) based on mid-year voting results, which show “say on pay” support has remained flat. However, since both Barack Obama and John McCain have said they support say on pay, why should shareowners exert much effort on such proposals this year? Yes, many are waiting to see what the next administration brings.

One out of every four working Americans (25%) describes their workplace as a dictatorship and only 34% believe their bosses react well to valid criticism, according to a new Workplace Democracy Association/Zogby Interactive survey. 80% of workers said they work better when they are given the freedom to decide how to best do their job. (Workplace Democracy Survey, Workplace Democracy Association and The WorldBlu Blog, 7/5/08) The revolution continues.

A socially responsible investment (SRI) global equity allocation could produce 40% lower COemissions than a conventional portfolio indexed to the MSCI World, according to a study by Pictet Asset Management (PAM). Such a portfolio also showed the positive impact on job creation for 2007, creating half again as many as compared to the benchmark increase.

There is growing recognition that proactive management of social and environmental issues by corporations will have a material impact on their long-term value. Pension funds should disclose the extent to which (if at all) LTRI issues are taken into account in investment-related decisions, including proxy voting policies, selection of investments, engagement with companies or regulators, and selection of investment managers. (Responsible investing requires full disclosure, David Hess, P&I, 6/9/08)

Karthik Ramanna and Sugata Roychowdhury find that outsourcing firms donating to congressional candidates in closely watched races managed their earnings downwards in the two quarters immediately preceding the 2004 election, deflecting attention away from outsourcing and negative media. As expected, such candidates to do better in elections. Conclusion: Accounting Information (can be used) as Political Currency. Ah, another form of corruption. People are so creative.

A bill signed into law in June positions Vermont as a leader in incorporating so-called virtual firms — those without a physical headquarters, actual paper filings, and directors’ meetings (they’re all online.) The state will charge virtual companies the same amount — about $235 per year — that standard corporations pay when filing. (Vermont Wants to Be the “Delaware of the Net,”, 6/30/08)

Dennis Johnson, Director of Corporate Governance, will be leaving CalPERS  to become Managing Director of Shamrock Activist Value Fund. He also intends on stepping down from the post as Chair of the Council of Institutional Investors Board of Directors. (press release, 7/2/08) It looks like 3 years is all we can hope for at CalPERS until they move to the private sector for higher pay.

CalPERS also reached an $895-million settlement of a class-action lawsuit brought against UnitedHealth Group, over its stock-option grant practices… probably the largest stock option backdating recovery to date.

The Delaware Supreme Court accepted questions from the SEC on AFSCME’s binding bylaw proposal seeking reimbursement for third-party solicitations at CA. Briefs are due July 7; oral argument is scheduled for July 9. (Delaware Supreme Court: CA/AFSCME Certification Accepted and Fast Tracked, Blog, 7/2/08)

It has now been more than 10 years since DOL wrote a letter to Calvert advising them that the fiduciary standards of ERISA didn’t preclude socially screened funds as long as “the investment was expected to provide an investment return commensurate to investments having similar risks.” (Socially conscious investing blossoms with DOL’s blessing, Investment News, 6/23/08)

Preliminary 2008 AFL-CIO Key Votes Survey Preliminary Scorecard posted.

Former SEC chairman Arthur Levitt Jr. called on the SEC to immediately take up proxy access with “a significant, but not onerous, threshold amount of stock one must own to put forward a vote, a framework regarding disclosure and conflicts of interest, and rules that ensure that any changes to a board do not violate stock-exchange listing standards.” (How to Boost Shareholder Democracy, WSJ, 7/1/08)

Lipton and Democracy

In Shareholder Activism and the “Eclipse of the Public Corporation”: Is the Current Wave of Activism Causing Another Tectonic Shift in the American Corporate World?, Martin Lipton discusses the pressures that have been “pervasively eroding the centrality of the board of directors and transforming its role in the governance structure of public companies, with the end game being a new conception of the corporate organization.”

Lipton cries out that “directors risk embarrassment for any misbehavior or other failures of their companies, however diligent they may have been.” Of course, since board minutes are not routinely made public, how can shareowners assign blame other than to responsible committees and their members? “Many active CEOs and other senior business people now restrict themselves to only one outside board…” leading to a situation “where few members are CEOs or former CEOs, and too few members are fully qualified to provide the best possible business and strategic advice.” Yes, shareowners want fully engaged directors with a variety of skills and perspectives, not primarily CEOs.

Of course, not all his criticisms are baseless. For example, he points to a recent study by Bhagat, Bolton and Romano that found “no consistent relation between governance indices and measures of corporate performance… the most effective governance institution appears to depend on context, and on firms’ specific circumstances.” Similarly, Robert Daines and Dave Larker found no correlation between the corporate governance ratings given by four services to various corporations. (Rating the Ratings: How Good Are Commercial Governance Ratings?, Daines, Gow and Larcker, 6/26/08)

The bottomline question for Lipton is, will the subprime and leveraged loan financial crisis sufficiently move us from “director-centric governance to shareholder-centric governance, along with a concomitant transformation of the role of the board from guiding and advising management to ensuring compliance and performing due diligence.” I certainly hope so, and I’m sure shareowner-centric directors will also offer plenty of excellent advice.

When Berle and Means wrote The Modern Corporation, pointing out the separation between the ownership of property and the control of property, they didn’t blame performance failings on the greed of shareowners but on their passivity. They looked to the court as the ultimate arbitrator of the corporation’s legitimacy and viewed its ultimate purpose as maximizing not shareowner profits but the general interest of society. “The control groups… have placed the community in a position to demand that modern corporations serve not alone the owners or the control but all the society.” (p. 312, 1968, London: Transaction Publishers) As New Dealers, they believed political intervention was necessary to support market forces.

Managers and economists have sought for decades to avoid political regulations by overcoming the inherent inefficiencies of separate ownership and control by relying on and developing more efficient market forces. Through the pure economic model (PEM), financial markets take on the role of the entrepreneur, ensuring profit maximization by directing the flow of capital. However, markets behave more in line with crowds and mass movements, than as rationally efficient. Shareowners seek to exploit imperfect information.

Advocates of PEM have concentrated on designing mechanisms to reduce agency costs, by aligning CEO pay, for example, with stock price. However, PEM depends on all shareowners expecting the same maximized level of profit over the same time and different shareowners have different timeframes. PEM also underestimates the fragmentation of ownership and the consequences for corporate governance.

Lipton is right that costly regulatory checklists could kill the goose that lays the golden eggs, but the solution is not to return to a Fordist management dominated system that worked when corporations were conservative bureaucracies, politically counterbalanced by unionionized employees.

In a recent interview, Bob Monks describes some of his thoughts in returning from the 2008 ExxonMobil meeting. “Coming back from Dallas, I sat down and I began to write, ‘Shareholder Democracy, R-I-P’ which is inscribed on tombstones for Requiescat in Pace, or ‘Rest in Peace.’ Unhappily, the bold experiment that came out of the 1930s and some very idealistic people who tried to repair some of the damage of the Depression has now been thoroughly thwarted by people like Exxon, who view shareholder involvement as being at best a tax and at worst a crime.” (Bob Monks: ExxonMobil Exemplifies Corpocracy, SocialFunds, 6/30/08)

It would be a mistake, however, to think we have moved from a golden age of shareowner primacy. That only existed when corporations were owned, controlled and operated by families. The most interesting book I’ve seen in years on the evolution of the corporation is one that Bob knows well. His cover note says, in part, “The ideal of democratization of economic values, following de Toqueville, is a perilous voyage for which this book is a fine route map. Everyone can benefit from understanding the underlying precepts of tomorrow’s dialogue.”

Entrepreneurs and Democracy: A Political Theory of Corporate Governance by Pierre-Yves Gomez and Harry Korine identifies three “models of reference ” for corporate governance: the familial, managerial and public — each corresponding to distinct stages of evolution. The first stage began with the liberal thought of equal rights and the emergence of private property, which initiated enfranchisement of the entrepreneur. The second stage had roots in the separation of powers between owners and management. The third stage, emerging now, is typified by increasing representation and public debate, giving shareowners effective oversight of the corporation.

Gomez and Krine view the tension between individuals and the collective as opposing forces: that of the entrepreneur, a force necessary for directing and channeling the energies of individuals, and that of social fragmentation, a force that divides and balances individual interests, involving increased exercise of authority and control. Democracy, through institutions and processes, helps to establish equilibrium between these two forces. The governed view governance as legitimate only if there is balance between the directing force of the entrepreneur and the contrary force of fragmentation and independence.

“Management finds itself increasingly subordinated to the markets and has to take investors’ reaction into account to define and weigh decisions.” (p. 184) Shareholders have taken the entrepreneurial mantle and drive the market in two ways. “Investors” exercise the entrepreneurial force by allocating resources to the highest performers based on extrinsic comparisons. “Shareowners” seek to integrate active owners at specific firms based on their interpretation which also includes more intrinsic data. Contemporary corporate governance is characterized by the omnipresence of information, the de-privatization of the corporation, debate and the representation of different interests. Public opinion has become the counterweight to the entrepreneurial force of direction.

Under familial governance, business secrecy was paramount. Under managerial governance, we relied on the primacy of management expertise. Today, good governance depends on a mass of standardized information that allows easy comparison by the investing public of risks and opportunities. It depends both on relatively efficient markets to direct large capital flows and on actively involved shareowners to improve efficiencies at specific corporations.

Under the managerial form of governance that has been in dominant for most of Lipton’s brilliant career, the board is composed of experts and operates primarily to provide internal technical advice. Under public governance, the board is composed of outside directors, shareowner interest groups and even more broadly defined stakeholders to link the corporation to mass markets and society… functions increasingly important for companies operating in a global context.

Lipton’s clients would be better served if he helped them adapt to the process of democratic deliberation, rather than fighting a rear guard action. How can they evolve to a system of selecting board members nominated by and directly accountable to shareowners? How can they supplement the annual meeting with an assembly of elected shareowners who provide advice to management throughout the year? By inviting public discussion in areas heretofore regarded as the exclusive domain of management, companies deliberate matters of public concern in advance and are less vulnerable to the vagaries of market bubbles and crashes. Lipton can best help his clients avoid the imposition of overly burdensome regulations by advising them on how to build democratic mechanisms into the very structures and processes of corporations themselves.

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