Australian Listed Infrastructure Market
Submitted by: Martin Lawrence, ISS Australia Lead Analyst
Listed infrastructure is a new asset class around the world. Toll roads, airports, ports and the like have found a way into investor's portfolios, especially institutional investors, largely because of their reliable cash flows. In Australia, investment banks such as Macquarie Bank and Babcock & Brown have helped spur rapid growth in the Australian listed infrastructure market, with Macquarie having three listed infrastructure vehicles on the Australian Stock Exchange and Babcock & Brown two. Macquarie especially is now launching infrastructure funds around the world, including listed funds in Singapore, Korea and the US.
These vehicles have been marked by innovative and complicated structures, including triple stapled securities consisting of domestic and international companies stapled to a trust, and innovative governance arrangements. On 24 February 2006, a conference organized by ISS Australia and the University of Melbourne's Centre for Corporate Law and Securities Regulation, "Corporate Governance: Managing Risk and Driving Value" saw investors, directors, advisers, academics and company in-house governance professionals hear three key investment players speak on the governance challenges listed infrastructure funds posed to investors.
Principal of boutique investment research house Capital Partners, Peter Doherty, stressed that listed infrastructure was a new asset class and investors should be cautious in approaching it, despite the impressive return characteristics of some listed vehicles to date. He also argued that while the large fees paid to the managers and promoters of these vehicles had attracted considerable attention, investors should remember that promoters of infrastructure funds took big risks in purchasing assets and launching these funds.
The other two panelists were Executive Director of Macquarie Bank, Nicholas Moore, a major participant in the growth of listed infrastructure funds, and the Investment Director of Australian equities funds manager Investors Mutual, Anton Tagliaferro.
Tagliaferro said Australia's accounting standards and corporate disclosure rules had not kept pace with stapled securities. He said the complexity of the listed infrastructure funds-usually attributed to attempts to seek the best possible financing structure for investors-did make it hard to assess their accounts and called for new regulations and accounting rules specifically designed for the sector.
Attendees also heard from ISS Australia's Managing Director, Dr Geof Stapledon, who raised several emerging concerns about new features of executive compensation in Australia. Australian companies over the past four years have largely abandoned traditional options from remuneration packages, instead preferring to use 'performance rights': zero priced options that vest based on company performance against a range of indicators, the most common of which is total shareholder return against a peer group of companies.
Dr Stapledon also highlighted the results of research undertaken by ISS Australia into the 'real' value of executive share options. The study examined option grants made to CEOs of ASX 100 companies, and compared the value the company attributed to the options at the time they were granted, with the actual value realised by the CEO when exercising the options 3 or 4 years later. The study revealed that the average 'fair value' attributed to options at grant date turned out to be only 31% of the actual value realised by the CEO. A policy issue stemming from the research is that there is inadequate disclosure about the assumptions made in the determination of 'fair value' of options. In particular, there's a lack of transparency about the 'discounts' applied to the value of the options to reflect the possibility that they won't vest (due, for example, to performance hurdles not being satisfied, or the executive resigning before the vesting period has elapsed).
And in some cases Dr Stapledon said companies were not disclosing the performance targets against which long term incentives were awarded, instead saying these targets were "to be determined by the board." This occurred when companies used internal measures of performance such as earnings per share or return on capital employed.
While investors were sympathetic to companies' qualms about not disclosing specific internal performance targets against which short term incentives were judged, Dr Stapledon said investors were not sympathetic to long term incentives, especially equity grants, being awarded based on hurdles that were not clearly disclosed and transparent.
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More Firms Adopt Majority Vote
Submitted by: Tad Kopinski, Staff Writer
More U.S. companies are trying to head off shareholder proposals seeking majority board elections by changing their bylaws to require a majority of votes cast to elect a director.
The latest firms to embrace a full majority vote standard include Alaska Air Group, Altera, and Safeway. These changes bring to at least 18 the number of companies that have adopted a majority vote bylaw plus a resignation policy for incumbents who fail to gain the requisite vote, an approach commonly referred to as the "Intel model." Another seven companies have confirmed that they are in the process of doing so.
Last year, Alaska Air faced eight investor resolutions seeking annual elections, a vote on "poison pill" plans, and other governance reforms, half of which got more than 70 percent of votes cast. Five shareholder proposals received a majority of votes cast in both 2004 and 2003. In response to these votes and another round of shareholder proposals this season, Alaska Air adopted a majority vote bylaw and is seeking shareholder approval to declassify the board and rescind supermajority requirements at the company's May 16 meeting.
At Altera, a majority vote resolution filed last year by the Sheet Metal Workers Union got 59.5 percent of votes cast. A similar proposal by the United Brotherhood of Carpenters and Joiners received 46.1 percent at Safeway.
In 2004, Safeway was the subject of a "vote no" campaign by four public pension funds, which generated withhold votes of 15 to 17 percent against CEO Steve Burd and two directors. In the face of the campaign, Safeway introduced a number of governance changes, including naming an independent lead director.
At Marriott International, management is supporting a majority vote proposal by the Carpenters at the company's April 28 annual meeting. Last year, a similar proposal by the union fund received 39.1 percent of votes cast.
"The company now believes that the clear trend in corporate governance is toward greater and greater adoption of the majority vote standard for uncontested elections," the company said in its proxy statement. "Corporate governance experts agree that the majority vote standard will likely become the norm over the next few years."
While Pfizer and some 80 other firms have adopted resignation guidelines while retaining plurality voting, the Carpenters and other proponents argue that only an explicit majority standard would provide shareholders with a meaningful vote in uncontested elections.
"The growing list of major companies whose boards have adopted a true majority standard combined with post-election resignation policies has set a new standard," Ed Durkin, the Carpenters union's corporate affairs director, told Governance Weekly. "I think we have turned the corner on the issue and the burden is now on those companies that do not have majority vote standard bylaws to justify their continued use of a plurality vote standard."
Of the 65 majority-vote proposals filed by the Carpenters' pension fund this year, three came to a vote earlier this month at Analog Devices, Ciena, and Hewlett-Packard. Fifty-one resolutions are still slated for a vote, while 11 have been withdrawn. Many of those firms have agreed to implement a majority standard.
A "Very Strong Vote"
Durkin said that the 45 percent support received at Hewlett-Packard, which adopted a resignation policy modeled after Pfizer's, was "a very strong vote." Pfizer was the first to introduce a director resignation policy last June.
"Despite action by the H-P board to adopt a director resignation policy and the company's strong advocacy against the proposal, nearly half the shareholders said that its director resignation policy combined with a continuation of the plurality vote standard do not go far enough," Durkin noted.
Richard Ferlauto, director of pension investment policy at the American Federation of State, County & Municipal Employees--which has a majority elections proposal at Morgan Stanley's April 4 annual meeting--has a similar view.
"I don't believe [the Pfizer model] is good policy. I think the momentum is there and most investors do understand the critical differences between a resignation policy and changing the voting standard itself," Ferlauto told Governance Weekly. "I expect that there will be strong and growing support for majority voting throughout the season."
In contrast, Martin Lipton, a founding partner of the law firm of Wachtell, Lipton, Rosen & Katz, which represents corporate clients, sees the vote results at H-P, Ciena (31 percent support), and Analog Devices (35 percent) as a vindication of the Pfizer approach. "We continue to believe that the corporate governance guideline is sufficient and should satisfy the desire of governance advocates for majority voting," Lipton said in a memorandum to clients.
The issue is also on the ballot April 6 at Novell. Majority vote proposals are being voted on April 18 at Sprint Nextel, Wachovia, Kaman, and Electronic Data Systems. Similar proposals are slated to go to a vote at Burlington Northern Santa Fe on April 19 and at Weyerhaeuser on April 20. Majority election proposals are on the agenda at more than 100 meetings this proxy season.
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February 27, 2006 |
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2006 Preview: Continental Europe
Submitted by: Thaddeus C. Kopinski, International Editor
Efforts to facilitate proxy voting, improve executive compensation disclosure, and to limit the use of takeover defenses will likely dominate continental Europe's corporate governance debate this proxy season.
After two public consultations, the European Commission in January proposed a directive to facilitate the cross-border exercise of shareholders' rights. The directive called for an end to the practice of "share blocking" and for companies to use instead a record date, which, the EC suggested, be set no earlier than 30 days before the meeting.
Companies in some continental European markets, such as France, Italy, and the Netherlands, require investors to prove ownership before voting by depositing shares with an institution designated by the company. While deposited, the shares are blocked from trading. The practice, dubbed share blocking, is a concern for foreign institutional investors and fund managers, many of whom will not vote shares, rather than risk the liquidity of their holdings.
The elimination of share blocking could spur greater voting participation, particularly by Anglo-American investors who traditionally have been the most vocal advocates of corporate governance reforms.
Individual markets also are getting into the act. In Germany, a 21-day record date voting system for companies with bearer shares, which constitutes about 90 percent of the German market, was introduced in November to replace the practice of having to block shares in advance of a shareholder meeting. And in Sweden, the record date is no longer 10 calendar days, but instead "not earlier than five business days prior to the meeting" following a Jan. 1 amendment to the Swedish company law.
The cross-border directive also calls for general meetings to be convened with at least 30 days' notice with all relevant information made available on a company's Web site. The directive must be ratified by both the European Parliament and the European Council and, if approved, must be incorporated by European Union member states into each of their corporate laws. (For more details, see the Jan. 13, 2006, issue of Governance Weekly.)
While the directive will not directly impact the 2006 proxy season, it may spur some institutional investors to seek governance changes contained within the recommendations.
Voting Rights Caps Targeted
A March 2005 study commissioned by the Association of British Insurers noted that roughly two-thirds of the top 300 European firms still do not follow the one-share, one vote principle. For example, voting rights caps at some continental European firms often limit the votes of shareholders to as low as 2 or 3 percent of voting equity, regardless of the size of their equity stake. And dual-class structures with unequal voting rights favoring certain shareholders still exist in several markets, including Sweden, where 75 percent of companies do not apply the one-share, one-vote principle, and the Netherlands, where 86 percent do not do so, the study found.
But for most investors tracking continental European governance issues, voting rights caps will feature more prominently than other types of defenses this proxy season. "The main issue on the Continent today is voting right caps, there is no question about it," Andre Baladi, co-founder of the International Corporate Governance Network, told Governance Weekly. "You do not have voting rights caps in Anglo-Saxon countries; this problem is typical of continental Europe and of Asia where it has been neglected for so long."
Baladi said that the issue has been and will continue to be a focal point for institutional investors at consumer goods giant Nestle, but it will also surface in other companies. "Nestle is the example, but other companies will follow, including in France where it came up at Danone."
Several major French companies, such as Vivendi Universal, Danone, Alcatel, Total, and Societe Generale, limit the voting rights of their shareholders with caps of 2 percent, 6 percent, 8 percent, 10 percent, and 15 percent, respectively. Shareholder proposals in 2005 to eliminate voting rights caps at Vivendi and a small number of other French blue-chip companies failed to carry despite efforts by both national and international investors to pool their clout behind the resolutions. Market observers suggest that efforts to dismantle these takeover defenses will continue in 2006.
France, Luxembourg Propose Takeover Defense Laws
While investors mount efforts to unravel many of Europe's long-standing takeover defenses, governments are moving in the other direction. The hostile takeover bid by Rotterdam-based Mittal Steel for steel producer Arcelor prompted the Luxembourg government, which holds a 5.6 percent stake in the target company, to seek to accelerate passage of the country's first takeover law that would explicitly allow companies to institute "poison pills," or to seek management-friendly buyers to fend off hostile bids.
Similarly, French Finance Minister Thierry Breton announced Feb. 17 that his government would introduce legislation to allow companies to adopt poison pills without shareholder approval. The move was seen by some investors as a response to Mittal's bid for Arcelor, and by others, as a continuation of recent efforts by French lawmakers and others to protect the country's corporate icons.
Germany, whose cross-border merger regulations were ruled incompatible with European laws by the European Court of Justice in December, announced in January it would also introduce new takeover legislation, according the German business daily Handelsblatt.
Germany, Sweden Improve Pay Disclosure
Executive pay will be spotlighted this proxy season as at least two markets push forward with plans to improve pay disclosure. Last year, German lawmakers approved legislation requiring companies disclose most elements of pay for executive directors. The information will be contained in all 2006 annual reports.
The German Corporate Governance Code recommends but does not require that companies disclose individual pay details for all directors. But because it lacks the force of law, many companies ignore the recommendation. As a result, of the 30 firms on Germany's main DAX index, only 20 have disclosed director pay data.
One concern for proponents of pay disclosure is a provision within the new German law that allows companies to forgo the disclosure requirement if 75 percent of shareholders agree with a management resolution limiting disclosure. Porsche, CTS Eventim, and car rental company Sixt, all of which have a controlling shareholder, have already taken steps to limit disclosure through such a vote.
Meanwhile, a revised comply-or-explain Swedish governance code that took effect July 1, 2005, is improving pay disclosure in that market. The number of companies putting their remuneration policies and other pay-related matters to a shareholder vote has risen and will continue to do so in 2006.
The code's recommendations now apply only to companies listed on the two major indices of the Stockholm Stock Exchange. According to the code, a remuneration policy should include:
- The relative importance of fixed and variable components of the remuneration and the linkage between performance and remuneration;
- The principal terms of bonus and incentive plans;
- The principal terms of non-monetary benefits, pension, notice of termination and severance pay; and
- The members of senior management covered by the terms.
Jean-Nicolas Caprasse, managing director, ISS Europe, and Global Analysts Nina Penna and Michael Vogele contributed to this article.
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February 24, 2006 |
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File Those Claims...
Submitted by: Bruce Carton, VP, ISS' Securities Class Action Services
I've been writing about this for a while over at the Securities Litigation Watch blog (see my posts here and here, for example), but the SEC provided institutional investors with yet another reminder today of the importance of filing claims in securities class action settlements.
As stated in this Litigation Release, the SEC today filed a motion with the federal court in Colorado requesting approval of its distribution plan for the over $250 million settlement reached in its financial fraud investigation of Qwest Communications International. Notably, the SEC proposes to distribute the $250 million via a completely separate securities class action settlement involving Qwest Communications International.
The SEC proposes that the claims administrator handling the securities class action settlement (Gilardi & Co.) also handle the distribution of its settlement. The SEC is increasingly using class action claims administrators to distribute SEC settlements wherever possible because it is a "win-win" for both the SEC and investors. Specifically:
--the SEC does not have to serve as, or hire, a separate claims administrator, saving both time and money;
--using this method, investors should only need to fill out one claim form to recover in both the securities class action and SEC settlements; and
--no attorneys fees are deducted from the SEC money ($250 million in this case) added to the settlement pot.
The SEC's proposal today regarding Qwest shows that investors who fail to file claims in securities class action settlements increasingly risk not only leaving this class action money on the table, but also significant sums of money from SEC settlements.
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Constructive Dialogue Improving Executive Pay Practices in the UK
Submitted by: Sarah Ball, ISS Europe Communications Director
Communication between companies and shareholders over executive remuneration has improved, both in terms of numbers of companies approaching shareholders and the quality of dialogue, according to RREV, the UK corporate governance body, jointly owned by the National Association of Pension Funds and ISS.
RREV's new report, Trends in Executive Remuneration 2005, highlights that it has now become market practice for companies to consult shareholders and shareholder representatives when introducing any significant change to executive remuneration arrangements. In a considerable number of cases, a company will include RREV in this consultation process and RREV received over 150 such approaches during 2005.
The report details trends in executive remuneration based on company reports in 2005. Median chief executive salaries increased by 10% in the FTSE 100 and by 11% in the FTSE 250 and the FTSE SmallCap. Maximum potential bonuses have also increased at a number of companies. Bonus targets are rarely disclosed therefore it is hard to determine whether these have become more challenging to accompany the increases in bonus limits.
RREV is encouraged by the greater use of multiple performance measures in long-term share schemes and, in some companies, the greater use of measures tailored to company strategy. This indicates greater sophistication in the market, which can at least partly be attributed to productive discussions between companies and shareholders.
However, the report highlights a wide variety in the level of disclosure provided by companies about annual bonus plans and disclosure of the performance targets. Whilst recognising that companies consider that commercial sensitivities make it difficult for them to provide detailed disclosures in advance, RREV's position is that there is little justification for the lack of acceptably detailed retrospective disclosure of the targets and associated performance after the performance year has ended.
The report notes bonuses tied to performance made up an increasing proportion of total pay in accordance with corporate governance guidelines but it also notes that some companies had stopped deferring bonuses and were paying annual bonuses immediately in cash, a change contrary to best practice.
The report further notes that the lifetime limit on pensions takes effect from April 2006 and highlights that there was little disclosure in 2005 company reports on companies' intended approach. It states that although RREV would expect companies to make changes for tax efficiency purposes, it would not expect shareholders to bear additional costs as a result of any new arrangements.
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February 23, 2006 |
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French Poison Pills
Submitted by: Michael Gray, International Content Manager
Just when you might think the Europe is making progress with corporate governance regarding its takeover rules, some Member States seem to be pushing back in the other direction. This week there were reports that France is considering legislation to allow companies to use poison pills. According to an article in the FT (http://news.ft.com/cms/s/95720648-a348-11da-ba72-0000779e2340.html ) the new legislation will allow companies to do a directed issue of discounted convertible warrants to existing shareholders. The part of this that goes against the EU directive is that the new law would not require reciprocity -- companies would only be allowed to use such defenses if the company making the bid also had the same access to a defense. In response to France's action earlier this week, Italy has also started making statements indicating that they might be considering revisions to their takeover laws. (http://news.ft.com/cms/s/8994ecc6-a412-11da-83cc-0000779e2340.html)
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Disclosing Political Contributions
Submitted by: James Letsky, ISS Senior Analyst
Every year, millions of dollars pass from corporations into the political process. While the Bipartisan Campaign Reform Act of 2002 applied some increased restrictions on these funds, including the prohibition of unlimited contributions to national political parties or committees controlled by federal office holders, it has done little to address funds that move through other channels. Corporations are free to contribute so-called "soft money" through industry and trade associations, certain state and local political committees, and nonprofit political organizations known as "527s" that generally report to the Internal Revenue Service rather than the Federal Election Commission (FEC).
Disclosure of some types of contributions is required by the FEC, as well as by certain state and local regulations; however, some shareholders are concerned that loopholes and limitations in this disclosure result in a lack of accountability at the corporate level. Shareholders advocating increased disclosure of corporate political contributions file dozens of shareholder resolutions each year calling for transparency into this information, raising the question: do existing regulations and disclosure requirements provide shareholders with adequate insight into their companies' involvement in the political process?
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February 22, 2006 |
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Time Warner and Icahn Settlement
Submitted by: Chris Young, M&A Research Director
On Friday, February 17th, Time Warner and Carl Icahn settled their putative proxy fight a little over a week after Lazard issued a report commissioned by Icahn in support of his agenda. Speaking as a former investment banker, I can attest to the blood, sweat and tears that went into the report, perhaps the most in-depth analytical presentation I've ever seen an investment bank put together for public consumption. This clearly was not a frivolous exercise or some kind of trial balloon, so it's a little surprising that the fight was dropped a week and a half after the report's highly public unveiling. Icahn faced a February 19th deadline to submit nominees to the board, and it's clear that after sifting through the tea leaves he decided that a settlement would be more productive than a proxy contest. Alan Murray in today's Wall Street Journal talks about some of the lessons that shareholders should draw from the "Icahn affair."
The Economy
BUSINESS: Hedge-Fund Lessons From the Icahn Affair
By Alan Murray
The Wall Street Journal
22 February 2006
(Copyright (c) 2006, Dow Jones & Company, Inc.)
THIS IS SUPPOSED to be the Year of Hedge Fund Activism. Hedge funds, we've been told, are the new barbarians, rattling the gates of entrenched corporate management. Lawyer Marty Lipton, centurion of the palace guard, sent his warning out last December, urging big-company clients to steel themselves against hedge-fund attacks. Merrill Lynch began marketing its skill at building ramparts.
And then Carl Icahn -- who declared in the pages of this newspaper just three weeks ago that he had no intention of giving up his campaign against Time Warner -- gave up. Chief executives everywhere breathed a sigh of relief. Maybe the hedge-fund threat was just a passing fad after all.
Don't count on it.
Here are some of the wrong lessons being drawn from the Icahn affair, and the right ones:
Time Warner Chief Executive Richard Parsons won this battle because he had loyal shareholders. In a meeting with the The Wall Street Journal last week, Mr. Parsons boasted that his company had "a pretty sophisticated shareholder base." True enough. But Mr. Icahn's goal at the outset wasn't to win over the old shareholders; it was to persuade a raft of hedge funds to become new shareholders. He wanted to be the Pied Piper of hedge-fund investors. And that didn't happen. When he played his music -- with accompaniment from Bruce Wasserstein of Lazard -- the hedge funds didn't follow.
Big companies are immune to hedge-fund attacks. The jury is out on this one. Mr. Icahn told me yesterday that "when you have an $80 billion company, hedge funds alone can't do it." But hedge funds control more than a trillion dollars, and they are desperately searching for good ideas to make big returns. Hedge-fund managers tell me that if the idea is right, the money will be there. Even if hedge funds can't win control of an $80 billion company, they can certainly create the momentum for change.
Mr. Parsons is doing a fine job running Time Warner. Don't get carried away. Many of the criticisms that Mr. Icahn and Mr. Wasserstein leveled at Time Warner had the sting of truth. The company has done a lousy job managing AOL, which missed out on the big surge in the search business and stuck with its "walled garden" approach to the Internet for far too long -- though much of that precedes Mr. Parsons.
Moreover, there is something unnerving about Mr. Parsons's talk of his company as a giant hedge. The essence of leadership is vision, and the essence of strategy is choice. Mr. Parsons seems a little too willing to acknowledge his lack of a clear vision of the future, which makes it more difficult for him to make choices about where to devote his resources.
The problem is, no one else seems to have a very clear vision of the future of media, either. Mr. Icahn's idea of spinning off Time Warner's cable-distribution assets lost its luster last fall, as the stock price of cable rival Comcast took a tumble. Enlisting former Viacom chief Frank Biondi as his choice to replace Mr. Parsons didn't help much. Mr. Biondi was seen more as a retread of the past than a leader for the future.
So what are the real lessons in all of this? Here are some:
Companies can't sit on cash without risking a hedge-fund attack. Private-equity firms make much of their money these days by adding debt to the company balance sheet, enabling investors to get "leveraged" returns. Why shouldn't public-company investors be entitled to the same? Mr. Icahn didn't succeed in breaking up Time Warner, but he did succeed in forcing the company to buy back more stock, paying out cash and increasing its debt.
Mr. Icahn isn't going away. The investor turned 70 on the day he cut the Time Warner deal, but shows no sign of retiring. Next stop: South Korea, where he has targeted the country's largest tobacco manufacturer, KT&G, and is demanding three board seats. "I intend to keep doing this," he says.
The managers of the largest activist hedge funds are, by and large, pretty smart people. And they are doing a service for public-company investors. The backlash against these hot money movers -- fueled by nationalism in parts of Europe and Asia -- is overwrought. The Time Warner episode shows that the funds won't attack en masse unless they have very good reason. And if they have good reason, we should all cheer them on.
"Shareholder democracy" has never proven itself to be very potent at holding corporate leaders accountable. Maybe hedge-fund democracy has more promise.
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Email me at business@wsj.com and read reader comments Saturday at WSJ.com/TalkingBusiness.
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SEC Comment Letter on e-Proxy
Submitted by: John M. Connolly, President and CEO
ISS' SEC Comment Letter Regarding the Internet Availability of Proxy Materials
Dear Mr. Katz:
Institutional Shareholder Services Inc. ("ISS") is pleased to submit these comments on the Commission's proposed amendments to the proxy rules under the Securities Exchange Act of 1934. We commend the Commission both for its consideration of widely adopted technical advances and for the range of questions asked in an attempt to improve the proxy materials distribution process for investors and issuers. Institutional Shareholder Services generally endorses the proposed amendments with the expectation that these changes will facilitate wider access to, and review of, proxy materials helping investors to make more informed investment decisions, increase investor participation in the proxy voting process, save money for issuers (ultimately benefiting their stockholders) and allow for additional "low cost" communication between investors and issuers as well as between dissident shareholders. Finally, these proposed changes will accelerate the ongoing movement of proxy voting in the United States from a paper based process to a electronic, data based process which should increase timeliness, accuracy and consistency.
February 13, 2006
Via Electronic Mail to Rule-Comments@sec.gov
Jonathan G. Katz, Secretary
U.S. Securities and Exchange Commission
100 F. Street, N.E.
Washington, D.C. 20549-9303
Re: Commission Proposal Regarding Internet Availability of Proxy Materials under the proxy rules of the Securities Exchange Act of 1934, File No. S7-10-05
Dear Mr. Katz:
Institutional Shareholder Services Inc. ("ISS") is pleased to submit these comments on the Commission's proposed amendments to the proxy rules under the Securities Exchange Act of 1934. We commend the Commission both for its consideration of widely adopted technical advances and for the range of questions asked in an attempt to improve the proxy materials distribution process for investors and issuers. Institutional Shareholder Services generally endorses the proposed amendments with the expectation that these changes will facilitate wider access to, and review of, proxy materials helping investors to make more informed investment decisions, increase investor participation in the proxy voting process, save money for issuers (ultimately benefiting their stockholders) and allow for additional "low cost" communication between investors and issuers as well as between dissident shareholders. Finally, these proposed changes will accelerate the ongoing movement of proxy voting in the United States from a paper based process to a electronic, data based process which should increase timeliness, accuracy and consistency.
With twenty years of experience and more than 1,600 institutional clients around the globe, ISS is the world's leading provider of proxy voting and corporate governance services. Our core business assists institutional investors with all aspects of proxy voting, from the analysis of proxy proposals and the formulation of voting decisions through the mechanics of casting proxy votes, vote disclosure and recordkeeping. 1
Our voting services allow institutional investors to outsource the mechanics of proxy voting or to cast their own votes electronically through our web-based proxy voting platform.
The amendments proposed by the Securities and Exchange Commission will not directly impact the services ISS provides to our clients, but the changes may impact the manner in which we service institutional investors. The changes proposed by the SEC will certainly impact the majority of "retail" investors. To ensure that the changes to the existing process are beneficial to all investors, ISS respectfully requests the SEC to consider the following suggestions when considering the final rule changes:
- The changes proposed by the SEC allow for differing means of proxy material distribution depending on issuer preference or agenda type (business combination transactions). Variations in the distribution process will erode suggested cost savings to issuers and potentially confuse investors. To eliminate this possibility, ISS encourages the SEC to require proxy cards/vote forms to be distributed to investors at the same time as the "Notice of available materials". In addition, ISS suggests that "business combination transactions" should be allowed to follow the "Notice and Access" process. Consistency in the proxy distribution process is very important to issuers, intermediaries and investors.
- The ability to view proxy materials online or to acquire hard copy originals is a requirement if investors are to make informed voting decisions. Requiring issuers and intermediaries to make proxy materials available online is consistent with today's common practice and is a logical practice to continue. The process to acquire hardcopy materials under the proposed rules would be a new activity and one that requires some consideration. As mentioned above, consistency of process is important, with timeliness of delivery a key attribute as well. The suggested process of having intermediaries request materials from issuers (or maintain an inventory of materials on hand) to forward to investors will only add time and cost to the process. Instead, ISS would suggest that both issuers and intermediaries make materials available online, but issuers (or their designated agent) bear the responsibility (and cost) to provide hard copy proxy materials to a shareholder upon demand from the shareholder.
- The proposed rules for "soliciting parties" offer significant flexibility and will greatly reduce the costs to conduct a "proxy contest". The current costs for investors to challenge company management are substantial and that bar would be lowered by the proposed changes. In our opinion, it is preferable for "soliciting parties" to engage in some level of constructive dialogue with company management before launching a proxy contest. Once a contest is launched, it is important for a level playing field with known rules to exist, otherwise investors may be confused by the variation in the proxy voting process from a "normal" shareholder meeting. In this regards, ISS asks the SEC to consider holding "soliciting parties" to the same distribution, notification and access standards as issuer management.
As stated above, ISS supports the proposed amendments allowing an alternative method for distributing proxy materials. We believe these changes have the potential to improve the process for investors (both retail and institutional alike) and issuers. ISS believes that it would be enormously helpful to the industry if the Commission were to consider and clarify the points mentioned above when issuing any final amendments to the proxy distribution rules. We very much appreciate the opportunity to express our views on this issue. If you have any questions regarding our comments, please contact Diana Bourke, Executive Vice President, Institutional Shareholder Services, at 301-556-0549.
Respectfully,
John M. Connolly
President and Chief Executive Officer
Cc: The Honorable Christopher Cox, The Honorable Paul S. Atkins, The Honorable Roel C. Campos, The Honorable Cynthia A. Glassman, The Honorable Annette L. Nazareth
1.We also offer a comprehensive database of securities class actions and services to assist institutional investors in participating in applicable class action settlements. Completely separate from our institutional business, ISS also serves the corporate market with a variety of governance web-based tools and other services that assist issuers with identifying and complying with corporate governance best practices. A complete listing of our products and services is available at www.issproxy.com.
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New Study Finds Governance-Valuation Link
Submitted by: Thaddeus C. Kopinski, Staff Writer
A recent study of 5,300 U.S. companies has found that there is a strong positive correlation between improved governance and greater market value.
The value of a company increased by 4 percent for each attribute of better governance that the firm implemented, according to a working paper, "Did New Regulations Target the Relevant Corporate Governance Attributes?" by Reena Aggarwal and Rohan Williamson, who are both professors at the McDonough School of Business at Georgetown University.
"The bottom line is we came to the conclusion that there is a very strong positive relationship between firm value and corporate governance," Aggarwal told a Feb. 15 webcast hosted by the ISS Center for Corporate Governance.
By adopting 10 more governance attributes, firms increased their value, as measured by Tobin's Q, by an average of 40 percent, the study found. "That has statistical significance, which becomes economically significant," Aggarwal said.
The average Tobin's Q ratio for the sample was 1.13. Tobin's Q is the market value of the firm divided by its book value on a replacement cost basis. The study examined a total of 64 governance attributes, using ISS Corporate Governance Quotient data on 5,300 companies.
Even before the passage of the Sarbanes-Oxley Act of 2002, the market put a premium on companies that voluntarily adopted good corporate governance practices, the Aggarwal-Williamson study found. Since the law took effect, firms that have adopted good governance practices beyond what was mandated have received higher valuations, the researchers found.
"Firms that voluntarily go beyond the mandatory requirement in adopting good corporate governance practices enjoy higher market valuations," Aggarwal said.
Aggarwal, who is also a visiting professor of finance at the Sloan School of Management at the Massachusetts Institute of Technology this year, spoke on a panel moderated by Stephen Deane, director of the ISS center. The panel also included Gavin Grant, director of global corporate governance research at Deutsche Bank, and John Deosaran, ISS vice president for corporate ratings. The webcast can be downloaded for replay at: http://www.issproxy.com/cgq_webcast/index.jsp
Governance Is a "Leading Indicator"
"We agree with the findings that the market has found a way to differentiate between the stocks of well-governed and the poorly governed companies," Grant said about the Aggarwal-Williamson paper. "But to us, it was unclear whether investors were reacting to events and therefore losing performance, or whether they were correctly anticipating the price implication of governance events and therefore being ahead of the curve and adding potentially to their portfolio returns."
Over the past four years, Deutsche Bank has developed a model that offers investors ways to integrate corporate governance into investment decision-making by linking a quantified measure of governance risk to traditional equity valuation metrics. The bank has applied this model in research on markets in North American and Europe in published reports entitled "Beyond the Numbers," and will shortly issue a similar study of Asian markets.
Grant said Deutsche Bank analysts look for companies that introduce board-related corporate governance improvements. They also track these companies' announcements of share buybacks, sell-offs of underperforming assets, and the redeployment of capital to more profitable businesses. The market generally picks up on the capital reallocation, and puts a premium on the stock price, Grant said.
"We believe that corporate governance is actually the leading indicator to that capital reallocation by introducing better directors and improved corporate governance standards at the board level," Grant said.
Deosaran said that recently there has been considerably more research, both survey and quantitative analysis, as investors seek to understand the link between governance and performance. He pointed to a recent article by Jay W. Eisenhofer and Gregg S. Levin of the law firm of Grant & Eisenhofer, in the Sept. 23 issue of Corporate Accountability Report, published by the Bureau of National Affairs. The article, "Does Corporate Governance Matter to Investment Returns?" reviews some two dozen recent studies on this topic.
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Fairness Opinions
Submitted by: Chris Young, M&A Research Director
Conglomerates are not born rather they are created primarily via acquisitions. Many of the acquisitions used to build up conglomerates were undertaken based on the advice of investment bankers and attorneys, the same advisors that now counsel a reversal of course and the sale of "unrelated" businesses. Advisors first trumpet the supposed synergies to be derived from sharing the same roof, and then turn around and sing the praises of the "strategic focus" that comes from going it alone. Of course, the bankers and lawyers make their fees coming and going.
This change of heart phenomena is not limited to the build up and breakdown of conglomerates. On February 13, Merrill Lynch (MER) agreed to swap its mutual fund management business for a major stake in BlackRock Inc. (BLK). This move is in effect a reversal of the "one-stop shop" strategic rationale that was all the rage in the 1990s and which was used to justify a significant amount of M&A activity in the financial services industry.
Of course, hindsight is often 20:20, and no one can ever know for sure if the synergies forecasted for an acquisition will ever by realized. Yet the ease at which advisors apparently are able to "do a 180" should give shareholders pause when evaluating the importance of fairness opinions supporting acquisitions. Advisors may be able to profit twice despite being "wrong," but shareholders do not have that luxury. As such, ISS recommends that shareholders apply a healthy dose of skepticism whenever a company justifies a deal based upon the receipt of a fairness opinion or highlights the participation of a brand name advisor.
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Interesting Twist to Nortel Settlement
Submitted by: Bruce Carton, Vice President, Securities Class Action Services
As widely discussed in articles such as this one, Nortel has agreed to pay $2.4 billion to settle securities class action lawsuits concerning accounting irregularities. According to the SCAS database, the settlement will be the 5th largest ever, behind only Enron ($7.14B), WorldCom ($6.15B), Cendant ($3.18B) and AOL Time Warner ($2.65B).
According to Nortel's press release on the settlement and published reports, the settlement will also include an interesting (especially if you work at ISS) corporate governance-related term. In its press release, Nortel states that:
The proposed settlement is also conditioned on Nortel and the lead plaintiffs reaching agreement on corporate governance related matters and the resolution of insurance related issues.
Nortel is committed to benchmarking its corporate governance practices to those of companies ranked in the top quartile by Institutional Shareholder Services. "The Board of Directors strongly believes that sound and responsible corporate governance is integral to Nortel's future," said Harry Pearce.
While it is not completely clear from the quote above that the benchmarking to ISS' ranking is a term of the settlement, articles such as this one in the E-Commerce Times suggest that this is the case:
In addition to the payments, the agreement will likely include some requirements that Nortel adhere to certain corporate governance standards going forward....
***
Nortel said while details were still being hammered out on the corporate governance terms of the agreement, it was comfortable being compared to the top-ranked publicly traded companies in terms of corporate governance as measured by Institutional Shareholder Services.
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February 21, 2006 |
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State Sanctions on Sudan
Submitted by: Nahla Ivy, Environmental and Social Analytics Director
Recently enacted legislation by state regulators requires investment managers to either divest from companies with ties to Sudan because of the Sudanese government's involvement with state sponsored terrorism, or to report on those companies they hold in their public pension fund portfolios.
Illinois, New Jersey, Oregon, Arizona and Louisiana already have Sudan screening mandates in place with differing guidelines affecting investment managers, who manage public pension funds. For example Arizona requires state pension funds to report all holdings in companies doing business with state sponsors of terrorism, while Illinois requires public pension funds to divest securities with ties to the Sudan in phases beginning in January 2006. Sudan divestiture and reporting legislation has also been introduced in New York, North Carolina and Vermont and is expected to be implemented in the coming months. Learn more about the various states legislation.
ARIZONA
http://www.azleg.state.az.us/legtext/47leg/1r/bills/hb2562s%2Ehtm
Fact Sheet (Senate):
http://www.azleg.state.az.us/legtext/47leg/1r/summary/s%2E2562fin%5Fcaucus%2Dfloor%2Edoc%2Ehtm
ILLINOIS
http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=094-0079
PDF: http://www.ilga.gov/legislation/publicacts/94/PDF/094-0079.pdf
LOUISIANA
PDF: http://www.legis.state.la.us/billdata/streamdocument.asp?did=308635
NEW JERSEY
http://www.njleg.state.nj.us/2004/Bills/PL05/162_.HTM
OREGON
http://landru.leg.state.or.us/05reg/measures/sb1000.dir/sb1089.en.html
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Calif. Bill Calls for Majority Vote
Submitted by: Thaddeus C. Kopinski, Staff Writer
California state Senator Richard Alarcon has introduced a bill to require companies incorporated in the state to elect directors "by a majority of votes cast."
SB 1207, introduced Jan. 26, is supported by the California Public Employees' Retirement System (CalPERS), which said last March it would pursue changes to state laws to implement majority voting. Read the entire article after the jump...
Calif. Bill Calls for Majority Vote
By Thaddeus C. Kopinski, Staff Writer
California state Senator Richard Alarcon has introduced a bill to require companies incorporated in the state to elect directors "by a majority of votes cast."
SB 1207, introduced Jan. 26, is supported by the California Public Employees' Retirement System (CalPERS), which said last March it would pursue changes to state laws to implement majority voting.
"We want to allow the owners of the corporation, the investors, to be able to elect their boards by a majority vote," Alarcon told Governance Weekly. Alarcon, a Democrat, said the bill was meant "to send a message" to corporations "to be more reflective of our democratic society."
The measure would affect 23 California-incorporated companies in the Russell 1000 and eight firms in the S&P 500, including Sempra Energy, PG&E, Broadcom, Edison International, Cisco Systems, and Apple Computer, according to the senator.
The bill would require a candidate who fails to get the support of a majority of votes cast to resign within 90 days. Thereafter, the board "may declare vacant the office of that director."
"By requiring a majority vote, and by this language, we are effectively eliminating the holdover rule," Rodger Dillon, a legislative aide to Alarcon, told Governance Weekly.
"After recently reviewing our language, we concluded that the board might not declare the position vacant, thus effectively refusing to accept the resignation," Dillon said. "So we are going to fix that, and further specify that the board may not reappoint the same person or persons."
"If the whole board was rejected--an extremely unlikely, but possible, outcome--the board would be required to appoint the full complement of new directors, who would hold office until the election period," Dillon said. "If they failed to act in an appropriate manner, they would be subject to lawsuits and penalties under current law for breaching their fiduciary responsibilities."
CalPERS' Role
"CalPERS, which is putting its weight behind the bill, has been the moving force on this issue throughout the nation, and other public pension funds have begun to weigh in on the issue," Alarcon said.
CalPERS spokesman Brad Pacheco told Governance Weekly that the country's largest public pension fund helped in drafting language underlying the legislation. CalPERS' involvement is in keeping with the pension system's decision last year to support majority voting in director elections at multiple levels. In March, the pension fund adopted a plan to advocate majority vote procedures at individual companies through bylaw and charter amendments as well as to pursue changes to state laws. CalPERS also has said it would promote the majority vote concept at the Securities and Exchange Commission and major stock exchanges.
Alarcon's bill is now in the Senate Committee on Banking, Finance, and Insurance and is expected to move forward within a month, the senator said. No committee hearings on the bill have been scheduled. The bill would need to be considered by the Judiciary Committee and then passed by the full Senate. A similar bill would need to pass the lower chamber and be signed by Governor Arnold Schwarzenegger, a Republican, to become law.
"We believe we have a good chance of getting this bill through both houses of the legislature, so it will likely come down to whether Governor Schwarzenegger will sign the bill," Dillon said. "We think the governor is smart enough to see the merits of the bill--the basic fairness of majority vote and the part this measure can play in making corporations more responsive to shareholders."
Alarcon cited the growing number of corporations that have voluntarily converted to majority voting as evidence that corporate fears of failed elections are unfounded. "I think that over time and with practice this will be a minimal problem," Alarcon said. "We believe this is do-able."
Change at Career Education
Supervalu, an S&P 500 company, and Career Education, a Russell 1000 firm, are the latest to adopt a majority standard with a director resignation policy--similar to that of Intel, Dell, and Pepco. Career Education also is proposing to change its charter to declassify the board and to allow shareholders to call special meetings with a two-thirds vote. The changes require shareholder approval at the company's forthcoming annual meeting. Last year, in a proxy fight launched by dissident shareholder Steve Bostic, management's three director nominees each received withhold votes totaling roughly 70 percent of votes cast.
In the past few days, several companies announced that they were changing their governance policies to adopt a modified plurality standard with a director resignation policy similar to the provisions adopted by Pfizer. These include Greater Bay Bancorp, which also said it would allow shareholders to vote to declassify its board at its 2006 annual meeting. Also last week, Staples announced that it would declassify its board.
Other companies recently adopting a modified plurality standard include CSX, Chubb, and Progressive, bringing the total to more than 40 companies with such a policy.
Meanwhile, investors led by the United Brotherhood of Carpenters and Joiners are continuing their efforts to encourage other U.S. companies to change from plurality voting to a majority standard. Shareholders have filed more than 140 majority vote proposals for the 2006 proxy season. During 2005, 89 majority vote resolutions were filed. Sixty-two proposals came to a vote, garnering an average of 44 percent support. In 2004, only 12 resolutions were voted on, receiving 12 percent support on average.
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Multi-listed companies learn from experience
Submitted by: Stanley Dubiel, International Research Managing Director
Royal Dutch Shell will have hoped to satisfy investors with its annual results, announced last week. Investors in Shell should also be interested in how the Anglo-Dutch company has worked to satisfy regulators of the three exchanges on which it is listed: London, Amsterdam and New York.
Global companies such as Shell are under intense pressure from shareholders in various corners of the world to establish and maintain corporate governance best practices. This is not easy when you have to satisfy different sets of listing requirements, prescribed by the exchanges on which Shell's stock trades. And the fact is that Shell does not. Shell follows the corporate governance principles set out in the UK combined code of corporate governance, but discloses significant ways that its standards differ from those followed in the US. This is in line with NYSE rules, although there is significant deviation in corporate governance requirements in several areas. But before investors sound the alarm bells, this is something for them to be aware of, rather than distressed by. Read the entire article after the jump...
FT REPORT - FT FUND MANAGEMENT
Multi-listed companies learn from experience - Global giants such as Shell are under greater pressure to satisfy both shareholders and regulators. Stanley Dubiel takes a look at their strategies.
By STANLEY DUBIEL
708 words
6 February 2006
Financial Times
Surveys FNS1
Page 6
English
(c) 2006 The Financial Times Limited. All rights reserved
Royal Dutch Shell will have hoped to satisfy investors with its annual results, announced last week. Investors in Shell should also be interested in how the Anglo-Dutch company has worked to satisfy regulators of the three exchanges on which it is listed: London, Amsterdam and New York.
Global companies such as Shell are under intense pressure from shareholders in various corners of the world to establish and maintain corporate governance best practices. This is not easy when you have to satisfy different sets of listing requirements, prescribed by the exchanges on which Shell's stock trades. And the fact is that Shell does not. Shell follows the corporate governance principles set out in the UK combined code of corporate governance, but discloses significant ways that its standards differ from those followed in the US. This is in line with NYSE rules, although there is significant deviation in corporate governance requirements in several areas. But before investors sound the alarm bells, this is something for them to be aware of, rather than distressed by.
Shell is part of a new wave of companies with multi-listings that have adopted innovative corporate governance practices to bridge regulatory differences. These approaches manage to address the challenge of cross-border regulation and the need to increase shareholder protection.
The problem of navigating corporate governance across borders is not new. Historically, companies have followed two strategies. They either adhered to the regulatory regime in their country of registry or they adopted the least rigorous regulatory requirements in one of the countries where they were listed. But times are changing and so are corporate governance strategies
While Shell has not determined whether its board would meet the independence requirements for non-executive directors of the NYSE listing standards, it does consist of a majority of members who are wholly independent of any personal business connection with Shell. NYSE standards also require a listed company to maintain a nominating/corporate governance committee and a compensation committee composed entirely of independent directors and with certain specific responsibilities. One of Shell's committees complies with these requirements, but the other - the nomination and succession committee - requires only a majority of the members to be independent. Shell also differs from NYSE requirements in its code of ethics. While no worldwide whistle-blowing procedure has been set up, as required by the NYSE, any Shell employee can report irregularities to management without fear of retribution. Through being transparent about where the company's policies differ between the combined code and the NYSE standards, Shell is able to provide shareholders with the information they need to judge governance performance, irrespective of where the shareholder is located.
Other companies with multiple listings have been equally creative. Carnival Cruise Lines, for instance, works to satisfy the board independence criteria of both the London and New York exchanges rather than fashioning a new governance code from the better of two previous codes. Granted, Carnival has not adopted all the investor protection requirements of the London and New York exchanges. Carnival's executive compensation practices are not tied to performance, and a board compensation committee decides the remuneration. Nonetheless, Carnival recognises the advantages of meeting the governance standards of two exchanges in two countries and has reflected that recognition in its own governance rules.
Several factors have contributed to this new creativity. One is increased global communication between companies and institutional investors around the world about corporate governance. It is also a recognition from companies that adopting positive corporate governance practices can attract more capital.
So rather than the pick-and-mix approach to corporate governance which it may seem, the new model is positive for shareholders. The era of companies adopting the least rigorous regime is rapidly disappearing. Instead of diluting corporate governance best practice, the corporate governance trend is moving slowly but steadily in the direction of greater investor protection and the number of best-practices case studies, Shell included, is growing.
Stanley Dubiel is managing director, international research, Institutional Shareholder Services
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China Enacts New Governance Rules
Submitted by: Dennis Eucogco
China has enacted new corporate governance rules, but market observers caution that the impact may be modest and that most Chinese companies still have a long way to go to reach international corporate governance standards.
The amendments to China's Company Law, which took effect Jan. 1, mark the first major changes to the law in several years. China's capital markets have been roiled by several corporate scandals, including the arrest of Delong Group executives. Delong's actions, dubbed by the online China Daily as the "largest financial crime" in Chinese history, involved alleged stock manipulation by management. Delong executives were charged with utilizing company investments in both public and private companies to surreptitiously increase stock prices.
The new amendments reflect the government's interest in preventing future corporate scandals. Significant among these amendments include requirements to seek shareholder approval for the provision of loan guarantees or investment in other enterprises. Read the complete article from ISS' Publications Division after the jump...
In many of the recent corporate scandals, including Delong's, company financials allegedly were manipulated through a complicated web of relationships between members of large company groups and their various subsidiaries and associates. Requiring shareholder approval of guarantees and investments and requiring independent shareholder approval in cases where directors have interests in the transaction, as the amendments do, would provide another level of much-needed oversight.
Another key change will hold directors, executives, and shareholders financially liable for actions that damage the company. Although some observers note that the new rules are ambiguous and require further clarification, this new provision makes clear that China's regulators are responding to the recent corporate scandals, which affected tens of thousands of investors and involved billions of yuan.
The Company Law amendments also address the role and responsibilities of directors. Specifically, directors are now prohibited from voting on issues in which they may have related interests. In addition, companies are barred from making loans to directors, supervisors, and senior officers.
Chinese companies have two-tiered boards with directors and supervisors. As is the case in other markets with similar board structures, directors focus on company management, while supervisors serve in a monitoring capacity as representatives of shareholders and stakeholders.
The role of supervisors is also enhanced, with new rules allowing them to submit proposals to shareholder meetings and to bring lawsuits against directors and corporate officers.
Notably, investors holding at least 3 percent of outstanding equity may now submit proposals to general meetings. The law had not contained provisions on shareholder proposals. The impact of this particular change, however, may be nominal because China's companies continue to be dominated by controlling shareholders.
The amendments also allow for the use of cumulative voting in director elections, provided the company allows for such voting procedures either in its articles of association or through approval of a proposal calling for such a change at a general meeting of shareholders.
Because many larger Chinese companies are listed in Hong Kong, the United States, or other developed capital markets, the Company Law changes will have less impact on Western institutional investors than on shareholders investing directly in the Chinese market.
Implementation of the recent changes still requires significant clarification, which is generally done through regulations issued by the relevant Chinese government agencies or bureaus. While the Shanghai and Shenzhen stock markets, as well as the China Securities and Regulatory Commission, have issued regulations to implement some of the new amendments, much remains to be done, market observers say.
The recent changes, however, now set higher governance standards for all Chinese companies. And, notably, the new rules reflect the increased awareness of China's government for much-needed improvements in corporate transparency and oversight. --Dennis Eucogco
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