More Support for Majority Voting
Submitted by: Tad Kopinski, Staff Writer
This season's first binding proposal seeking majority voting received more than 49 percent of votes cast at Honeywell this week, according to the proponent, the American Federation of State, County & Municipal Employees (AFSCME).
That showing was significantly higher than the 20 percent vote received by a binding AFSCME proposal at Paychex in October. The Honeywell vote is also noteworthy, because the company had adopted a director resignation policy like those adopted by Pfizer and 85 other U.S. firms. Before the April 24 vote, the best showing for a majority vote resolution at a company with a resignation policy was the 45 percent support at Hewlett-Packard in March for a non-binding proposal by the United Brotherhood of Carpenters and Joiners.
Another AFSCME binding proposal was on the ballot on April 25 at Wells Fargo. The company reported that the proposal did not pass, but the exact vote was not available by press time. Richard Ferlauto, the union's director of pension investment policy, said he expected that the proposal would get a similar level of support. Wells Fargo has adopted a director resignation policy.
"We are really pleased with the result because it shows that binding proposals [on majority elections] can pass," Ferlauto told Governance Weekly. John Keenan, a strategic analyst for the union, noted, "Given that both companies have adopted a director resignation policy to try to deflect support for this resolution, we think this is a strong result."
This week, non-binding majority vote proposals by the Carpenters and other unions fared less well at firms that have adopted a director resignation policy while retaining plurality voting in board elections. For example, the Carpenters' proposal got 33 percent of votes cast at American Express on April 24, and 40 percent support at IBM the next day, according to the companies.
Those companies adopted their policies in response to the growing investor support for majority voting resolutions, which averaged 44 percent support at more than 60 firms last year. The union proponents argue that these companies should go further and change their bylaws to provide a "true" majority standard--with "for" and "against" votes--like Intel and more than 20 firms have done.
Meanwhile, the Carpenters' proposals this week continued to win majority support at firms that have not adopted director resignation policies or other election reforms. The union's proposal won 61 percent at Kohl's, 59 percent at Textron, 56 percent at Bank of America, and passed at Wyeth, according to the companies. A similar proposal by the Sheet Metal Workers National Pension Fund at Weyerhaeuser received 55 percent support on April 20.
At Marriott International's April 28 annual meeting, management is supporting a Sheet Metal Workers' proposal that seeks a majority vote for the election of directors. A similar shareholder proposal last year received 39 percent of votes cast.
Progress Energy Sets New "Gold Standard"
Meanwhile, Progress Energy filed in its proxy materials what is believed to be the first management proposal to change a company's articles of incorporation to require a majority vote for the election of directors. Management is also proposing a resolution to hold annual board elections. The North Carolina utility's annual meeting is May 10.
More than 20 companies have adopted a majority vote standard this year, primarily by revising their bylaws. Progress Energy appears to be the first to seek to make the change in its articles of incorporation. In North Carolina, as in most jurisdictions, articles of incorporation can only be amended if the change is proposed by the board and endorsed by shareholders, whereas bylaws can generally be revised by the board alone.
The Progress Energy proposal requires a majority of votes cast to pass, and abstentions and broker non-votes will not count as votes cast or against, the proxy statement notes. If approved, the new standard would apply for the company's 2007 annual meeting. To overcome the North Carolina "holdover rule" which requires a director to serve until his or her successor is elected, the company adopted a director resignation policy in its corporate governance guidelines, which would become effective upon filing of the amended articles of incorporation.
Action on the resignation is left up to the governance committee, but if its members fail to gain majority support, the independent directors who did get elected can appoint a committee of independent directors to make a recommendation on the tendered resignation.
"This has become the new gold standard on company policy on director elections," Rajeev Kumar, ISS director of U.S. research, told Governance Weekly.
Delaware Lawyers Issue Recommendation
In another development in the debate over board elections, the executive council of the Corporate Law Section of the Delaware State Bar Association has issued a recommendation on the issue. On April 20, the lawyers' group endorsed draft legislation to amend the Delaware General Corporation Law to enable shareholders to introduce an irrevocable change of bylaws on director elections, as well as provide for an irrevocable resignation of directors who fail to get a requisite number of votes.
The proposal, which must be endorsed by the full bar association and then passed by state lawmakers, is noteworthy because a majority of U.S. public companies are incorporated in Delaware. The proposal would amend paragraph 216 of Section 5 of the law to provide that a company bylaw adopted by a vote of stockholders that prescribes a required vote for director elections cannot be altered by the board without shareholder consent.
Another proposed revision seeks to get around the restrictions of Delaware's "holdover" rule by adding a new provision that a director resignation may be made effective upon the occurrence of a future event or events, coupled with authority granted in the same section to make certain resignations irrevocable.
"The changes seek to allow shareholders to effectuate a majority vote standard, if that is their choice," David C. McBride, a partner in the law firm of Young Conway Stargatt & Taylor, and chairman of the corporate law committee's executive council, told Governance Weekly.
The proposed bill will be submitted to the Delaware legislature in the next week or two, McBride said. The proposal does not modify the default plurality standard.
Michael Barry, a partner in the law firm of Grant & Eisenhofer, which represents the Council of Institutional Investors in this matter, told Governance Weekly that the Delaware proposal is more flexible than the recommendations on majority elections made by the American Bar Association.
"I think this is a significant change and these amendments appear to have been proposed directly in response to the demand for majority voting and . . . more responsiveness [by directors] by shareholders nationally," Barry told Governance Weekly. 'But I am disappointed that it's not a larger step."
A larger step would entail changing Delaware law to establish majority voting as the default standard, while providing an opt-out mechanism for corporations that wish to retain a plurality standard, Barry noted.
"What this proposed amendment does is to make clear--that on bylaws that are specifically directed to the voting requirements for directors--the board can not amend them," he said. "It makes it a question of law rather than one of fiduciary duty."
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April 27, 2006 |
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Earth Day-Progress and Perils
Submitted by: Doug Cogan, Deputy Director of Social Issues Services
Thirty six years after the first Earth Day, there is much environmental progress to celebrate. Since 1970, lead emissions are down 98 percent, particulate emissions are down nearly 80 percent and sulfur dioxide emissions have been cut in half. All of this has been accomplished despite a doubling of the number of cars on the road and a 75 percent increase in coal-fired power generation. Progress since Earth Day is living proof of what can be achieved when governments, companies, investors and consumers all pull together.
Yet on global warming, there is no such harmony of thought or will. Some are still not convinced that the problem is real or serious, or that if it is, the remedies are too costly to implement. Meanwhile, carbon dioxide emissions have climbed relentlessly since 1970 -- up almost 20 percent -- and global temperatures have risen by 1 degree Fahrenheit.
And here's the most troubling part. In the decades leading up to Earth Day, fossil fuel emissions were completely unfiltered -- no scrubbers on power plants, no catalytic converters on cars. The result was visible air pollutants that shrouded the atmosphere in haze and produced reflective clouds that allow less sunlight to reach the Earth. This "cooling effect" has been measured at 1.5 watts per square meter, offsetting more than half of the warming effect of greenhouse gases, now equal to 2.6 watts per square meter.
As we rid the atmosphere of these visible pollutants in our post-Earth Day world, the warming effect of invisible greenhouse gas emissions is growing more apparent. This may be one reason why all 10 warmest years on record have occurred since 1990 (in a temperature record dating back to 1861). And why the rate of warming is accelerating, with global temperatures projected to rise possibly five or even 10 degrees higher by the end of the 21st century.
So despite all of the accomplishments since Earth Day, the problem of global warming isn't going away; in fact, steps being taken to clean our air may be making it worse. Ways must be found to get at the root of this problem -- and soon -- in order to slow and eventually reverse the growth of carbon dioxide and other greenhouse gases. This will require energy and technology innovations that dwarf the remarkable environmental achievements of the last third of a century. And once again it will require governments, companies, investors and consumers all pulling together.
If there is a silver lining in this, it is that tremendous investment opportunities await those who anticipate a world less reliant on carbon-emitting fossil fuels. With new concerns expressed about "addiction to oil" and $3 per gallon gasoline, the marshalling of forces in this country to address the larger problem of global warming finally may have begun.
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April 26, 2006 |
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Introducing the 2006 ISS Global Investor Study...
Submitted by: Stephen Deane, Vice President of ISS' Corporate Governance Center
The culimination of a year-long effort to contribute to the global understanding of how institutional investors view and practice corporate governance. The study reflects the collective voice of institutional investors worldwide and is unprecedented in scale and scope, with over 300 institutions across 18 countries participating. To download the study, please visit here.
Findings from the ISS Global Investor Study wrap around five key themes, with an additional special report on investor views on corporate governance in China. The study data and commentary not only demonstrate investors' diversity but also the overriding universality of their concerns and objectives regarding corporate governance.
In the coming days, we will post the findings from the study on the blog. The first chapter of the study focuses on how corporate governance has shifted from a compliance obligation to a business imperative. Compliance provided the catalyst for the increased importance of corporate governance in recent years, with 94 percent of investors globally saying that corporate governance is important to their firms. Yet investors are now seeing corporate governance in a new light, recognizing it not only as an externally imposed obligation, but as an ownership responsibility, or "the right thing to do" in their words.
Increasingly, investors are also transforming corporate governance issues and activities into a competitive and portfolio advantage - some are using their corporate governance focus as a competitive advantage to differentiate their firms or funds, while others call corporate governance a competitive necessity "just to get in the game." Investors also are leveraging corporate governance to build portfolio value by enhancing long-term investment returns, mitigating risks, and providing a better picture of portfolio companies. And far from subsiding, 63 percent of investors globally believe corporate governance will become even more important over the next three years. Stay tuned for more...
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April 25, 2006 |
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More on Insider Trading Bounty Hunters
Submitted by: Bruce Carton, Vice President of Securities Class Action Services
William P. Barrett of Forbes has this article updating the SEC's seldom-used insider trading "bounty" program. The bounty program began in 1988, when Congress optimistically passed Section 21A(e) of the '34 Act, which authorizes the SEC, in its discretion, to award a bounty to a person who provides information leading to recovery of a civil penalty from an insider trader, a person who "tipped" information to an insider trader, or a person who directly or indirectly controls an insider trader. The bounty may be up to 10% of the civil penalty actually recovered in the SEC's action.
As discussed in this SLW post from December 2003, however, only three bounties had ever been awarded at that time, and only one known recipient existed: one "John L. Skipper," who received a check in the amount of $29,000 according to this SEC Litigation Release.
The Forbes article notes that an an additional $17,000 bounty was paid in 2005, and that the grand total for the four payments to date under the bounty program is now at a not-so-whopping $67,570.
According to SEC spokesman John J. Nester, the four payments since 1988 are as follows:
1989: $3,500
2002: $18,000
2002: $29,000 (to Mr. Skipper)
2005: $17,000
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April 24, 2006 |
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Japan's Pension Fund Association Targets Poison Pills
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services
The Pension Fund Association (PFA), which represents Japan's corporate pension funds, plans to vote against directors who adopt "poison pill" plans and other takeover defenses without seeking shareholder approval.
The influential PFA manages 12 trillion yen in assets (approximately $104 billion), 4 trillion yen of which are invested in major domestic, exchange-listed corporations. While the association's investments represent only a small fraction of Japanese corporate pensions, it acts as a manager of last resort for insolvent funds.
Beginning with annual meetings in May, the PFA said it will vote against incumbent directors at companies that adopt poison pills without seeking shareholder approval of such provisions. The PFA also will oppose takeover defenses that can be implemented at the sole discretion of the board of directors, according to the Nihon Keizai Shimbun.
The PFA is responding to the increasing number of Japanese companies that have implemented takeover defenses or have announced plans to do so this year. (For more on this trend, see the March 24, 2006, issue of Governance Weekly.)
The PFA is focusing on companies with the "advance notice" (or "advance warning") poison pill, such as the defense announced by Matsushita Electric in March. These defenses may or may not appear on corporate ballots, and contain limited detail on how options or other securities would be used to dilute the value of a raider's equity position, or precisely what would trigger the issuance. Following court rulings last year that invalidated more detailed poison pill plans at Nireco and other firms, the "advance notice" model appears to be gaining currency among a small but growing number of Japanese firms.
In the past, the PFA has supported "chewable" plans--those put forth for shareholder approval, that have a sunset provision of at most three years, and other features designed not to deter well-financed bids that an "independent committee" deems to be in the interest of shareholders. But the new advance notice pills appear to leave considerable discretion to the board of directors to determine whether and how to deploy the pill.
So far, there have been seven advance notice pills and one "trust type" pill (where warrants are issued to a trustee) among the 265 firms that held their meetings during the first three months of the year, according to ISS data. Of those eight firms, five put their defenses in place without a shareholder vote. Approximately 80 percent of Japanese firms will not hold their annual meeting until June.
The PFA is calling on companies to provide a full description of their plans and to put them to a shareholder vote at their annual meetings. The association has set four conditions for supporting any poison pill, but those standards still leave the PFA with significant discretion that may invite corporate lobbying:
--Management must provide "adequate explanation" of how the defense would be "useful" in boosting long-term shareholder value.
--The firm must seek advance shareholder approval of the pill plan's details.
--The pill plan must clearly spell out what would actually trigger the action to dilute a raider's position, as well as conditions that would preclude such action, "such as oversight by a committee of non-executive directors."
--Any plan must have a two- to three-year sunset provision.
In addition, the PFA said it will "in principle oppose" these other defensive proposals by management:
--Issuance of "golden shares" (a share class with veto power over major company policies), shares with multiple voting rights, or any "dead hand" takeover defenses.
--Increases in authorized shares outstanding, or changes to the bylaws giving the board discretion to move the record date for the right to vote at shareholder meetings. However, the PFA said it would consider voting for these resolutions if management provides an "adequate explanation" that the changes would not be used as a takeover defense.
The PFA is also opposing article changes that would make it more difficult for shareholders to oust directors. Japan's Company Law was recently amended to allow shareholders to oust a director by a simple majority. However, companies may alter their bylaws to restore the two-thirds requirement that applied before April. There have been four such proposals this year--at Senshu Electric, SBS Co., Internet service provider GMO Internet and network equipment manufacturer Allied Telesis Holdings--as well as 11 such bylaw changes in late 2005
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April 21, 2006 |
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Majority Voting Passes at Sprint
Submitted by: Tad Kopinski, Staff Writer
In another sign of growing investor support for majority voting in director elections, Sprint Nextel shareholders this week endorsed an AFL-CIO proposal with 66.4 percent of votes cast.
The April 18 vote follows a 61.7 percent showing at Novell on April 6 for a United Brotherhood of Carpenters and Joiners proposal. These early votes suggest that majority voting will receive significant investor support this season at companies that have not adopted board election reforms, such as the director resignation policy adopted by Pfizer and more than 80 other U.S. companies since last June.
However, majority vote proposals continue to receive less support at corporations that have adopted resignation policies while retaining plurality voting. This week, similar proposals received 37.5 percent at Wachovia and failed to pass at Burlington Northern Santa Fe. Electronic Data Systems reported that a majority elections resolution got 32 percent support, but that tally counted abstentions as votes against. In February, all three companies adopted governance principles that call on director nominees who get more "withhold" votes than "for" votes to tender their resignations to the board, which then can decide whether to accept it.
These votes are consistent with earlier results, where majority vote proposals failed to pass at Morgan Stanley, Hewlett-Packard, Ciena, and Analog Devices, all of which had adopted resignation policies. Corporate lawyer Martin Lipton, in a memo to clients, said these early votes were a vindication of the Pfizer approach. Nevertheless, proponents said they were encouraged by the 45 percent showing at H-P and the 40 percent vote at Morgan Stanley, noting that those results showed that a significant number of investors believe that companies should go beyond the Pfizer model and adopt a "pure" majority election bylaw, like almost 20 other firms, including Intel and Safeway, have done.
Vote results from Kaman (April 18) and Weyerhaeuser (April 20) were not available by press-time. Neither company has adopted a director resignation policy.
More Policy Changes
Meanwhile, other companies are continuing to revise their board election policies. Among the latest to adopt a director resignation policy is CMS Energy, according to its April 14 proxy statement. On April 10, Liberty Property Trust announced that it had adopted a full majority standard and a director resignation policy. And Host Marriott has decided to support a majority vote proposal by the Carpenters pension fund, according to Ed Durkin, the union's corporate affairs director.
On April 17, Paychex announced that it had changed its bylaws to adopt a "pure" majority standard with a director resignation policy. The move reflects a change of heart for the company, which opposed a binding proposal by the American Federation of State, County and Municipal Employees (AFSCME) at the company's last annual meeting in October. That resolution got 20 percent of votes cast, less than half the 44 percent support received on average by more than 60 non-binding majority vote proposals in 2005.
"The proposal presented last fall, management believes, would have had undesired consequences for shareholders," Jonathan J. Judge, the company's president and CEO, told Governance Weekly. "We said at the time that majority voting was a worthy idea, and since then, we found a way to implement it in a manner that is in the best interest of our shareholders."
Upcoming Meetings
Next week, majority vote proposals will appear on the ballot at 24 companies. Investors at Honeywell (April 24) and Wells Fargo (April 25) will see this season's first two binding resolutions on this issue, both filed by AFSCME. At Honeywell, there also are shareholder proposals seeking to recoup executives' performance bonuses after a restatement, and requesting shareholder approval of golden parachutes and director compensation plans. At Wells Fargo, investors also are seeking to separate the functions of chair and CEO.
On April 26, General Electric (GE) shareholders will have a chance to vote on a majority elections proposal by the Carpenters pension fund. GE, which opposes the resolution, has adopted one of the strongest director resignation policies among the Pfizer-model companies. The policy notes that "absent a compelling reason for the director to remain on the board, the board will accept the resignation."
In an April 13 regulatory filing, the company elaborated on this provision: "For the purpose of this policy, a compelling reason could include, without limitation, a situation in which a director nominee was the target of a 'vote no' campaign on an illegitimate basis, such as racial discrimination, or on the basis of misinformation--or the resignation would cause the company to be in violation of its constituent documents or regulatory requirements."
GE also said it would seek to embed its director resignation policy into its bylaws at its next board meeting. This action would go beyond most of the other Pfizer-model companies, which have adopted director resignation policies through corporate governance policies or guidelines. Majority voting proponents have argued that such policies are not sufficient because they can be rescinded easily by board members.
While ISS has supported all non-binding majority elections proposals that have come to a vote since the start of the 2005 season, its recommendation research staff opted not to support the Carpenters' proposal at GE. The ISS analysis concluded that the company had met the three criteria set forth in the ISS U.S. voting policy for evaluating corporate alternatives to majority voting. For more details on that policy, go to the ISS Policy Gateway here.
Under the policy, ISS considers what measures the company has taken on this issue; the company's arguments as to why its measures would provide a meaningful alternative; and the firm's governance features and history of accountability. The analysis also noted that under the law of New York, where GE is incorporated, changing from a plurality to a majority standard would require amending the company's certificate of incorporation, which must be initiated by the board and endorsed by shareholders.
"By adopting a robust director resignation policy in its bylaws, the company has effected change immediately and has created an acceptable alternative at this time," the ISS analysis noted.
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April 20, 2006 |
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Dual-Class Equity Structures
Submitted by: Rob Kellogg, Managing Director of Global Research
Over the past couple days, there has been a lot of attention paid by the media to dual-class equity structures and why they are so problematic for shareholders. At the New York Times Company's annual meeting on Tuesday, Morgan Stanley Investment Management teed up a protest vote against the company's Class A directors on the grounds that it was consistently failing to deliver value to its owners. Despite owning nearly six percent of the company's outstanding shares - a sizable chunk by most measures - Morgan Stanley's protest vote likely won't result in change at the company because the Sulzberger family controls nine of the thirteen seats on the board.
Preferred shares are nothing new in the media industry. Dating back to the early 1900's, preferred voting rights were originally established by many of the founding families at the large publishing houses to protect the journalistic integrity and independence of their newspapers. Today, they've morphed into the Superman of all take-over defenses, completely shielding underperforming and overcompensated executives and directors from any dissent or potential proxy contests. This presents a big problem for investors and unlike the comic books, there's no Kryptonite to combat it.
It should come as no surprise that ISS is against the establishment of dual-class equity structures in all cases as it is the single most disenfranchising thing a company can do to investors. For example, the presence of a dual-class structure by itself could drag down a company's CGQ score by tens of percentage points, even if a company has a clean bill of health on all other of its governance provisions (there are almost 250 companies in CGQ's coverage universe that fall in this camp).
We almost always support shareholder proposals seeking to eliminate dual-class structures. The actual elimination, of course, never happens because the people who benefit most from dual class structures control the voting power at the company. However, because these structures have a long legacy, we generally do not proactively withhold votes from directors at companies with dual-class structures in place unless there are other significant governance issues. Nevertheless, Morgan Stanley should be commended for taking a strong stand on the issue by sending a symbolic shot across the bow at this company. Unfortunately for investors, there are plenty of other targets out there.
Other major media companies with dual-class capital structures with unequal voting rights include Comcast (Roberts family), Media General (Bryan family), News Corporation (Murdoch family), Martha Stewart Living Omnimedia (Martha Stewart), The Washington Post Co. (Graham family), and Dow Jones & Co. (Bancroft family). And let's not forget Google - today's darling of the market - who is one of the newest members to this not-so-exclusive club.
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April 18, 2006 |
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EC Seeks to Set Future Governance Reform Priorities
Submitted by: Roland Escher, International Research Analyst
The European Commission (EC) plans to hold a public hearing in Brussels on May 3 to gather more input on its future corporate governance priorities.
The EC's Action Plan on Modernizing Company Law and Enhancing Corporate Governance, which was initially adopted in 2003, is set to be updated with a new agenda. The public hearing will have four separate panels: on shareholder rights and obligations, on the modernization and simplification of European company law, on the responsibility of directors and internal controls, and on corporate mobility and restructuring. To participate, one must register by April 20. One may register through by visiting here.
The commission requested public comment on its corporate law priorities last December. About half of the questions in the commission's 14-point questionnaire focused on corporate governance issues. The objective was to clarify and evaluate the overall aim and context for future priorities and assess the continued relevance of the medium- and long-term measures of the action plan.
The commentary submitted by ISS focused on the many obstacles shareholders face, including share-blocking, unequal voting rights, and a lack of say regarding anti-takeover devices and executive compensation. ISS emphasized the need to uphold the principle of one-share, one-vote; shareholder rights; investor disclosure of voting policies; stricter independence standards for directors; and protection of minority shareholder rights, including squeeze-out and sell-out provisions.
Since its adoption, most short-term measures contained in the action plan have been, or will shortly be, implemented. These include, among others, two recommendations on directors, the revision of the accounting directives, the adoption of the directive on cross-border mergers, and the proposal for a directive on shareholder rights.
The EC recommendation on directors' pay calls on listed companies to disclose their policy on directors' remuneration and tell shareholders how much individual directors are earning and in what form, and ensure shareholders are given adequate control over these matters and over share-based remuneration schemes. The draft directive on shareholders' rights addresses the need of shareholders to have timely access to the complete information relevant to general meetings, to be able to exercise their voting rights by correspondence and by proxy.
According to Internal Market and Services Commissioner Charlie McCreevy, "Expert input will be important in preparing the strategy for EU company law and corporate governance in the coming years."
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April 17, 2006 |
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Responses to April 12 WSJ Article-Corporate Governance Concerns Are Spreading and Companies Should Take Heed
Submitted by: Sarah Cohn, Director of Communications
Below are responses to Alan Murray's April 12 Wall Street Journal article titled "Corporate Governance Concerns are Spreading and Companies Should Take Heed." The responses ran in the Saturday, April 15 edition of the Wall Street Journal in Alan Murray's Talking Business column. Please email us your thoughts on the April 12 Wall Street Journal piece at blog@issproxy.com.
The Math on Corporate Boards
Institutional Investors' Attention
To Governance Wins Approval
April 15, 2006
Wednesday's Business column, on a study showing that institutional investors plan to increase their attention to corporate governance over the next three years, brought plaudits from most readers who wrote in. Letters, as usual, are edited.
Here's a typical response, from Hal Gaffin:
"Corporate governance should continue to be a top priority of institutional investors until corporate management and boards get their greed under control and accept responsibility and accountability for the financial statements they churn out quarterly. They need to remember that it's my money they're managing, not theirs!"
And here's what Susan Shultz, of The Board Institute Inc., which helps companies assess the effectiveness of their boards, has to say about boards of directors in general:
"It is astonishing that this group, the board, responsible for corporate success, has often been secretive, randomly assembled and rarely held accountable. We don't need more regulation. We do need transparency and accountability -- we do get what we measure. Great boards = great companies."
Les Greenberg, of the Committee of Concerned Shareholders, wants institutions to take an even more activist role:
"Institutional investors should become more focused on the ultimate goal: equal access to the corporate ballot. One of the most revealing questions dealing with institutional investors and lack of better corporate governance is why institutional investors are wasting time with non-binding shareholder resolutions when they could, under current SEC rules, nominate slates of director-candidates by running low-cost, effective proxy contests."
But there were some naysayers. J. George Pikas, a frequent correspondent from Seattle, doubts that mutual funds, in particular, will ever pay much attention to the corporate governance of the companies they invest in.
"Mutual funds are compensated for accumulating assets under the premise that they can put those assets to work and get a favorable return for their customers. The voting power they have is wasted since their focus historically -- and currently, for the most part -- is their wallet, not the customer's wallet. They'll stay dormant until someone can draw a straight line from corporate governance to their asset-management fees."
Another reader, a former corporate executive, raised questions about the organization that conducted the study -- Institutional Shareholder Services. That's the firm that advises institutional investors on how to vote their corporate proxies. Many CEOs believe ISS is part of the problem. It has adopted, they say, a rigid, one-size-fits-all methodology for measuring corporate governance that suggests ISS's analysts know better than the people who run big companies.
One point of controversy in all of this is the focus on the independence of members of the boards of directors. Some great companies, like Warren Buffett's Berkshire Hathaway, take hits in the corporate-governance debate because they have too many directors who aren't viewed as sufficiently "independent" from management. But critics say an excess focus on independence may devalue the experience and personal investment that can make for better directors.
Michael Johnson, a private investor, has particular criticism for CalPERS's guidelines that disqualify some people who have significant ownership stakes. He writes:
"I can think of no better corporate-governance control for shareholders than having someone who has a significant amount of his personal net worth invested in the enterprise. Those are the kinds of directors that will ensure the best interest of shareholders are served."
Finally, Bob Nagel suggests that rather than focusing on complicated measures of corporate governance, investors should be focusing on a simpler standard:
"Why don't you check with Wall Street firms to see just how important the character trait of 'simple honesty' rates with the corporate-governance executives? From my experience, simple honesty seems to be a detriment to getting higher in a company's hierarchy and cheating everywhere seems out of control particularly in high schools and colleges from whence honest leaders grow from. It is scary as heck."
Write to Alan Murray at business@wsj.com
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April 13, 2006 |
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Governance Literature Review
Submitted by: Tad Kopinski. Staff Writer
The interrelationship of corporate governance, structural and institutional variations in corporations, as well as companies' performance continues to attract the attention of both scholars and corporate governance professionals around the world. The following is a quarterly review of academic studies, scholarly articles and reports of interest to institutional investors.
Academic Papers & Studies
"Did New Regulations Target the Relevant Corporate Governance Attributes?" Reena Aggarwal and Rohan Williamson, McDonough School of Business, Georgetown University, November 2005.
http://www.issproxy.com/pdf/Reemaaggarwal-GovernanceandFirmPerformance0206.pdf
The study examines the changes in corporate governance practices during 2001-2005, analyzing 64 attributes in a sample of 5,259 U.S. firms. The findings indicate that the value of a company increased by 4 percent for each attribute of better governance that the firm implemented. 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. 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.
In the period prior to the adoption of the Sarbanes-Oxley Act, a significant positive relationship was found between governance attributes targeted by the new regulations and firm valuation. The results imply that overall the new regulations did address relevant governance attributes that the market perceived to be important.
"Social Policy Shareholder Resolutions in 2005: Issues, Votes and Views of Institutional Investors," Carolyn Mathiasen and Heidi Welsh, ISS Social Issues Service, February 2006. http://www.irrc.com/bookstore/index.cgi?func=show&what=05CSIRBTH
The study reviews a broad palette of social policy shareholder resolutions filed in 2005, which reached a record high. Energy and environment, board diversity, and equal employment opportunities, political contributions, and international labor and human rights concerns led the list of topics on which socially concerned institutional investors focused their attention.
The study provides vote results, intervention dynamics, trends, and commentaries not only issue by issue, but also by company and by selected institutional investors. It also notes the record number of agreements that resulted in withdrawals of proposals and the high number of resolutions that the Securities and Exchange Commission staff allowed companies to omit from their proxies.
"Shareholder Activism in the United Kingdom," Julian Franks, Centre for Corporate Governance, London Business School; Colin Mayer, Said Business School, University of Oxford; Marco Becht, Universite Libre de Bruxelles; and Stefano Rossi, Stockholm School of Economics, presented in London, Feb. 9, 2006.
The research examined the interrelation of intervention and market performance of 41 stocks held by the Hermes U.K. Focus Fund. The average holding period for these stocks was 691 days; the stakes held ranged from 1-15 percent. The fund had engaged with 30 of the companies it held, had decided not to engage with eight, and had yet to engage with three. The engagement revolved around three issues: restructuring, financial policies, and board changes.
The study looked at the performance of stocks held (adjusted for movements in the market) around the time of public announcements of events, such as restructuring, board changes, and payout announcements. It found that there was a statistically significantly better performance by the stock in which the fund engaged following the event, exceeding that of other stocks with similar events but without engagement of Hermes. It concluded that almost 70 percent of the fund's improved performance was attributable to events influenced by the fund's engagement. [A Hermes affiliate, Hermes USA Investors Venture, has an ownership interest in ISS.]
Journal Articles
"Corporate Governance: Director Compensation," David A. Katz and Laura A. McIntosh; Wachtell, Lipton, Rosen & Katz; New York Law Journal, March 23, 2006.
This article focuses on director compensation as a growing corporate governance issue. It notes changes in the level of compensation, its structure, and heightened focus on disclosure of director pay and perquisites.
The article reviews policy recommendations by various corporate governance advocates and public pension funds. It concludes, "To the extent that boards fail to explain the rationales underlying director compensation decisions, those boards are likely to experience greater scrutiny from institutional shareholders and corporate governance rating organizations."
"Does Corporate Governance Matter to Investment Returns?" Jay W. Eisenhofer and Gregg S. Levin, Grant & Eisenhofer, Corporate Accountability Report, Vol. 3, nr. 37, Sept. 23, 2005.
The article reviews recent literature examining empirical links between corporate governance and firm performance. It examines specific corporate governance factors--such as board declassification, CEO compensation, or related-party transactions--and correlates them with individual firm performance.
The authors also examine the changes that are taking place in socially responsible investment. They note the exponential growth in this type of investing and assert that a growing number of companies now make social responsibility an important part of their corporate culture. The article concludes that "a substantial number of studies support the notion that investing in companies with sound corporate governance programs and practices makes good economic sense, and that good corporate governance fosters long-term profitability. Simply put, good corporate governance does, in fact, pay."
"The Case for Increasing Shareholder Power," Lucian A. Bebchuk, Harvard Law School, Harvard Law Review, Volume 118, Nr. 3, January 2005.
The article argues for granting shareholders the powers to initiate and adopt rules-of-the-game decisions to change the corporate charter or state of incorporation. The legal rules that tie shareholders' hands and insulate management from shareholder intervention partly account for the power of management and the weakness of shareholders in such companies, according to Bebchuk.
The article concludes that empowering shareholders would result over time in improvements in a wide range of corporate governance rules. "It would provide a mechanism that could, without further regulatory intervention, address existing governance flaws, as well as new governance problems that arise in the future," the article claims.
"Toward a True Corporate Republic: a Traditionalist Response to Bebchuk's Solution for Improving Corporate America," Leo E. Strine, Jr., Vice Chancellor, Delaware Court of Chancery, Harvard Law Review, Vol. 119, nr. 5, March 2006.
Strine provides a detailed critique of the reform proposals by Lucian Bebchuk (see above) to grant shareholders greater control over corporate functioning, arguing from the perspective of traditionalist institutional investors. He argues that they put a high premium on maximizing managerial flexibility to take risks and harbor great concern over the potential adverse effects of giving shareholders more influence over corporate governance, which they feel is not likely to generate better corporate performance.
Strine suggests a number of changes in state laws (particularly Delaware) and SEC regulations that would bolster the ability of stockholders to run a competing slate of directors against an incumbent board they believe is performing poorly. These facilitation measures, including a formulaic proxy fight cost reimbursement, would be available every three years for companies with staggered boards, and annually to those with declassified boards.
"Reform along these lines would strengthen the hand of stockholders, but only insofar as institutional investors are serious about being active, involved long-term, and willing to devote reasonable efforts to improving the overall integrity and performance of American operating companies," Strine argues.
"Director Primacy and Shareholder Disempowerment," Stephen M. Bainbridge, UCLA School of Law, Harvard Law Review, Vol. 119, nr. 5, March 2006.
In another rebuttal to Lucian Bebchuk's call for greater shareholder empowerment (see above), Bainbridge argues that if greater authority for shareholders created value, this would be reflected in the market. Invoking his primacy model of corporate governance, the author argues that the current system including a plurality standard for the election of directors is "the majoritarian default and therefore should be preserved as the statutory off-the-rack rule."
The article argues that even institutional investors have a strong incentive to remain passive. "The majority vote requirement is an inadequate constrain on rent seeking by union and public pension funds (or other institutional investors, such as hedge funds, for that matter)," the author notes.
"A Theory of Corporate Scandals: Why the USA and Europe Differ," John C. Coffee, Jr., Columbia University Law School, Oxford Review of Economic Policy, Vol. 21, nr. 2. Summer 2005.
The article argues that dispersed ownership systems characteristic of the United States are more susceptible to various forms of earnings management, and that concentrated ownership systems typical of Europe are much less vulnerable. In the latter, corporate scandals tend to involve the appropriation of private benefits of control.
The paper argues that this difference is the likely source of, and motive for, financial misconduct and has implications for the design of legal controls to protect public shareholders. The difficulty in achieving auditor independence in a corporation with a controlling shareholder may also imply that minority shareholders in concentrated ownership economies face a higher risk.
"Rethinking the Board," Yoram Wind, Wharton School, University of Pennsylvania, Directors & Boards, Vol. 30, nr. 1, Fourth Quarter, 2005.
The author argues that companies would benefit from having two boards rather than one: an oversight board made up of experts with strong industry knowledge and backgrounds in finance and law; and a strategy board made up of members with management expertise. The oversight board would report to regulators and interact with shareholders, while the strategy board would be charged with maximizing value for stakeholders, identifying growth opportunities, and helping the company become more profitable.
The two boards would meet at least annually to collaborate on governance, nominations, and compensation. Both would have independent sources of information and separate budgets for information gathering. The only rationale for this model that the author proposes is that "using two separate boards might make it easier for companies to recruit qualified candidates," noting that the strategy board could attract candidates from overseas, since it would meet less frequently.
"The Role of Audit Committees," Michael W. Oshima, Arnold & Porter, The Practical Lawyer, Vol. 51, nr. 6, December 2005.
The article discusses the changing authority and responsibilities of audit committees after the passage of the Sarbanes-Oxley Act. It addresses financial reporting processes and internal controls, including the review of periodic reports and the adequacy of controls. It focuses on the risk management and compliance roles of the committee, its composition to ensure independence and expertise, and provides a checklist for matters that should be addressed in an audit committee charter.
The article also examines the role of independent auditors in evaluating performance, planning and conducting the audit, and providing other services. The article is directed to audit committee members in public companies and their advisors, but it is also relevant to private companies contemplating a public offering in the future.
"Nine Steps to Bulletproof Director Personal Liability," James Bowers, Day Berry & Howard, Directorship, Vol. 31, nr. 11, December 2005.
The article provides a checklist of steps directors should take to mitigate personal liability for their board activities. It examines the history of legal cases that are significantly changing the actual or potential application of the business judgment rule, concluding that the Delaware Chancery Court is "sending a strong signal that it will carefully examine director decision making under emerging contemporary standards, and that passive director conduct will no longer be countenanced."
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April 10, 2006 |
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New Japanese Law May Lead to Less Meeting Clustering
Submitted by: John Taylor, Principal Researcher, Japan Governance Research Services
Japanese company law amendments, which will be ushered in the coming months, contain a relatively nondescript change that could lead to more advance notice and less clustering of annual meetings in the world's second largest economy.
Though the amendments do not address these two problems directly, the legislation will allow companies to waive the requirement to obtain shareholder approval of dividend allocations. If many companies seek such waivers, this change would weaken the long-standing arguments that underpin laws forcing the concentration of meeting dates and the short notice periods.
Most Japanese firms send meeting agenda notices to shareholders just two weeks--the legal minimum--before annual meeting dates. The short notice leaves investors only a few days at most before voting deadlines to translate, analyze, and execute votes for their holdings.
Equally problematic is the concentration of shareholder meetings on a few days each year. The perennially lopsided distribution was illustrated again last year. Of the 80 percent of Japanese firms tracked by ISS that held their annual meetings in June, 83 percent scheduled their meeting on June 24, June 28, or June 29.
These hurdles to voting have sparked complaints by international investors since many began voting their Japanese shares in the early 1990s, as well as by Japanese institutions that have started to systematically vote their domestic holdings in recent years.
Two rules that have helped sustain short notice and meeting concentration practices remain in the law, but as companies take advantage of the dividend approval deregulation, their justifications may start to ring hollow.
Because shareholder approval of profit allocation has long been a requirement before dividends could be paid, there has been a rationale for requiring that each year's annual shareholder meeting be held within three months of the fiscal year close, so that the year-end dividends could be paid in a timely manner. This requirement in turn presents a scheduling challenge, since audited profit figures are necessary for any profit allocation resolution, and they must be circulated to shareholders in meeting notices some time before the meetings.
In most international markets, annual meeting agenda notices reach shareholders three weeks or more before the meeting date, but Japanese companies have argued that they must rush to complete audits in time to meet even a two-week notice requirement. Even after the amendments, Japan's company law would still allow companies to wait until just two weeks before the meeting date before mailing the agenda.
However, if the bulk of Japanese firms ultimately opt to waive this dividend approval requirement, this justification used to defend the old practices will vanish.
Some institutions this year are expected to vote for proposals to delegate dividend and profit allocation authority to Japanese boards, in the hope that this may one day lead to further legal and regulatory reform that will enable a more manageable proxy voting calendar in Japan. Other investors who have developed policies concerning dividends may oppose granting boards discretion over income allocation, concluding that there's no guarantee that companies will then decide to actually hold their meetings substantially earlier.
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April 7, 2006 |
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Director Pay Rises Another 14%
Submitted by: Subodh Mishra, Managing Editor
Average pay for U.S. corporate directors shot up 14 percent between 2004 and 2005, while classified boards declined and committee independence levels reached an all-time high, according to a new ISS study on corporate boards.
The perennial study reviews and analyzes the structure, composition, and compensation of boards of directors among Standard & Poor's "Super 1,500" companies in order to identify the latest practices and emerging trends. This year's study, Board Practices/Board Pay 2006, looked at 1,269 S&P Super 1,500 companies that held annual meetings between Jan. 1 and July 31, 2005. The data analyzed was extracted primarily from proxy statements filed with the Securities and Exchange Commission.
A marked rise in director pay continued in 2005, according to the study, as total pay increased by almost 14 percent--from an average of $126,325 in 2004 to $143,807 in 2005. The jump comes on the heels of a more than 23 percent increase from 2003 when total average pay stood at $102,400.
The 2005 spike stems from a combination of rising cash pay levels and increasing stock prices that fueled the value of long-term equity awards, the study found, while median total compensation for a typical director also increased in 2005 by about 15 percent.
"As directors work harder and face potential greater liability, they are demanding higher pay for themselves," CompensationStandards.com editor Broc Romanek told Governance Weekly. "Higher pay also helps with growing recruitment and retention issues."
Greater Retainers and Committee Fees
This year's study notes that annual retainers remain the most prevalent component of director pay. In 2005, 96 percent of all companies provided retainers, compared with 95 percent in 2004. The median board retainer value for 2005 stood at $35,000--an 8 percent increase over 2004. The average retainer, $41,033, was up 13 percent. The majority of companies pay the board retainer in cash only, but 15 percent pay a combination of cash and unrestricted shares, and 2 percent use shares only, according to the study.
The highest average retainers are by large companies in terms of both market cap ($56,597 for the S&P 500) and revenue ($65,629 for those with $10 billion plus in revenue), and by companies in the consumer staples sector ($52,963). The most significant one-year increases in retainer value, however, were found in the S&P SmallCap (18 percent increase to $29,718) and those firms with less than $500 million in revenue (which recorded a 12 percent increase in the average value to $24,432), and among companies in the telecommunications sector, where the average retainer rose 23 percent, to $47,459.
A significant recent trend is the practice of paying more to committee chairs. As of 2005, chairs of the audit, compensation, and nominating committees received extra pay 80 percent, 73 percent, and 59 percent of the time, respectively. The study found that these fees usually take the form of additional retainers, with audit committee chairs receiving approximately $10,000 extra, on average, and compensation and nominating committee chairs each earning just over $7,000 extra.
The growth in director pay packages may not come without consequences, analysts caution. "Boards need to tread carefully here as more investors are seeing director pay as the next governance battle," Romanek warns. "And more importantly, since directors set their own pay levels, greater pay might lead to courts finding independence of boards compromised if pay is set too high. This is a universal claim in every compensation lawsuit brought in the last few years and likely will continue to be so."
Such thinking may have spurred Coca-Cola Co. to amend its director pay policies to stipulate directors would be paid only if certain financial goals are met. The company announced this week that it would no longer provide directors an annual retainer of $125,000, of which $50,000 is paid in cash and $75,000 accrued in share units.
Instead, directors would be awarded equity share "units" each year equal to a flat fee of $175,000, but realization would be tied to performance conditions based on earnings per share. When the performance target is met at the end of the performance period, the share units will be payable in cash. Should the performance target not be met, however, "all share units and hypothetical dividends would be forfeited in their entirety," the company said in an April 5 press release.
The approach is novel, analysts say, while warning such incentives may prompt directors to focus on short-term gains, thereby diverging their interests from those of most shareholders.
Continued Decline in Classified Boards
The study's examination of board practices found that the number of companies with staggered board elections continued to fall, declining from 61 percent overall in 2004 to 59 percent in 2005. That trend is driven by the increasing number of boards at S&P 500 companies that have moved to annual elections. In 2005, 53 percent of S&P 500 firms had classified boards, down from 56 percent the prior year. At the current rate, the majority of S&P 500 directors will be subject to annual election by the end of 2006.
Moreover, the use of classified board structures among the MidCaps and SmallCaps declined for the first time, albeit modestly. Companies in those indices had the same percentage of classified boards in both 2003 and 2004 (66 percent for MidCaps and 62 percent for SmallCaps), but the proportions dropped 2 percentage points and 1 percentage point, respectively, in 2005.
A steady decline in the prevalence of classified boards among all S&P 1,500 companies can be attributed to a marked reduction in their use by large cap S&P 500 firms. One reason may be the disproportionate shareholder scrutiny of high-profile companies.
From 1999 to 2005, S&P 500 companies have faced 220 shareholder proposals to declassify the board, for example. During the same period, MidCap companies faced only 43 such proposals, and SmallCap companies faced only 18.
In past years, support for shareholder proposals to declassify tended to be stronger at S&P 500 companies; however in 2005, average support among S&P 500 companies was 68 percent, compared with an average of 73 percent among MidCaps and 71 percent among SmallCaps.
It appears to be only a matter of time before classified board structures are no longer the norm at U.S. companies, the study finds, backing the view of many governance watchers who believe that staggered boards are no longer critical for maintaining management control.
"In light of increased institutional activism, they [boards] no longer see value in maintaining classified boards long-term," University of Delaware professor and noted governance expert Charles Elson said. "Boards are realizing they have limited value in preventing a takeover."
Committee Independence Increases
Average audit committee independence has climbed steadily over the last five years, and the percentage of companies with fully independent audit committees has increased most dramatically, rising 15 points since 2001, to 85 percent as of 2005, the study found. Independence levels also continue to rise slowly on both compensation and nominating committees, reaching an average of 94 percent and 92 percent, respectively, as of 2005.
The average number of audit committee meetings also continued to increase, to nine in 2004 (as reported in 2005), up from eight in 2003, seven in 2002, and five in 2001--suggesting that the surge is not just a reaction to the auditing scandals of 2001 and 2002, but rather reflects new demands on audit committee members stemming from Sarbanes-Oxley requirements.
Compensation committees met an average of five times in 2004 (as reported in 2005), the same as the prior year, although large companies averaged six meetings of this key committee. Although nominating committees met on fewer occasions--four times per year on average--that is double the frequency of their meetings in 2002. In 2005, only 2 percent of the companies in the study did not have a formal nominating committee.
Those trends will continue, according to Elson, who notes that regulatory pressure, shareholder activism, and litigation by investors will ensure companies do not backtrack on improving board practices.
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April 6, 2006 |
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Welcome News - News Corp., Shareholders Settle Poison Pill Suit
Submitted by: Patrick McGurn, Executive Vice President
Media giant News Corp. and an international group of institutional shareholders have settled a lawsuit concerning the company's poison pill takeover defense, according to an April 6 announcement by lawyers representing the shareholders. Groups such as the Connecticut Retirement Plans and Trust Funds and the Australian Council of Super Investors (ACSI), argued that the media company broke a promise to shareholders when it decided in August 2005 to extend its poison pill for another two years. In 2004, management, which sought-after shareholder approval to incorporate in Delaware, pledged that the company would refrain from activating a pill for more than 12 months without the prior approval of shareholders.
The settlement is great news on several fronts.
First, the New Corp. board will live up to its pledge to allow shareholders to decide if the pill stays in place. Many shareholders had relied upon this promise in voting on the company's proposal to switch its legal domicile from Australia to Delaware.
Second, the Delaware Court's decision to allow this lawsuit to proceed will make every board think twice before it seeks to back out of governance policies/guidelines that it has adopted in the past. The bulk of the governance reforms that have been adopted over the past several years, including dozens of policies calling for votes on future rights plans (poison pills), are found in these documents. If boards decide to ignore these policies, shareholders must resort to protracted battles to add similar provisions to the formal governing documents--the bylaws and the charter. Such a process would promote confrontation.
The significant collaboration by the Australian pension fund community and its international counterparts to hold News Corp. to its promise is probably one of the best examples to date of collective action by a broad range of global investors. In 2005, ISS recommended withholding votes on all the director nominees for a breach of trust with shareholders on the poison pill policy.
The settlement provides hope that New Corp. may be ready to improve its governance practices. We hope to see News Corp. follow up on this action by adopting more shareholder-friendly policies and practices. Please email us your thoughts about the News Corp. settlement at blog@issproxy.com.
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April 5, 2006 |
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Supreme Court Closes Off a State Court "Loophole"
Submitted by: Ted Allen, Director of Publications
In a victory for securities firms and business groups, the U.S. Supreme Court has ruled that investors who hold on to stock based on a company's fraudulent statements may not bring a class-action lawsuit in state court.
On March 21, the justices ruled 8-0 that the Securities Litigation Uniform Standards Act of 1998 (SLUSA) bars investors from bringing class-action claims for "holding" damages in state court. The high court's decision in Merrill Lynch v. Dabit overturned an appeals court ruling that held that claims for damages by investors who retained securities based on allegedly biased Merrill Lynch research could be filed in state court.
Writing for the court, Justice John Paul Stevens noted that allowing state class actions by holders "would give rise to wasteful, duplicative litigation" if the same facts led to both a state court lawsuit by holders and a federal class action by purchasers.
The Supreme Court's decision effectively prohibits any class-action claims by holders, because the high court ruled in 1975 that Securities and Exchange Commission Rule 10b-5 allows only private lawsuits by buyers and sellers of securities. Industry lawyers told Bloomberg News that the Dabit ruling will be helpful to mutual fund companies as they fight investor lawsuits over market-timing and other improper trading practices.
The court's ruling was praised by lawyers for companies and the securities industry. They had urged the court to close what they saw as a "loophole" in the SLUSA, which was intended by Congress to prevent investors from circumventing the stricter federal court pleading requirements of the Private Securities Litigation Reform Act of 1995. The Bush administration and the SEC also supported Merrill in the case.
"If the court had gone the other way, one could have expected an avalanche of state-law holder class-action claims," said Jay B. Kasner, a lawyer with Skadden, Arps, Slate, Meagher & Flom, who represented Merrill Lynch at the high court, according to Bloomberg News.
The Dabit case arose from state court lawsuits by investors (as well as brokers who lost commissions) that were filed in Oklahoma and Minnesota in 2002 after New York Attorney General Eliot Spitzer alleged that Merrill Lynch issued misleading analyst reports to promote its investment-banking business. Merrill Lynch later agreed to pay a $100 million fine to settle the New York state claims, and Henry Blodget, a high-profile technology analyst at the firm, was barred from the securities industry in 2003.
At the Supreme Court, lawyers for investors argued that Congress did not intend to use the SLUSA to bar long-term investors from bringing class-action lawsuits in state court.
"What they're really saying is, holders have no recourse, even if they're defrauded,'" Phillip Goldstein, a principal with Bulldog Investors, told Bloomberg News after the ruling. His firm, which manages more than $200 million in assets, wrote a brief urging the justices to allow holder suits.
The Dabit ruling will not affect individual holder lawsuits or class actions in state court that seek to represent fewer than 50 people, as those are not covered by the 1998 law.
The ruling is the latest setback for investors at the high court in the past decade.
"In every instance where there has been a choice between a more expansive view of the private right of action under Rule 10b-5, and a more restrictive view--the court has taken the more restrictive view," Aegis Frumento, a lawyer with the firm of Duane Morris told Compliance Week. "In essence, the court has been adopting the view that securities litigation in this country is broken in some way, shape, or form and needs to be fixed."
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