Does Cumulative Voting Compliment Majority Voting?
Submitted by: Rajeev Kumar, Director of U.S. Research, and Robert Kellogg, Managing Director, Taft-Hartley Advisory Services
An interesting post ran last week on Broc Romanek's Corporate Counsel Blog. If one agrees, as mentioned in the piece, that cumulative voting helps protect shareholder rights--which ISS policy does--then majority vote standard and cumulative voting compliment each other. Without majority vote standard, cumulative voting in an uncontested election has no teeth because then a director could still be elected if he/she receives one single vote.
As for cases of contested elections, it is a non-issue because plurality voting standard would remain the election standard maintaining the status quo. Having majority vote standard in an uncontested situation would actually serve as a takeover defense. Therefore, in evaluating shareholder proposals requesting majority vote standard, ISS looks for such carve-out for contested elections in the language of the resolution.
Regarding ISS' policy on cumulative voting with respect to majority vote standard, we would not support a cumulative voting shareholder proposal if the company has majority vote standard in place. This is not because the two are incompatible, as many companies have been arguing. Rather, the rationale behind this policy is to provide an incentive mechanism (the carrot) for companies to move toward a majority voting standard for electing its directors.
It is true that cumulative voting can be viewed as a vehicle to allow special interest shareholders to make their voice heard in that, in theory, it makes it easier for a minority holder to get at least one director elected. However, many would say this isn't necessarily a negative byproduct. ISS' current policy is willing to "trade off" a cumulative voting provision if the company is willing to adopt a majority vote standard.
| Permalink | Comments (2) | TrackBacks (0) | Print Article | Back To Top |
July 28, 2006 |
 |
Heinz Announces Governance Reforms
Submitted by: L. Reed Walton, Staff Writer
Seeking to woo institutional investors, H.J. Heinz Co. has embraced majority voting in board elections and other corporate governance reforms. The company unveiled these policy changes on July 20 as it sought support from state and union pension funds in a proxy contest with billionaire shareholder Nelson Peltz.
Heinz announced these commitments after CEO William Johnson met with representatives from the California Public Employees' Retirement System (CalPERS), the largest U.S. state pension fund. The Pittsburgh-based ketchup maker also detailed these steps during a presentation to the Change to Win labor federation.
Heinz officials have told ISS that the company will adopt a full majority vote standard with a director resignation policy, as Intel, Dell, and more than 30 other firms have done. In addition, Heinz said will ask shareholders to vote to change supermajority voting rules to require only 60 percent approval, rather than 80 percent, to make certain charter and bylaw changes. The company also promised to put any "poison pill" plan to a shareholder vote within a year of adoption.
"We welcome and are encouraged by the corporate governance reform commitments that the Heinz board has made to improve long-term value for shareowners," CalPERS CEO Fred Buenrostro told Bloomberg News. As of July 27, the pension fund had not announced which side it will back at Heinz's Aug. 16 annual meeting.
The meeting with CalPERS also produced a commitment from Heinz to add up to two independent directors to the company's 12-member board via current nominating processes. Director independence is a major issue in Heinz's proxy fight with Peltz, who seeks to replace five incumbent directors--that he deems "too connected" to the company--with his own nominees. In response, Heinz argues that Peltz's nominees, who include his son-in-law and a long-time business partner, would be a "self-interested voting bloc."
Peltz and his hedge fund, Trian Group, have urged the company to cut more than $500 million in costs and sell assets. Heinz has taken steps to reduce spending by $355 million, and is striving to buy back $1 billion in shares over two years, Bloomberg News reported.
ADP Proxy Services, which will mail ballots to 85 percent of Heinz shareholders, will allow retail investors to cast votes through the Internet, Heinz said. Management had accused Trian of obstructing Internet voting by these investors; Trian said that claim was "absurd" and said it welcomed such voting, according to Bloomberg News. About 22 percent of Heinz shares are held by retail shareholders through brokers and dealers, Bloomberg reported.
ISS is holding a Governance Forum on Monday, July 31, where Heinz management and the dissidents will present their arguments. The forum will start at noon Eastern (U.S.) time. To register, please click here.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 26, 2006 |
|
Summary of Today's SEC Webcast on the New Executive Compensation Disclosure Package
Submitted by: Sarah Cohn, Director of Communications
Investors calls for increased disclosure on executive compensation were answered today as the Securities and Exchange Commission (SEC) adopted an extensive and wide-reaching executive compensation disclosure package. The new rules are intended to advance the interests of shareholders through better disclosure.
The Commission's new rules require new tally sheet disclosure that will provide the first in focus snapshots of the total annual compensation packages paid to senior executives at U.S. companies. Clear and meaningful disclosure in "plain English" is now going to be required in the areas of pensions, deferred compensation, severance and perquisites. The staff also corrected many of the problems that investors had raised concerning the original proposal.
Shareholders called upon the Commission to keep compensation committee members on the hook for their decisions related to pay. The staff neatly accomplished this difficult task by creating a new slimmed-down Compensation Committee Report that will accompany the new beefed-up Compensation Discussion and Analysis (CD&A) section prepared by management. The staff also fixed the most glaring problems with the so-called Katie Couric rules by proposing to limit its application to highly-paid, senior-decision makers. The extended comment period on this provision should provide some additional fine-tuning.
The Commission's new rules are also asking for greater transparency on option grant programs and plans. Essentially, the new rules relating to option grant practices will look at 1) timing practices and, 2) practices involved in establishing exercise practices.
What do these new rules mean for investors? Since companies will be required to present an accurate picture as to why and how compensation decisions are made, investors can now better evaluate the actions of board members and will have access to more sophisticated tools to oversee their investments.
We welcome your thoughts to today's approved SEC's Executive Compensation and Disclosure Package.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
ISS Comment on SEC's Executive Compensation Disclosure Package
Submitted by: Patrick McGurn, Executive Vice President and Special Counsel
Rockville, Maryland; July 26, 2006: We applaud the Commission's substantive work and its unanimous decision to upgrade the disclosure of executive and director compensation. Shareholders and board members should receive immediate benefits next proxy season from the new tally sheets providing information on the total annual compensation packages paid to senior executives at U.S. companies. Additionally, we would expect abuses in the pensions, deferred compensation, severance and perquisites areas to dry up now that light will finally reach those previously dark recesses of the compensation landscape. The Commission also demonstrated its willingness to respond to public comment by making important adjustments to its original proposal. As a bonus, the staff also included enhanced disclosure provisions for stock option grant practices that should boost transparency regarding backdating and spring loading practices. Congratulations to Chairman Cox and his staff. Now, its up to shareholders and board members to put this information to good use.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 25, 2006 |
|
Hedge Funds to the Rescue
Submitted by: Chris Young, Director of M&A Research
Below is an article I submitted to BusinessWeek, which talks about why hedge funds can sometimes be a force for good. Please let us know whether you believe hedge fund activism in the current M&A environment has positive or negative consequences.
------------------------------------------------------
BusinessWeek
JULY 31, 2006
IDEAS -- OUTSIDE SHOT
By Chris Young
Hedge Funds to the Rescue
Thanks to Hedge Fund Activists, dealmakers can't rely on shareholder passivity
Back in the day, mergers and acquisitions advisers routinely viewed transactions as "in the bank" immediately upon the announcement of a deal. Indeed, deal conference calls were usually filled with congratulatory back-slapping from stock analysts as junior investment banking staffers planned elaborate closing dinners at tony steakhouses. True, regulatory concerns could occasionally scuttle a deal, but the shareholder vote (yawn) was usually a foregone conclusion.
But today, thanks to leadership provided by hedge fund activists, a shareholder vote can be very much in doubt. Consider the multibillion-dollar Novartis (NVS ) buyout of Chiron (NVS ) earlier this year. Chiron stockholder opposition to the buyer's "best and final" price resulted in hundreds of millions of dollars in incremental value received by target shareholders. Despite the common perception of hedgies as fast-money operators bent on corporate destruction, examples such as Chiron indicate ordinary investors can benefit from activists' "selfish" efforts.
How have we gotten here? A confluence of trends has conspired to alter the dynamics of dealmaking. First, high-profile M&A disasters like the AOL-Time Warner (TWX ) merger and numerous academic studies together have established a new conventional wisdom among investors that a significant percentage of deals destroy shareholder value. Even if most M&A indeed creates value, investors today will go out of their way to ensure that destructive transactions are not ratified.
SECOND, HIGH-PROFILE SCANDALS of the '90s, such as Enron, WorldCom, Tyco International, (TYC ) and the like, have made shareholders more cynical about the decision-making process of boards of directors. Investigations into conflicts inherent in investment banking's business model have left a cloud over advisers' objectivity. (Think Jack Grubman at Salomon Smith Barney.) Fairness opinions by such experts-for-hire were finally seen for what they have been all along: nothing more than insurance policies for the board.
Lastly, investors and regulators began to pay more attention to how fiduciaries were voting shares. Today, institutional shareholders who consistently defer to management (the modus operandi of the past) may be accused of abdicating their fiduciary duties.
Only a spark was needed to ignite the new "power to the shareholders" zeitgeist. Enter the hedge funds. With their growing economic clout (an estimated $1 trillion in assets under management worldwide), they've become the catalyst for the new world order of M&A and proxy fights. Unlike their more inhibited counterparts, the so-called vanilla asset managers, hedge funds are anything but wallflowers.
To be sure, left-leaning pension funds have long taken activist stands on pet peeves such as golden parachutes or the labor impact of a proposed deal. Hedge funds, however, maintain a laser focus on shareholder value. After all, fund managers get paid 20% of any shareholder value they can "help" create. For some funds, doing the "Wall Street walk," or selling shares when things go awry, is the coward's way out. Especially during periods when markets move sideways and volatility is low, activist investing potentially provides a better path to alpha. Why wait for an investment thesis to pan out when you can accelerate the process via activist pressure?
Such thinking is even spreading to an unlikely quarter: normally quiescent asset managers. These powerful constituents have long preferred to work behind the scenes if they were unhappy and sell their shares if their concerns were not remedied. But lately, "vanilla" managers have taken the first tentative steps toward activism. In the Chiron buyout, dissidents were joined by Citibank's (C ) asset management arm, proving an imprimatur of legitimacy to the activists' cause. To the extent that other traditionally passive investors follow that lead, the power of the M&A vote to rock management's world will only increase.
So, for the time being at least, it appears that boards will have to come to terms with activists looking over their shoulders on each and every proposed deal, acting as a market check more powerful than any regulatory scheme. And yes, shareholders free-riding on the activist coattails should remember to thank the hedgies for the extra return.
Views expressed in Outside Shot are solely those of contributors.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 24, 2006 |
|
Heinz Proxy Fight Heats Up
Submitted by: Ted Allen, Director of Publications
With less than a month before Heinz's annual meeting, management and dissident shareholder Nelson Peltz are trading insults while trying to court institutional investors.
On July 20, both sides presented their arguments at a forum hosted by Change to Win, a labor federation that includes the Service Employees International Union, UNITE HERE, the International Brotherhood of Teamsters, and other unions.
Peltz, a billionaire investor, and his Trian Group hedge fund have put forth five nominees for Heinz's 12-member board. If management and the dissidents don't resolve their differences, this fight would be the highest profile U.S. proxy contest to go to a vote this year. The company's Aug. 16 annual meeting will be in Pittsburgh, where the ketchup maker is based.
Settlement appears unlikely, as both sides have increased their vitriol in recent weeks. Trian, in a July 12 letter to Heinz shareholders, faulted the company's "dismal performance" under Chairman and CEO William Johnson. Trian, which owns a 5.5 percent stake, noted that the company's shares have fallen 38 percent since Johnson became chief executive in April 1998.
"The sad reality is," the Trian letter states, "you would have been better off financially keeping your [money] in a piggybank than investing it in Heinz stock!"
New York-based Trian has called on Heinz to undertake a series of stock buybacks, cut spending by $575 million, sell assets, and increase its dividend, according to news reports. In March, Peltz persuaded Wendy's International to install three of his board nominees after calling on the hamburger chain to improve its results and consider selling its Baja Fresh restaurants.
Heinz management has countered by questioning the independence of the Trian nominees, which include Peltz's son-in-law, Edward Garden, and Peter May, a business partner for 30 years. In a July 10 letter to shareholders, Johnson and Presiding Director Thomas Usher said the dissident nominees are "a self-interested voting bloc" that "cannot be expected to fairly represent the interests of all Heinz shareholders."
Management also points out that it "has dramatically transformed the company and delivered strong results in the last four years." Between Dec. 20, 2002, and Feb. 3, 2006, the day before Peltz became a shareholder, the company posted an 18.9 percent total shareholder return, which beat the S&P Packaged Foods peer group average of 16 percent, the management letter states.
Management has criticized Peltz and May for having to make personal payments to resolve allegations of breach of fiduciary duty and securities fraud. In response, Trian has pointed out that seven Heinz board members have named in investor lawsuits alleging breach of fiduciary duty and securities fraud.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 21, 2006 |
|
Investors Press for Reform in BRIC Markets
Submitted by: L. Reed Walton, Staff Writer, and Andrea Musalem, International Research Analyst
The emerging markets of Brazil, Russia, India, and China have seen a flurry of corporate governance reforms in the last five years as economies develop and competition for foreign investors increases.
These four countries, given the acronym "BRICs" by global banking firm Goldman Sachs, have some of the building blocks of solid corporate governance in place. But progress is erratic and sometimes hindered by government control and ineffective legal systems.
Still, as outside investors continue to press for reform at home and abroad, Brazilian, Russian, Indian, and Chinese companies and regulators are taking a greater interest in improving transparency in meeting practices, voting, board processes, ownership, and shareholder rights.
Regulations
India and Brazil have long-standing laws on the establishment of companies. Brazil's Law 6404, or the Corporations Law of 1976, and its amendment of 2001, lay out the guidelines for incorporation and briefly outline rights and duties of management and shareholders.
India's Companies Act has been in place since 1956 and sets out the current three-tier system of administration on the national, state and regional level. In 1997, the act was overhauled, dropping the prohibition on company share repurchase and on issuing shares with different voting rights.
China formalized its Company Law in 1993, dealing with incorporation and directorships. Russia's Federal Law on Joint Stock Companies is more recent. Parts of the 1995 law are based on the American Bar Association's Model Business Corporation Act.
The Securities and Exchange Board of India (SEBI) regulates Indian securities. Brazilian securities are regulated by the Securities and Exchange Commission of Brazil (CVM), which was created by Law 6385 on Dec. 7, 1976. Brazil's main exchange, the Sao Paolo Stock Exchange (Bovespa) was broken into three tiers in 2001, with only the highest, Novo Mercado, being subject to the strictest disclosure rules. Only 2.9 percent of all listed Brazilian companies are on the Novo Mercado (New Market) level, which also has a section that offers incentives for small companies to join the capital market.
Russia's Federal Commission for the Securities Market (FCSM), established in 1996, was replaced with the Federal Financial Markets Service (FFMS) in 2004, which inherited all of the former FCSM's controlling and supervisory powers. The China Securities Regulatory Commission (CRSC) was formed in 1992.
Ownership
In all of the BRIC markets, the major obstacle to minority shareholder rights is consolidated ownership. The national governments in the BRICs are still major stockholders to one extent or another.
Chinese companies have three types of shares: government shares, legal representative shares, and public shares. The first two types are non-tradable and can account for 60 to 80 percent of each company's total shares. Tradable shares, broken down into domestic and foreign, are dispersed among many individual investors, with institutional investors making up a paltry 0.5 percent. The larger the company in China, the more state shares it has, providing greater government control.
There is also a great deal of state control at Brazilian companies, mostly of infrastructure companies like utilities and transportation. A 1989 measure passed by the Brazilian legislature gave the state authority to privatize these companies, but the law reserved a 51 percent mandatory majority ownership for the state.
Large controlling shareholders present a problem in Russia and India, too. Many Russian companies suffer from low liquidity because the founders of the company or the parent company control most of the shares. Russian law also gives the federal government a "golden share," conferring a good deal of power over potential changes to company charters.
Family-owned companies are still quite prevalent in India, with family members and acquaintances controlling large parts of the shares and much of the board as well. India's pension system is still fairly weak, and the market is dominated by 30 or so controlling families. Other major controlling shareholders are Indian lending banks, whose representatives on the board tend to be less concerned with boosting stock prices than with making sure that loans are repaid.
Boards and Meetings
Shareholders in India and Russia owning 10 percent or more may call extraordinary meetings. In Brazil, owners of 5 percent of shares or higher may call a meeting eight days after the board has promised one and failed to deliver. Notice of annual meetings must be provided at least 15 days before the event in Brazil and must be published at least three times before the meeting. The notice period is 21 days in India and 30 in Russia.
Requirements for--and definitions of--board independence vary widely. China passed a regulation in 2001 requiring one-third of directors to be independent, and any nominating, auditing and compensation committees to be entirely independent. However, the law gives no official definition of independence. Chinese companies have a two-tier board system, but the supervisory board is often subject to the will of the executives and may not have any real oversight responsibility.
India also maintains a similarly vague definition of independence, requiring one-third independence if the chairman is independent, and half if the chairman is an executive. Indian codes of governance do not recommend a separation of chairman and CEO positions, nor do they mention compensation committees. However, with increasing interest from foreign shareholders, many larger Indian companies are adhering to practices recommended by the SEBI, which more closely resemble Western standards. All Indian boards are classified.
Russian boards are two-tiered, with a board of directors and an executive board. Federal commercial law provides that shareholders elect both, but companies can opt to change this in their charters under the law. Still, executives cannot comprise more than a quarter of directors, and the General Director (CEO) cannot be chairman at the same time. Like Brazil, directors are elected by cumulative vote, but Russia imposes no term limits.
Brazilian boards are three-tiered, with executives, directors, and a supervisory board that must be completely independent and cannot have its duties dictated by other boards. Directors are elected by shareholders, and at least three of them must be shareholders themselves. Executives are elected by the board of directors. Brazilian securities law requires companies to disclose director bonuses, stock options and shares, as well as their professional affiliations.
Voting and Shareholder Rights
Shareholders in Russia that own no less than 2 percent of aggregate shares can put forward proposals, but they must be introduced within 30 days of the end of the fiscal year in the case of an annual meeting. Proposals must be submitted at least 30 days before an extraordinary general meeting. Either the shareholder or a proxy must be present at annual meetings, but in the case of extraordinary meetings, many are conducted by postal vote. It is not required, but vote results are often disclosed in Russia, some by meeting minutes on company Web sites.
India rarely allows voting by mail; mostly shareholders or their proxies must be present, because voting is largely by show of hands. Election or removal of directors is considered an "ordinary" resolution and requires a simple majority to pass. India is unique in that its director nominations require a one-time fee of INR 500 ($11) 14 days before the meeting, refundable if the director is elected. Disclosure of vote results is not required and is therefore seldom practiced.
Shareholder proposals are uncommon in Brazil, though allowed by law. Like Russian firms, Brazilian companies may choose to disclose vote results in their meeting minutes. Under Brazilian law, companies can issue nearly unlimited non-voting shares, acting effectively to separate corporate control from cash flow rights.
China's voting system is the least developed of the four markets. Proxy voting is "recommended" by law. The Binding Code of Corporate Governance of 2002 mandates cumulative voting in director elections only for companies with more than 30 percent ownership by controlling shareholders. "The institution for implementing shareholders' rights is unsatisfactory," wrote Ruyin Hu of the Shanghai Stock Exchange in a 2005 study.
Corporate governance within the BRICs is not likely to move anywhere but forward as international pressure increases. In 2005, China began to experiment with floating more of its previously non-tradable government shares to gauge market effect. There is a push in India to make 1997's Desirable Corporate Governance Code mandatory. Brazilian regulators are pushing for the adoption of Generally Accepted Accounting Practices like those in the United States.
The Russian Institute of Directors, a nonprofit partnership, puts out reports on improvements in corporate governance every year. In early 2006, the National Council on Corporate Governance put out a report recommending, among other things, the legal establishment of audit committees, transparency of company affiliations to decrease related party transactions, and disclosure of major shareholders. The report also stressed the importance of bringing Russian accounting standards to a global level. A copy of the report is available here.
Accountability and disclosure standards, such as the ones required by the Sarbanes-Oxley Act in the U.S. or the governance principles outlined in the U.K.'s Combined Code, are a fair way down the road for the BRICs. But outside pressure for greater transparency and the urgent need for more foreign portfolio investments can only propel these emerging markets to that goal.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 19, 2006 |
|
Investor Engagement on the Rise in Europe
Submitted by: Natalie De Filette, ISS Europe Research Manager
Shareholders are filing a growing number of resolutions at continental European companies, according to an analysis of ISS proxy data.
ISS has tracked a total of 299 shareholder proposals filed at continental European firms through June 30, which traditionally marks the end of the European proxy season. The figure represents a 25 percent increase over the number of proposals tracked during the same period last year. For the entire year, ISS is projecting that the total number of shareholder resolutions will significantly exceed the 384 investor resolutions filed in calendar year 2005.
Of the shareholder proposals filed thus far, a majority--57 percent--were board related, such as proposing shareholder nominees to the board (46 percent of all shareholder resolutions), attempting to remove an existing director (3 percent), requiring a majority of independent directors on the board (1 percent) or introducing an age limit for board members (1 percent).
Non-board related shareholder resolutions covered miscellaneous topics, such as environmental and social considerations (3 percent of resolutions). Proposals related to these issues--addressing environmental, human rights, or labor concerns, for example--were added primarily to the agendas of Scandinavian companies, reflecting an interest in environmental, social, and governance matters on the part of some investors in Sweden, Finland, Norway and Denmark.
By market, the most significant increases were in the Netherlands, where ISS tracked 10 shareholder resolutions, compared with none last year. The majority of those proposals were put forward by foreign investors, thus illustrating the growing internationalization of the market's corporate shareholder base, as well as the introduction of U.S.-style shareholder engagement.
Significant increases in the volume of proposals also occurred at Nordic countries, with 32 shareholder proposals so far in Sweden (versus 21 over the same six-month period last year); 16 shareholder proposals in Denmark (compared with one during the first half of last year); and 15 in Norway (compared with seven during the same period last year).
In all other continental European markets, the number of shareholder resolutions remained similar to last year.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 18, 2006 |
|
Debrief from ISS' Options Backdating Webcast
Submitted by: Martha Carter, ISS' Managing Director of Corporate Governance
Over 400 callers tuned in last Thursday for a webcast on this year's hottest compensation topic - options backdating and spring loading. The hour-long webcast included a robust discussion by the panel of experts: Dr. Erik Lie from the University of Iowa, CFA's Kurt Schacht, and ISS' Pat McGurn.
According to the panel, backdating was most prevalent during the 1990's through 2002. Since then it has fallen by about 50 percent. Reasons for the decrease included Sarbanes-Oxley and accelerated Form 4 requirements. However, these don't safeguard against spring loading, which is more likely to be viewed as insider trading.
Dr. Lie provided a summary of his current work on the prevalence of options backdating practices. In his findings, Dr. Lie studied 8,000 companies from 1996-2005. His empirical work suggests that as many as 1,000 companies appear to have manipulated stock option grant dates. While over 50 firms are currently under investigation by the SEC, it appears that shareholders are seeing the tip of the iceberg of companies who have come forward to "confess and correct."
CFA's Kurt Schacht echoed that there are lots of facts still to be revealed, and he cautioned that shareholders should not jump the gun. In a comment letter submitted to the SEC, the CFA Centre for Financial Market Integrity cites loss of investor confidence as one of the largest implications for shareholders. A volatile stock market suffers from the uncertainty involved with these scandals and their associated legal, accounting, and tax costs.
The market is already seeing the issue being taken up in court, with more than 70 lawsuits filed. ISS' Pat McGurn weighed in on the success of these lawsuits. Future reaction to backdating scandals will depend on the findings and outcomes of current investigations. Questions still remain, such as how to deal with boards of directors, audit committees, and compensation consultants that were "in the know," or worse, involved in the cover-up. There seems to be a lack of communication and cooperation between audit and compensation committees, which will need to improve.
The panel members also discussed better compensation disclosure, in light of the SEC's proposal and suggestion that some guidance in this area is forthcoming. It was generally felt that the SEC should augment their reform proposal concerning executive compensation. Companies that don't use "plain English" in compensation disclosure as proposed by the SEC will be seen as less forthcoming. More troublesome is that companies and boards may try to defend their actions rather than disclose them. (Consider SEC Commissioner Atkins' remarks defending spring loading.) The larger implication goes to the investor confidence issue. While discounted stock options are nothing new and not illegal per se, it's the cover-up that is most problematic for shareholders.
What do you think? Please let us know your thoughts and comments from last week's webcast.
To learn more about the practice of options backdating and spring loading, please click here.
| Permalink | Comments (1) | TrackBacks (0) | Print Article | Back To Top |
July 17, 2006 |
|
Board Diversity Increases Slowly
Submitted by: Sarah Cohn, Director of Communications
This article, the second in a two-part series looking at diversity in the boardroom, is drawn from ISS' 2006 Board Practices/Board Pay study.
Minority representation on boards appears to have remained essentially stable over the past year, but there has been a gradual, though slow, trend over recent years to diversify boards in terms of ethnicity, according to a recent ISS study.
Among the 6,979 directorships in the 2005 director group for which definitive information on racial or ethnic status is available, 706 are members of minority groups--representing a little over 10 percent of the total, about the same as in 2004. This percentage is up from 7 percent in 1999. The current group of minority directors includes:
--452 African-Americans (6.4 percent);
--146 Hispanics (2.1 percent); and
--107 Asian or Pacific Islanders (1.5 percent).
Larger companies are more likely to have minority directors on their boards than smaller firms. The correlation between company size and the likelihood that the board will have some minority representation is even more pronounced than with respect to female representation.
The likelihood of a board including a minority director significantly increases at companies with revenue over $3 billion, where over half of the companies tend to have a minority director (rising to 83 percent at companies with more than $10 billion in revenue). Companies with less than $500 million revenue have a minority director only about 12 percent of the time, rising to 22 percent for companies in the $1 billion to $3-billion range. Companies in the lowest band (less than $500 million), however, have made the biggest gains since 1999, when only about 2 percent of that group identified a minority director.
Racial and ethnic diversity on boards varies by economic sector, but there has been some small change over the last year. The energy industry remains the sector least likely to include minority directors on the board, but industrials increased representation in 2005. Telecommunication services companies have the highest proportion of minority directors, followed by utilities and consumer staples.
Thanks to steadily increasing minority recruitment at smaller corporations that peaked in 2003, the proportion of minority directors has grown over the past six years. As with the proportion of women directors, though, this growth stagnated over the past year despite board overhauls brought on by new regulations. Twelve companies (five fewer than in 2004) reported that they had at least four minority directors on their boards as of 2005. Citigroup and FirstBanCorp Puerto Rico each reported five minority directors.
Minority directors are far more likely to be independent from the company where they sit on the board: 86 percent of the directorships held by minority directors are classified as independent (up from 84 percent in 2003), compared with only 71 percent for Caucasian directors. Similarly, only 8 percent of minority directorships were considered affiliated, while 12 percent of Caucasian directorships were classified as affiliated. As noted earlier, these dramatic differences between the general independence levels of minority and Caucasian directors make it somewhat surprising that mandates for higher independence levels on the board did not lead to recruitment of significantly more minority directors by S&P 1,500 companies over the past two years. Only 7 percent of directors new to boards in the past two years are minorities.
Few minority directors are employed by firms where they sit on boards, perhaps reflecting the continued small number of minority employees in top executive positions. Only 0.3 percent of all directorships are held by minorities who are employees, and 74 percent of those directors are CEOs of their firms. In 2005, 25 companies (one fewer than in 2004) that had a minority-identified CEO.
| Permalink | Comments (1) | TrackBacks (0) | Print Article | Back To Top |
July 14, 2006 |
|
Legislation to Spur Majority Vote
Submitted by: Tad Kopinski and L. Reed Walton, Staff Writers
Lawmakers in Delaware, where most U.S. companies are incorporated, have amended the state's General Corporation Law (DCGL) to facilitate majority voting in director elections, but they stopped short of switching the law's default standard from plurality to majority.
The legislation, which goes into effect Aug. 1, makes clear that director resignation policies--which have been adopted by pharmaceutical giant Pfizer and more than 100 other firms--are enforceable under Delaware law. The new law also mandates that directors cannot overturn or alter shareholder-approved bylaw amendments that spell out vote requirements in director elections.
"[The] changes are intended to give stockholders more options to initiate their own action," retired Delaware Supreme Court Chief Justice E. Norman Veasey told Governance Weekly. "I think [the amendments are] significant changes that really at the end of the day put in the hands of the stockholders the ability to make these changes by getting votes from other stockholders."
The DGCL amendments, which were signed June 27 by Delaware's governor, will help mitigate worries over holdover provisions that called for a director to hold office until a successor is "elected and qualified." Those holdover provisions had provided directors a legal footing to reject calls for their resignation when receiving a majority of "withhold" votes, as called for under the Pfizer model.
While investors advocating for majority voting welcome the amendments, the legislation falls short of their demands to change the default standard in uncontested board elections. Moreover, some governance analysts question the overall efficacy of the amendments to give shareholders a greater say in the boardroom.
"It is not clear that the legislation will really impact a major change in corporate governance; let's see what the companies actually do with it," said Rolin P. Bissell, a partner in the corporate litigation and counseling section of Wilmington-based law firm Young Conaway Stargatt & Taylor, which helped shepherd the amendments through the Delaware legislature. "It seems to us that efforts to re-invigorate proxy fights by reducing their cost and that sort of thing will probably provide a more meaningful increase in stockholder power than majority voting."
With Delaware behind them, proponents of majority voting are now focusing on legislative efforts in Sacramento to create a default majority vote standard. A bill to do just that for all companies incorporated in California is now moving ahead in that state's legislature.
"We are hopeful that we can get it passed still in this legislative session and signed into law," Brad Pacheco, spokesman for the California Public Employees' Retirement System, told Governance Weekly. The pension fund, the nation's largest, is backing the legislation, which was introduced in January by Senator Richard Alarcon, a senior Democrat.
Strong Showing in 2006
So far this year, majority vote proposals filed by shareholders have won more than 50 percent support at 32 companies (or 38 percent) out of 84 firms where the issue has appeared on the ballot and results are available. In 2005, 14 shareholder proposals (or 23 percent) at about 60 firms received majority backing. This year, the average level of support stands at 46.9 percent, up from 43 percent a year ago, according to ISS data.
The lowest support this season occurred at General Electric (19.4 percent), which adopted a bylaw with a strong director resignation policy. Proposals also did not receive wide support at Wal-Mart (22.3 percent) and PepsiAmericas (27 percent), where there are large insider voting blocks.
Majority vote proposals by the United Brotherhood of Carpenters and other building trade unions have been withdrawn at more than 30 companies this year, primarily because these firms voluntarily adopted a majority standard in their bylaws along with a resignation policy for incumbent directors who fail to get more than 50 percent support.
Last month, Chubb announced that it would begin the process of amending its certificate of incorporation to include a majority voting clause after a shareholder proposal received 52 percent support in April. At Granite Construction and Target, shareholders withdrew proposals after board promises to introduce management resolutions in 2007. The boards of eight other firms, including Principal and fellow financial services group Hartford, have resolved to establish majority voting by amending company bylaws in 2007.
ABA Model Act Revision Endorses Resignations
Last month, the American Bar Association officially amended the Model Business Corporation Act, which is the basis for the corporate laws in most U.S. states, to include a provision for ousting a director in 90 days or fewer if he or she receives more than a 50 percent withhold vote. That provision is similar to the resignation policies in place at Pfizer and other firms, but it standardizes the 90-day window for replacing directors.
"I think they went a lot further than a lot of people thought they'd go," University of Delaware law professor Charles Elson said in June.
The moves by the ABA and Delaware lawmakers won't stop activists from pushing for deeper board election reforms, governance analysts say, leading many to predict growing investor support for such proposals later this year and next.
"Companies should expect continued significant pressure from institutional investors and shareholder activists on this issue in the next proxy season," Martin Lipton, a senior partner at Wachtell, Lipton, Rosen & Katz, told Governance Weekly, echoing sentiments he raised in a memo to clients.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 11, 2006 |
|
ICGN Discussion on Spring-Loading Stock Options
Submitted by: Cheryl Gustitus, Senior Vice President of Marketing and Communications
More than 500 people representing the institutional investment community attended the 2006 annual conference of the International Corporate Governance Network (ICGN) last week in Washington DC. Of course, a DC conference wouldn't be complete without a speaker from a regulatory body and SEC Commissioners draw a crowd at just about any investor conference.
In fact, the crowd that assembled to hear SEC Commissioner Paul Atkins speak turned a bit less courteous when the Commissioner suggested that the practice of springloading stock options (timing option grants prior to releasing positive company news) represented a legitimate tool for boards to use as incentives for CEOs and executives.
Immediately following his presentation, a vote was taken and 62% of the investor audience said that springloading should be considered a form of insider trading, while 16% seemed to agree with the Commissioner's viewpoint. 21% were undecided.
In other audience polls:
--82% of the conference-goers said that hiring and firing directors was the most important right a shareholder should have
--72% of the conference-goers said that corporate governance adds value but its difficult to measure, while 26% said that the value can in fact be measured
--70% of the conference-goers said that board practices have improved while only 8% said they had declined. 22% were on the fence.
While the practice of backdating options is clearly getting a close look by regulators, the newer approach of springloading option grants is just beginning to emerge. Is it insider trading? Tell us what you think.
| Permalink | Comments (1) | TrackBacks (0) | Print Article | Back To Top |
July 10, 2006 |
|
The Debate on Whether 'Spring Loading' is Insider Trading
Submitted by: Sarah Cohn, Director of Communications
There were two very interesting articles this weekend on options backdating. The first story is from The Wall Street Journal, which talks about the practice of 'spring loading' and, the second is a Guardian Unlimited story on how Dr. Erik Lie, associate professor of finance at the University of Iowa, is rocking corporate America by revealing boardroom reward ploys.
To read the Guardian Unlimited story, please click here.
To read the Wall Street Journal article, please Download file
Do you think 'spring loading' is insider trading? We welcome your comments.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 7, 2006 |
|
Japanese Investors Step Up Activism
Submitted by: John Taylor, Principal Researcher, Governance Research Service
Japanese firms once again overwhelmingly concentrated their annual shareholder meetings on a frenzied single day this year--June 29--as shareholders, together with their voting agents and proxy advisers, struggled to execute votes during the world's most challenging proxy voting marathon.
But while voting Japanese equities remains a daunting task, institutional activism, once almost exclusively associated with foreign pension giants like CalPERS and TIAA-CREF--both of which were instrumental in enabling international proxy voting in Japan in the early 1990s--is finally spreading to the long sleeping giant of Japanese institutional money.
In the past year, the Japanese business community has become increasingly sensitive to the growing clout of domestic institutional activism. Corporate managements, many of which are sitting on sizeable cash reserves, are facing hostile takeover threats for the first time in recent years. Moreover, the web of management-friendly cross-shareholding has steadily eroded, stemming primarily from the collapse of the economic bubble that peaked 16 years ago, forcing many banks and old-guard firms to sell off paper assets. Abysmal stock performance simultaneously drove many pension funds that were just starting to dabble in equity into under-funded positions, making them increasingly desperate for higher investment returns.
High-profile activism has been spearheaded by the Pension Fund Association (PFA), the fiduciary of last resort representing Japan's corporate pension funds, together with its public employee pension counterpart, the Pension Fund Association for Local Government Officials, or PAL.
Both have been joined by increasingly aggressive voting by Japan's giant life insurers, trust banks, and unit trusts (often acting as managers of pension assets). While still in its infancy, Japan's institutional activism is shocking traditional managements each year with demands for independent board oversight, better disclosure, and warnings against entrenchment measures that sap shareholder value.
Japanese corporate management is torn between a new awareness that investor support is no longer guaranteed, and extreme sensitivity--stoked by investor-relations pundits--to the growing likelihood of hostile bids that could force firms to reform inefficient capital deployment policies or threaten executive job security.
Poison Pills Stir Governance Debate
Poison pills emerged with a vengeance this year, following their appearance at a small number of firms in 2005, and other moves related to takeover defenses or board discretion have each led to new triggers for shareholder dissent. The influential PFA has been among the first to publicly air how it voted, and its comments were front-page news late last month.
On June 29, the Nihon Keizai Shimbun reported that the PFA, which manages approximately $104 billion in assets, said it is opposing about 40 percent (71 proposals) of the 171 proposals that it identifies as "takeover-defense related" in its portfolio of 819 Tokyo Stock Exchange 1st Section firms that held annual meetings in late June.
Earlier this year, the PFA and the PAL both threatened to vote against some or all board nominees at firms that institute pill programs without seeking shareholder ratification, but neither has yet disclosed details on votes against board nominees. The absence of this disclosure may have given the PFA a gentler image in the Japanese press, since the association voted against more than 90 percent of corporate defense proposals in 2005.
It also appears that the association may have defined takeover-defense related proposals to include measures such as large increases in authorized capital and reductions in the authorized board size (arguably hampering a new owner from stuffing the board with its lieutenants), possibly to ease the shock of its opposition levels as they are reported in the business press.
The PFA's voting suggests it may be more clearly opposed to many poison pills and other management-entrenchment moves than the 40 percent figure would suggest. The association opposed all proposals where management sought to restore a supermajority requirement to oust directors, now that the new Company Law default requirement is a simple majority. The old Commercial Code requirement was for a 67 percent vote, and a large number of Japanese firms sought to restore the old limit using language that suggested the move was a routine housekeeping matter. The association acknowledges that it identified and opposed the move in 19 ballot proposals.
The association also opposed 45 bylaw amendment proposals that included a large increase in authorized capital, out of a total of 66 such proposals at its portfolio firms, arguing that these were intended to finance potential ill-advised poison pill defenses.
The PFA also opposed 127 out of 201 bylaw amendment proposals that included a measure to allow quarterly dividends. Most firms in Japan pay just one or two dividends a year, and the new Company Law allows more frequent distributions. Firms also are allowed starting this year to waive the requirement for shareholder approval for dividends and other distributions of profit. This also requires a bylaw amendment, but the association argues that such flexibility on dividend payouts can leave too much power in the hands of the board of directors.
Finally, the PFA opposed "all shareholder rights plans [poison pill plans] structured such that the deployment is left to the discretion of the board of directors," according to the June 29 Nihon Keizai Shimbun article. This suggests a high level of opposition to poison pills. Virtually all Japan's pill proposals this year left final discretion to the board of directors, but a key distinction emerged as a minority of pills set up a committee of nonexecutive directors with binding authority to stop deployment of a pill if it judges the defense to be contrary to shareholder interests.
A large majority of pill proposals set up a committee characterized as "highly independent of management" to pass judgment on whether a pill should be deployed and explicitly authorized non-board members on the committee, which legal authorities note precludes the possibility of giving the committee binding authority to prevent a pill from being deployed. If the PFA actually used this feature as a trigger, accepting only plans where a nonexecutive committee can block a pill, it would have opposed the great majority of pills at firms listed in the TSE 1st Section.
Early indications are that shareholders defeated few if any of Japan's new flood of poison pills in June, but managements have been served notice that entrenchment measures will not be overlooked. As such, boardroom sensitivity to the PFA's activism and to that of Japan's other thought leaders on corporate governance is likely to remain high.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 6, 2006 |
|
U.K. Regulators Revise Governance Bible
Submitted by: Subodh Mishra, Managing Editor
On June 27, U.K. regulators announced amendments to the Combined Code on Corporate Governance, a set of best practice requirements that govern all London Stock Exchange-listed companies. The code, dubbed Britain's governance "bible," was last revised in 2003.
Britain's Financial Reporting Council said the changes would:
--amend the existing restriction on the company chairman serving on the remuneration committee to enable him or her to do so where considered independent on appointment as chairman (although it is recommended that he or she should not also chair the committee);
--provide a 'vote withheld' option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. Many listed companies already provide this option. A 'withheld' vote is not a vote in law and would not count in the calculation of the proportion of the votes for and against the resolution, however;
--recommend that companies publish on their Web site the details of proxies lodged at a general meeting where votes are taken on a show of hands. The Company Law Reform Bill currently with Parliament includes clauses that would require companies to publish details of votes taken on a poll. This amendment to the Combined Code means that details of all votes would be made available; and
--enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web site.
"When the FRC reviewed the implementation of the 2003 Code in the second half of 2005, we found that it was generally felt to be bedding down well," FRC chairman Sir Christopher Hogg said in a press release. "But the review did identify a small number of modifications that have now been endorsed by both listed companies and their investors, and these have been incorporated into the updated version of the Code."
According to the FRC, listing rules will not formally apply to the revised Combined Code until the Financial Services Authority has carried out a separate consultation, which is expected to start in September. The FRC will encourage listed companies and their investors to adopt the updated code on a voluntary basis for reporting years beginning on or after Nov. 1 2006, however, "in view of the limited nature of the changes and the strong support that they have received."
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
July 5, 2006 |
|
Discussion: Majority Voting for Directors
Submitted by: Cheryl Gustitus, Senior Vice President, Marketing and Communications
There is an interesting article in the Harvard Business School publication Working Knowledge titled "Corporate Governance Activists are Headed in the Wrong Direction." Author Joseph Hinsley offers his perspective on majority voting for directors and states that its a flawed concept that neither enhances shareholder democracy nor improves corporate governance.
To read the article click here. We welcome your comments on majority voting for directors.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |
State of the (Securities Litigation) Union
Submitted by: Bruce Carton, Vice President, Securities Class Action Services
Each year the president of the United States provides the nation with a "State of the Union" address that provides an update on the status of our country. Given the many recent developments, industry reports, and high-profile cases that have resulted in a flurry of discussion concerning the health, status, and future of securities class action litigation, we offer this State of the Union for securities litigation:
It's about the same as it's been for the last 10 years.
At least that's how we see it, despite some curious media pronouncements this year about the supposed demise (or at least the supposed decline) of securities litigation.
Already in 2006, Stanford University/Cornerstone Research, NERA Economic Consulting, and PricewaterhouseCoopers have published interesting studies presenting securities litigation statistics and analysis of possible trends. These studies, combined with notable events such as the high-profile settlements in the Enron case, as well as the criminal indictment of powerhouse plaintiffs' law firm Milberg Weiss Bershad & Schulman, have provided the press and pundits with numerous opportunities to opine on where securities litigation is headed.
The Stanford/Cornerstone report in January got the ball rolling when it showed that new case filings dropped 17 percent in 2005 (from 213 new cases in 2004 to 175). Articles in The Wall Street Journal and the New York Times covered the release of this report by describing the "steep drop" or "sharp decline" in securities class actions in 2005, and pondered the possible causes, from the success of Sarbanes-Oxley to the end of the dot-com line of cases.
In fact, however, there was no "steep drop" or "sharp decline" in cases in 2005. Viewed in context, the 2005 decline of 37 cases simply does not appear to be historically significant. To the contrary, it is directly in line with the pattern of the last nine years. Looking at the fluctuation of the number of cases filed through the years as shown in the same Stanford/Cornerstone report, this becomes quite clear. Since 1997, the number of securities class action filings has gone up and down in a narrow range with amazing consistency: up a bit every even year, down a bit every odd year.
The NERA Economic Consulting study, which was published in April, similarly found that the number of federal filings in 2005 declined to its lowest point since 1997. It concluded, however, that "it is far too early to conclude that there is a downward trend." The study's statistical testing confirmed what a glance at the chart above also shows--that "the 2005 dip is not statistically different from either the post-PSLRA average or from a longer-term trend." Interestingly, NERA also clarified that almost all of the difference between the 2004 and 2005 totals was accounted for by an unexplained drop in filings in the Ninth Circuit, and it concluded that the most likely explanation for the drop in 2005 was simply random year-to-year variation.
The NERA study contained another statistic, however, that generated its own measure of confusion. The study noted that "dismissal rates have doubled since PSLRA" became effective in 1996, stating that "dismissals accounted for only 19.4 percent of dispositions for cases filed between 1991 and 1995. More recently, for cases filed between 1998 and 2003, dismissals have accounted for 40.3 percent of dispositions." The report explained, though, that "there is no indication that dismissal rates have continued to rise after an initial adjustment to the tougher pleading requirements of PSLRA." In other words, nothing has changed in terms of dismissal rates since approximately 1998.
Notwithstanding that fact, a newsletter called Agenda wrote in late May that securities class actions have begun to "dry up," citing both the lower number of cases in 2005 and "the increase in the number of securities class actions that have been dismissed in recent years. Indeed, more than 40 percent of the securities class actions filed between 1998 and 2003 were dismissed, according to a study issued last month by NERA Economic Consulting. That's more than double the number of cases filed in the four-year period from 1991 to 1995 that were dismissed."
Again, viewed in context, neither the number of cases in 2005 nor the NERA dismissal statistics support the argument that securities class actions have recently "dried up" in any meaningful way--the number of cases is roughly what it has been since 1997 and the dismissal rate is, according to NERA, the same as it has been since 1998.
Other recent events that, while noteworthy, do not seem to signal any dramatic change in the securities litigation landscape include the Enron settlement and the indictment of law firm Milberg Weiss. While the approval of the Enron settlement in May prompted some to assume that the settlement symbolized the end of the line for big securities settlements, this does not appear to be the case. Indeed, the ISS Settlement Pipeline, which measures the sum of all pending or tentatively announced settlements for which the claim deadline has not passed, currently stands at a massive $14.9 billion and includes significant cases such as Nortel Networks ($2.7 billion), Royal Ahold ($1.1 billion), and the IPO Securities Litigation (currently $1 billion and possibly much more). Indeed, including SEC settlements, there are currently 20 settlements in the pipeline valued at over $100 million.
With respect to Milberg Weiss, it seems clearer now that even if the firm's practice is diminished or destroyed altogether by the indictment, there will not be a significant impact on securities class actions generally. There are far too many competent plaintiffs' law firms out there that will gladly fill any void that may be created. It also appears that to the extent Milberg Weiss is losing any lawyers, it is because these lawyers are being recruited away by competitors, where they will promptly resume their securities class action practices.
One thing that has changed markedly in the securities class action world is the size of settlements. The recent PwC 2005 Securities Litigation Study showed that the average settlement of a securities class action soared to $71.1 million in 2005, a 156 percent increase from the $27.8 million average in 2004. Notably, these numbers exclude the mega-settlements in the historic WorldCom and Enron cases.
As PwC notes, the reasons for this surge likely include the success of plaintiffs in involving third parties such as investment banks, accountants, and law firms as defendants in these cases, as well as the huge "theoretical economic damages" present in cases involving companies with large market capitalizations and huge stock drops. Other reasons may include the impact of large pension funds serving as lead plaintiffs, and the phenomenon that each new high dollar settlement sets the bar a bit higher, encouraging plaintiffs to demand more money in settlements (and arguably contributing to a recent surge in the number of trials occurring in securities class action cases).
In short, the "State of Securities Litigation" in 2005 looked a lot like it did in 2004 ... and 2003 ... and 2002 ... and so on. Just with bigger numbers.
| Permalink | Comments (0) | TrackBacks (0) | Print Article | Back To Top |