Pension Funds File Access Proposal at H-P
Submitted by: Tad Kopinski, Staff Writer
Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard's board of directors.
This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).
The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.
"Proxy access is critical to insuring shareholder rights," New York State Comptroller Alan G. Hevesi said in a press release. "While we wait for the SEC to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders."
H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company's handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.
"The H-P board is completely dysfunctional and has been for a long time, which is an example of why shareholders have fought so hard for proxy access," Richard Ferlauto, AFSCME's director of pension investment policy, told Governance Weekly. "We seek to nominate directors at H-P who will make the board do its job better through an election process that is not stacked against investor interests."
The SEC has scheduled a meeting on Oct. 18 to review its rules on shareholder proposals concerning board elections. Given the lack of time before filing deadlines for the 2007 season, the SEC is not likely to revive a controversial 2003 draft rule that would have established procedures to allow shareholders to nominate directors. While Ferlauto has expressed hope that the SEC will allow shareholders to file proxy access proposals at individual firms, other observers, including Gordon Smith, a law professor at the University of Wisconsin, warn that the agency may revise its rules to bar such resolutions.
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September 27, 2006 |
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The Milberg Effect? Not So Much
Submitted by: Bruce Carton, Vice President, Securities Class Action Services
The WSJ had a Review and Outlook piece earlier this month entitled "The Milberg Effect," which argues that the projected drop-off in securities class action cases in 2006 suggested by a recent study is due to a reduction in the number of cases filed by the law firm Milberg Weiss. According to the WSJ piece,
According to Cornerstone, a research firm that tracks litigation, law firms filed 179 class actions last year. The first six months of this year saw only 61, a rate that would result in about 123 class actions for the year -- or a decrease from 2005 of 56 suits. Meanwhile, according to publicly available press releases, Milberg Weiss filed 91 of last year's suits. Yet in the first six months of this year, having come under prosecutorial scrutiny and lost many lawyers, the firm has filed only 17. At this rate, Milberg would tally about 34 suits for the year -- or 57 fewer than 2005.These numbers are more than a coincidence, and should put to rest the assumption that Sarbanes-Oxley or
better corporate governance standards are producing fewer causes of legal action. Securities lawyers have
long understood that most class actions have little or no substance but are manufactured by the plaintiffs bar to pad their own pocketbooks.
This is simply wrong. Contrary to the conclusion in the piece above, the projected overall drop-off of 56 class actions in 2006 and the projected Milberg drop-off of 57 class actions filings is a coincidence. The flaw in the WSJ's analysis is that it rests on the false assumption that each of the companies that are the subject of a securities class action are sued by only one law firm. That is not the case.
To develop this point a bit, the Cornerstone study projects that at the current rate, 123 companies will be the subject of a securities class action lawsuit this year--56 fewer than in 2005. It is critical to note here, however, that virtually all (let's conservatively go with 90%) of these 123 cases will involve multiple complaints filed by multiple law firms. Indeed, many companies will be sued by a dozen or more different law firms. Using this conservative 90% figure, if Milberg does file 57 fewer complaints in 2006, this drop-off will only impact the total number of companies that are the subject of a securities class action in the 10% of Milberg's filings where it is the only law firm to file a complaint. So we're looking at a possible reduction of 5 or 6 cases (5.7 to be exact), not 57 cases.
The Milberg Effect? Not so much.
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September 26, 2006 |
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European Commission Assigns ISS to Lead Research on Proportionality Between Ownership and Control
Submitted by: Sarah Ball, Director of Marketing and Communications, ISS Europe
In the European Union, numerous mechanisms exist that allow limited numbers of shareholders to exercise significant influence on companies disproportionate to their financial contribution to the wealth of the company. For this reason, the European Commission has decided to take a closer look at the question of proportionality and capital in companies listed in the EU.
Those that advocate a move away from control-enhancing mechanisms and towards 'one-share-one-vote' being the norm, acknowledge that although there may be implementation challenges, these would be outweighed by the creation of a true single EU marketplace in which all shareholders could exercise their rights in a democratic manner.
Detractors point out that control-enhancing mechanisms in the EU are created by shareholders at the general meeting and are acquired voluntarily and knowingly by investors. They argue that many EU countries have applied the system of multiple voting shares, for instance, for over 100 years and have no knowledge of any difficulties or complaints.
The situation in the US is very different with 92% of market capitalization including companies that have voluntarily chosen to align cash flow and control rights. This is a high number compared to the EU.
ISS has been selected to lead an important research project, in collaboration with the global law firm Shearman and Sterling LLP and the European Corporate Governance Institute (ECGI), on the proportionality between ownership and control for the European Commission. This EC research initiative will tackle the important corporate governance concept of "one share-one vote" and lead to more insightful discussion within the industry.
Led by Managing Director of ISS Europe, Jean-Nicolas Caprasse, ISS' team of European researchers working from our Brussels, London, Paris and Amsterdam offices will produce profiles on the structure of over 450 companies in 16 EU member states. ISS has also been asked by the EC to survey institutional investors in European and international markets about their views on control-enhancing mechanisms.
The final report will include an overview of European regulatory frameworks by Shearman and Sterling plus a review of existing theoretical and empirical research by ECGI. Both the overview and review will contain a comparison of the situation in some key jurisdictions outside the European Union. To view the full announcement, please click here.
What are your thoughts on the one share-one vote principle? We welcome your thoughts.
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September 25, 2006 |
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Support Grows for Social Proposals
Submitted by: Meg Voorhes, Social Issues Service Director, and Carolyn Mathiasen, Social Issues Service Editor
Investors are looking with increasing favor on shareholder proposals asking companies to disclose and monitor their political contributions, to report on their fair employment policies, and to issue broad-based reports on sustainability. Investors also gave greater support to selected proposals on labor rights and environmental issues in the 2006 proxy season.
While shareholder proposals on social issues historically have not fared as well as governance resolutions, social proposals have received increased support this year. In fact, 27 percent of the social issues proposals that came to a vote through June 30 were supported by more than 15 percent of the shares voted; only 15 percent of the social proposals in 2004 and 2005 achieved this level of support, according to ISS data.
In contrast, investors overwhelmingly rejected proposals asking companies to drop equal treatment protections for gay employees, to review or improve animal welfare, and--in the case of tobacco companies--to restrict their marketing or to support smoking bans. Proposals along these lines averaged less than 6 percent support.
The 177 social issues proposals that came to a vote through June represent only about half the number that shareholders originally filed. Shareholder proponents withdrew 97 resolutions, often after fruitful discussions with management. In addition, companies were able to obtain permission from the staff of the Securities and Exchange Commission to omit 51 proposals from their proxy statements.
What follows is a snapshot of four issue areas--environment, equal employment opportunity, global labor standards, and political contributions--that produced some of the highest votes or notable withdrawal agreements this season. (All vote support levels are calculated according to the formula the SEC uses to determine resubmission eligibility: the percentage of "for" votes out of the total shares voted "for" and "against," excluding abstentions. Under SEC rules, first-year proposals must win at least 3 percent support to qualify for resubmission, second-year proposals must get at least 6 percent, and proposals in their third year or more must score at least 10 percent.)
Environment
Of the 75 environmental proposals that were filed for meetings before June 30, 44 came to votes. Activity spanned a new anti-toxics campaign to a continued focus on climate change. This category included some of the year's most significant withdrawals, as well as seven of the proposals that won at least 15 percent support.
Ten proposals concerning greenhouse gas emissions, energy efficiency, or climate change came to a vote. Six were filed by proponents who believe that climate change is a major problem and that companies need to reduce their greenhouse gas emissions. The Nathan Cummings Foundation, the Sierra Club, and New England Friends asked four companies for reports on energy efficiency plans. The proposals won 39.3 percent at Standard Pacific, setting a new record for support on that issue, and received 28.7 percent at Bed Bath & Beyond. The third highest vote in the climate change arena was the 22.6 percent achieved by Trillium Asset Management's resolution asking Dominion Resources to report on and reduce its greenhouse gas emissions.
Four proposals by investors who are skeptical of climate change fared less well. Resolutions seeking an annual "scientific report on global warming/cooling" received 4 percent support at Ford Motor, 7 percent at Occidental Petroleum, and 2 percent at General Motors. A similar proposal from Action Fund Management at General Electric received 6.9 percent support.
The 2006 season was notable for several largely new shareholder campaigns on environmental issues. One focused on the potential impact on local communities from toxic emissions. The highest scoring resolution was Mercy Investment’s first-year proposal asking Synagro, whose sewage-to-fertilizer operations in the Bronx have prompted complaints, to review and reduce its toxic emissions; it received 31.6 percent support.
A shareholder focus on toxic chemicals was also evident in several proposals that asked companies to consider reformulating their products or services to limit the use of toxic chemicals or to reduce the number of products they stock with toxic ingredients. The highest-scoring proposal in this category was at DuPont, where LongView won 28.9 percent support for a request that the company report on "the feasibility of an expeditious phase-out of the use" of perfluorooctanoic acid (PFOA). PFOA, which is used in the production of Teflon and other products, was labeled a "likely carcinogen" by a federal scientific advisory board in January. In addition, toxin-related proposals from Boston Common Asset Management at CVS, and from Green Century at Whole Foods, each won about 10 percent support.
Five proposals came to a vote that focused on conserving natural resources and natural habitats. The top-scorer was Green Century's first-year proposal asking ConocoPhillips to report on "the potential environmental damage" that would result from oil drilling in Alaska's National Petroleum Reserve; it won 25.5 percent support. Green Century also asked both Chevron and Exxon Mobil for a second time to report on the potential environmental damage that would result from drilling in certain protected areas including national parks, wildlife refuges, and World Heritage Sites. Both proposals received around 8 percent support, enough to clear the 6 percent resubmission threshold.
Proponents reached withdrawal agreements on 21 of the environmental proposals put forth for 2006, with climate change resolutions leading the list. Proponents withdrew requests for reports on greenhouse gas emissions at Anadarko Petroleum, Devon Energy, Peabody Energy, and four Midwestern utilities when the companies promised to do the reports. The utilities Alliant, Great Plains, MGE, and WPS agreed to disclose how they are preparing for regulatory controls on greenhouse gas emissions. In addition, the Sisters of St. Dominic withdrew a resolution asking General Motors to reduce greenhouse emissions; the company has significantly increased its reporting on climate change in the last year.
Proponents of energy efficiency in buildings withdrew four resolutions--at Home Depot, Liberty Property, Lowe's, and Simon Property--when the companies agreed to provide significant information on energy usage and energy efficiency goals. Early in the year, church shareholders ended a decade-long campaign to get General Electric to disclose information about the costs of an effort to delay cleanup of PCBs, especially in the Hudson River, after the company published extensive information on PCB costs in a letter to the SEC.
A proposal asking Johnson & Johnson to report on reformulating cosmetics to meet European Union standards was withdrawn after the company agreed to continue meeting with the proponent, Citizens Funds, to ensure greater transparency and safer products.
Walden Asset Management withdrew its proposals on bottle recycling--at PepsiCo and Coca-Cola--with the latter withdrawal coming at the last minute after the company had published the proxy statement. Both companies agreed to seek quantitative and national goals and a timeline for increased recycling.
Equal Employment
Five proposals came to a vote concerning non-discrimination on the basis of sexual orientation or sexual identity, all of which earned double-digit support. The resolution asking Exxon Mobil to amend its non-discrimination policy to include sexual orientation received 34.6 percent support, the highest vote ever for this topic at the company. The same proposal also fared well at Expeditors International (33.6 percent support), Amsouth (28.0 percent), and Leggett & Platt (24.7 percent). In addition, the New York City pension funds asked Robert Half International to implement the Equality Principles, a 10-point set of guidelines to bar workplace discrimination on the basis of sexual orientation and sexual identity; that proposal earned 18.7 percent support in its first appearance before company investors.
Investors also supported, as they have in past years, proposals asking companies to report on their EEO policies with regard to women and racial minorities. At Home Depot, a second-year proposal on this topic, prompted by the company's reversal of a 2001 decision to provide statistical data to shareholders on its work force by race and sex, won 35.9 percent, up nearly 6 percentage points from 2005. At Lockheed Martin, a similar first-time proposal from religious investors won 25.1 percent. The EEOC filed suit against the company in 2005 alleging race discrimination.
Proponents withdrew 14 sexual-orientation proposals because companies agreed to amend their EEO policies or demonstrated that they already had gay rights policies in place.
Proponents also reached withdrawal agreements at Wal-Mart and Donaldson over requests for equal employment data. The withdrawal at Wal-Mart came after the company posted its entire EEO-1 form along with comparative data on its Web site. A large coalition of SRI funds and church groups had been asking the company since 2002 to release its EEO-1 data, and votes for the proposal had increased steadily, from 11.3 percent the first year to 18.8 percent in 2005.
Global Labor Standards
Four of the 13 proposals that came to a vote asking companies to report on, improve, or monitor the labor standards in their global operations won double-digit support. The top vote-getter--winning 49.8 percent support--was the New York City pension funds' proposal to Lear. It asked the company to develop and monitor a code of conduct for its operations and suppliers based on the eight core conventions of the International Labor Organization and the U.N. Norms for Transnational Corporations. The same proposal from New York won 32.9 percent support at C.R. Bard, where the company acknowledged it did not have a labor code for its suppliers, and 25.4 percent at Bed Bath & Beyond. As You Sow's request that Time Warner report on its vendors' labor standards also won 26.5 percent.
Proponents withdrew 10 global labor proposals. Seven of the withdrawals were negotiated by the New York City pension funds, which usually insists on substantial concessions from companies before agreeing to withdraw. The others were negotiated by Domini at Apple Computer, where the company unveiled a comprehensive code, and by LongView at Colgate-Palmolive, where the company agreed to produce a report for shareholders on the risks of globalization.
Political Contributions
The broad-based shareholder campaign to get companies to provide information on political contributions continued into a third year. As in the past, most proponents, following a template developed by the Center for Political Accountability, a Washington think tank, asked for a listing of contributions made with corporate funds, the corporate policy on contributions, and the name of the decision-makers. Some of the proposals, for the first time, also asked for a reporting of dues paid to trade associations.
Twenty-nine of these proposals came to a vote through June; the primary filers were labor unions, religious investors, and SRI funds. With only four exceptions, all received support of 10 percent or more, and all but two earned enough support for resubmission. The top scorer--with 75.5 percent--was Green Century's proposal at Amgen, where management recommended a vote in favor. Other high votes came at Amsouth (25.2 percent), Caremark (42.1 percent), Home Depot (34.0 percent), JPMorgan Chase (28.9 percent), Marsh & McLennan (33.2 percent), Charles Schwab (28.9 percent), St. Paul Travelers (28.7 percent), Union Pacific (27.7 percent), Verizon Communications (33.4 percent), Washington Mutual (24.1 percent), and Wyeth (29 percent).
Meanwhile, Action Fund Management's request that JP Morgan Chase report on its procedures for "identifying and prioritizing legislative and regulatory public policy advocacy activities" received 27.2 percent support.
Proponents withdrew resolutions at Bristol-Myers Squibb, Coca-Cola, Eli Lilly, McDonald's, Southern, and Staples when the companies provided the requested information. The AFL-CIO also withdrew a proposal at SunTrust when the company promised not to donate funds for campaigns in favor of Social Security privatization.
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September 22, 2006 |
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Cablevision Grants Underground Options
Submitted by: Patrick McGurn, ISS Executive Vice President and Special Counsel
Leave it to governance misfit Cablevision Systems to bring the ongoing backdating scandal to a new low point. Disclosures of a backdated, after-life option grant to a close ally of the controlling and dysfunctional Dolan dynasty will provide new fodder for the headline writers of the nation's newspapers and will fuel calls for the mercy killing of stock options.
In coming days, you should expect to see banner headlines screaming: "Pay For No Pulse" and "Can't Fog a Mirror Grant." Leading the parade, Columbia Law Professor John Coffee dryly quipped to the WSJ this am that "trying to incentivize a corpse suggests (the board) was not complying with the spirit of shareholder-approved stock-option plans." I checked the plan text and I can say that Jack is right, shareholders didn't authorize Sixth Sense grants.
Shareholders looking for those to blame for the posthumous payout should push to learn the name of the compensation consultant who apparently received options in lieu of his or her fee (also not properly accounted for) and "directly participated in the options dating process." A career death penalty would be the appropriate investor response.
Two directors, who saw the "I pay dead people" grants take place on their watch, have surrendered their seats on several key boardroom panels. Shareholders might wonder why these directors haven't been shown the boardroom exit door.
Cablevison continues to earn its reputation as one of the worst governed companies in the US. The Zombie grant practices on display here are additional proof that the company's governance practices have been spirited away.
What's your view?
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September 19, 2006 |
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Asian Corporate Governance Association Announces Asian Proxy Voting Survey 2006
Submitted by: Sarah Cohn, Director of Communications
The WSJ has an interesting article today titled, "Proxy-Voting Systems Improve, But Investors Still Face Hurdles." The piece discusses the Asian Corporate Governance Association's (ACGA) Asian Proxy Voting Survey 2006, which addresses the obstacles shareholders face when voting in Asia.
According to the WSJ's summary of the report, often times institutions in Asia don't bother to vote due to cumbersome procedures and out of apathy. The ACGA estimates that no more than 20% to 30% of minority investors vote, however this is expected to change as foreign holdings in Asia rise.
What are your thoughts on proxy voting in Asia? We welcome your comments.
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September 18, 2006 |
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Improving Pay Practices
Submitted by: ISS International Research Analysts
With the new Securities and Exchange Commission rules to enhance disclosure of executive compensation at U.S. companies, many domestic and international institutional investors are sharpening their focus on pay policies, practices, and disclosure requirements in overseas markets.
What they are finding is that while many markets lag far behind U.S. standards of compensation disclosure, some are, arguably, more advanced because, analysts believe, shareholders have a say on compensation policies.
In 2002, for example, the United Kingdom became the first market to require a shareholder advisory vote on board pay, which was coupled with the introduction of required disclosure of key compensation data.
The 2002 remuneration report regulations formalized what most of Britain's larger companies had already been doing--in keeping with local best practice recommendations--while also ensuring that such regulations extended to smaller and middle-capital firms. By specifying that a reasonably comprehensive level of information had to be provided, the regulations helped to raise reporting standards and provided a level basis for comparing individual and group compensation elements.
In the United Kingdom, the ability for shareholders to vote on the remuneration report was perceived as a way to provide a separate outlet for concerns that previously resulted in votes being dispersed across a range of resolutions, such as votes against directors who were remuneration committee members or who might have been executives themselves.
In other cases, compensation concerns were significant but not sufficient to merit voting against directors. Consequently, the ability to consistently and more effectively express views on pay has been welcomed by investors and has proved a valuable tool in encouraging companies to improve their practices. Specific high-profile examples of high-dissent votes (or even defeats, such as GlaxoSmithKline in 2003) help to demonstrate the importance of the regulations.
The required vote has contributed to a significant increase in constructive dialogue between companies and investors on this issue in the U.K. market. Rob Burdett, a partner at the London-based consulting group New Bridge Street, told the Financial Times in August that the 2006 annual meeting season "has been less fraught this year than in previous years, with companies listening to shareholders."
Underscoring the change, New Bridge Street's study of basic salaries of top executives at Britain's largest 100 companies notes a rise between 5 and 6 percent in 2006, to a median of £785,000 ($1.5 million). This compares with yearly rises of about 14 percent five years ago, before the advisory vote rules were put into place.
U.K. companies' strategy of quelling shareholder rebellions through engagement is being copied elsewhere. In Australia--another market where the remuneration report is submitted for (non-binding) shareholder approval--larger companies are attempting to avoid confrontations with shareholders at general meetings by consulting with investors in advance of the remuneration report vote.
Though just one Australian firm (Novogen) has so far had its remuneration report rejected by a majority of shareholders, several have received "against" votes of more than 40 percent. But analysts predict engagement with shareholders will continue, and possibly increase, during the forthcoming 2006 annual meeting season as companies seek to lower opposition levels.
Like the U.K. and Australia, Sweden's "comply or explain" style Corporate Governance Code recommends that corporate boards get approval for policies on remuneration and other terms of employment for senior management. This best practice provision has not been enshrined in law.
According to the code--which now applies to companies listed on the two major indices of the Stockholm Stock Exchange with revenues of over SEK 2 billion ($275 million)--firms should disclose: the relative importance of fixed and variable components of the remuneration and the linkage between performance and remuneration; the principal terms of bonus and incentive plans; the principal terms of non-monetary benefits, pension, notice of termination and severance pay; and the members of senior management covered by the terms.
During the 2006 proxy season, 74 Swedish companies of 81 subject to the code put executive remuneration up for shareholder approval, according to ISS records. Of the 74, roughly one-quarter chose to do so voluntarily. But the relatively relaxed definition of what information should be disclosed, coupled with the lack of established best practices in the market, led to notable variances in disclosure levels among companies. Some companies were content with disclosing an absolute minimum thus defying the purpose of having this resolution.
The Netherlands, notably, has gone one step beyond the advisory vote method used in the United Kingdom and Australia. By recommendation of the Dutch Tabaksblat Code on corporate governance, the compensation policies of Netherlands-based firms must be put to a binding--rather than advisory--vote at general meetings of shareholders.
Investors in Dutch companies also must approve cases where the non-executive supervisory board intends to materially change the remuneration policy for management board members. The approval procedure consists of an "ex-ante" approval, which can have far-reaching consequences if shareholders do not vote in favor. In such instances, the company would be unable to implement a new compensation policy and would be forced to maintain existing policies.
The Dutch code also enhances disclosure of pay elements such as the ratio of variable versus fixed remuneration, peer group companies' pay, severance arrangements, pension plan payments, and performance criteria for any performance-related payment.
Though it remains unclear whether recent measures to increase corporate accountability for compensation policies and practices in these markets will ensure sustainable long-term improvements and higher standards, demonstrable short-term improvements have not been lost on U.S. investors.
This year, the American Federation of State, County, and Municipal Employees pension fund filed proposals at Home Depot, US Bancorp, Countrywide Financial, and Merrill Lynch, calling on the firms to give shareholders an advisory vote on compensation committee reports. Support for the proposal averaged nearly 40 percent, which, analysts note, is remarkably high for a first-year submission and will likely prompt similar proposal filings in 2007.
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September 13, 2006 |
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Poison Pill Tinkering Not Enough, Some Investors Say
Submitted by: Tad Kopinski, Staff Writer
While more companies are agreeing to submit future "poison pill" plans to a shareholder vote or modifying existing ones to make them more palatable, some individual investors are pressing ahead with shareholder proposals--including binding resolutions seeking bylaw or certificate of incorporation changes--to get companies to submit future defenses to a shareholder vote.
A case in point is the Aug. 21 announcement by Pep Boys, the automotive aftermarket retail and service chain, that it will modify its poison pill after reaching an agreement to resolve a proxy fight with Barington Capital Group, which holds a 9.9 percent stake in the company. As part of the agreement, the dissidents will get four director nominees at the company's Oct. 19 annual meeting.
Pep Boys said it will amend its anti-takeover plan to include a provision that requires a committee of independent directors to meet every three years to review the plan and determine whether the plan should be terminated or revised. The proposed change also calls for the elimination of the so-called "modified slow-hand provision," which requires a vote by directors unrelated to a potential acquirer to redeem the pill, and in its place permit the redemption of the plan by the entire board.
"This tinkering with the poison pill plan falls far short of allowing shareholders a vote on this most important topic, especially at an underperforming company such as Pep Boys," shareholder activist John Chevedden told Governance Weekly. He said his proposal to submit future pills to a shareholder vote will remain on the company's ballot.
In addition to the more than a dozen companies that have either rescinded their pill or put it up for a shareholder vote this year, a number of companies have promised to do so in the future, including Comerco and Gemcorp in 2007, and OfficeMax in 2008. At News Corp., which was sued by investors last year after it failed to submit a poison pill extension for shareholder approval, management is now seeking such an endorsement at the company's upcoming annual meeting, tentatively scheduled for Oct. 20.
An unusual poison pill proposal by Harvard Law Professor Lucian Bebchuk is set to come to a vote on Sept. 18 at CA, a large management software company. The measure seeks a binding bylaw amendment that would require all poison pills that have not been endorsed by shareholders to be approved by a unanimous vote of the board of directors, and that these poison pills may not have a life of longer than one year, and must be renewed every year by another unanimous vote of the board.
Bebchuk's proposal may ultimately help to establish a legal precedent clarifying issues surrounding "binding bylaw" proposals regarding poison pills. The validity of such proposals is largely unsettled in Delaware law. The outcome of Bebchuk's proposal, and a similar proposal which got 71.2 percent approval by Hilton Hotels shareholders in May, may spur Delaware courts to address the issue.
At the 14 companies where poison pill proposals by investors have come to a vote this year, the average level of support exceeded 50 percent.
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September 12, 2006 |
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The Value of Periodic Corporate Governance Performance Assessments
Submitted by: Jill Lyons, Executive Vice President and General Manager, ISS Corporate Services
Corporations measure their performance all the time. In addition to public announcements of their financial performance as required by government regulations, corporations perform a wide-range of internal and external assessments of performance, from brand value analyses and product comparisons, to investor perception studies or customer satisfaction surveys. All of these analyses are important in helping a corporation manage its business, particularly with public perception and positioning itself in relation to peer companies. Due to its importance in driving investor and public perception, corporate issuers would also be well served to perform periodic assessments of corporate governance performance.
Why Assess Corporate Governance?
ISS' recent Global Investor study found that 70% of institutional investors describe the corporate governance of their portfolio companies as important. With this level of investor interest, demonstrating good corporate governance should be a priority for all issuers. Assessments, either internal or by third parties, can be a useful tool in this regard.
Assessments could also be useful in demonstrating corporate governance performance to other stakeholders, including officer and director liability insurance providers, credit rating agencies and regulatory agencies. In countries such as Austria, Belgium and Turkey, periodic assessments are included in Corporate Governance Codes. In some cases, results of such assessments need to be published as part of the issuer's annual report or otherwise made available to the public. All over Europe, the general notion of "comply or explain," under which issuers comply with a given code, or provide a public explanation for deviations from the code, supports the idea of periodic assessments of corporate governance practices.
What Should be Included in an Assessment?
A performance assessment should cover the major aspects of the company's corporate governance practice critical to shareholders, such as the board of directors, executive and director compensation, transparency and disclosure, and shareholder rights and communications. Depending on the industry sector, the company might also consider including environmental or social issues as part of the assessment.
Evaluations of board performance are included in the listing requirements of the NYSE as well as Corporate Governance Codes of several countries, including France, Belgium and Portugal. Such evaluations typically include evaluations of board functioning and performance, committee activities, as well as the contribution and work of individual board members. Depending on the code, results of evaluations may need to be revealed in reports to shareholders.
With respect to transparency and disclosure, the company should confirm that it is telling investors and other stakeholders what they need to know about company operations. While national corporate governance regulations and exchange listing requirements spell out the minimum level of disclosure, companies may want to consider going beyond these minimums to provide additional information. For example, a company might disclose performance toward specific environmental goals, such as reductions in greenhouse gas emissions, even if it is not legally obligated to do so. During the assessment, the company should also confirm that external documents related to corporate governance practices are up to date.
Shareholder communications are an important part of corporate governance. Many issuers have robust programs for outbound communications to shareholders, including press releases, webcasts, conference calls and websites. However, managing inbound communications from shareholders is just as important. Institutional investors are very interested in engaging with their portfolio companies, with 80% engaging either directly with companies and directors, or through a third party investment manager, based on data obtained from ISS' 2006 Global investor Study. Therefore, companies may want to look at responsiveness to shareholders as part of an overall assessment.
A review of executive and director compensation practices, especially how they align with those of peer companies, may also be a useful element of an overall corporate governance assessment. US companies in particular may want to ensure they are ready for the new SEC requirements for Executive Compensation Disclosure for 2007.
All of the items above need not be included in every assessment. Rather, it may make sense for companies to start by focusing on areas they deem critical to their corporate governance practice, and then expand to other areas.
Benefits of Corporate Governance Assessments
Corporate governance assessments can be used in variety of ways to provide ongoing benefits to the organization. An assessment provides a baseline analysis of the company's current corporate governance practices. Management can use this baseline to develop a strategic roadmap for future changes in governance practices, whether they want to attack easy to resolve items or more complex issues. Combining the assessment with an analysis of institutional voting trends can help management plan the corporate governance strategy to ensure alignment with shareholder desires.
Some companies may decide to leverage certain parts of their assessments publicly, just as they might highlight a positive product review or an award the company receives. For example, if the assessment shows achievement of certain environmental or social goals, the company has a positive story to tell shareholders and the general public. Some companies choose to reveal their new corporate governance initiatives they have adopted on their websites, as they feel the adoption of sound corporate governance practices reduces risk and improves shareholder value.
A corporate governance assessment can help companies measure where they are with respect to corporate governance objectives, and provide insight into changes they can make to accomplish those objectives. In today's business environment where boards are under increasing scrutiny to create shareholder value, good governance just makes good business sense. Clearly, the advantages of periodic governance assessments outweigh the challenges.
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September 11, 2006 |
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Increasing Pressure on Board Members: The Case of Hewlett-Packard
Submitted by: Martha Carter, ISS' Managing Director of Corporate Governance
As news continues to develop in the story of Hewlett-Packard Co.'s board, shareholders await the fate of board members, particularly the H-P board's Chair Patricia Dunn. At issue is the board's conduct during the investigation of its own board members regarding leaks to the media, the use of investigation tactics known as "pretexting," and the possible criminal and civil legal exposure that those tactics present. With H-P's annual meeting typically being held in March, there is no immediate opportunity on the horizon for shareholders to weigh in on the current dysfunction in the board room. We invite you to share your comments on the board's actions in this blog.
From a corporate governance perspective, we are usually exposed to disagreements between boards and their shareholders, shareholders and management, or boards and CEOs. Rarely have shareholders seen boardroom infighting to such a significant degree and in such a public light. But as pressures increase in boardrooms, it is likely that we will continue to see public boardroom disagreements. However, the investigation conducted by H-P's board goes beyond a boardroom disagreement. What could be more dysfunctional than board members investigating each other? The job of a public company director is already difficult and demanding. Do board members need to add to the list - the inability to have a dissenting opinion and the feeling that their fellow board members are tracking their phone logs?
When the results of the investigation were reviewed by the board last May, Director Keyworth was asked to resign. He refused, but he won't be renominated. In at least one respect, Keyworth got it right. In his refusal to resign, he said that he was elected by shareholders. Does the H-P nominating committee deserve a withhold vote for their swift refusal to renominate Keyworth? What is your opinion about the actions of Director Perkins (previously Chair of the Nominating Committee)? Slamming the briefcase and quitting in anger might have been the best move for Perkins, but was it the best move for the shareholders that he was elected to represent? What is the best course of action for board members when faced with a significant disagreement on the board? Does the entire board deserve a "vote of no confidence?"
A possible scenario is that the board's Chair Dunn will emerge to take the fall for the scandal. If Dunn is ousted, CEO Hurd may emerge in the combined Chair/CEO role. The significant share price rise during Hurd's 18 month tenure may inoculate him from the current crisis and give him an opportunity to help reshape a board that obviously needs better leadership. But would combining the chair and CEO roles be in shareholders' best interest? With all of the distraction going on in the boardroom and no voting opportunity until next March, we can only wonder whether this board is capable of doing the job for which it was elected - to represent shareholders.
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September 8, 2006 |
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The AFSCME AIG Decision: Mea Culpas Not Enough To Allow Inconsistent Interpretation
Submitted by: Rosanna Landis Weaver, Governance Research Services Analyst
In its September 5 opinion granting shareholders the right to place proxy access proposals on company proxy statements, the Second U.S. Circuit Court of Appeals was critical of the SEC staff's lack of support for varied interpretations of Rule 14a-8 (i-8). In his decision, Judge Wesley notes, "Although the SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission's regulatory approach, it nevertheless has a 'duty to explain its departure from prior norms.'"
One of the arguments in the case depended on what the interpretation of the word "an" was. The regulation allows proposals to be omitted if they "relate to an election of directors." The opinion states that the language of the regulation was ambiguous. AFSCME argued that the rule was meant to address particular elections but the court also considered the interpretation of American International Group (AIG) and the SEC's amicus brief which argued for a "comparatively broader exclusion, one covering 'a particular election or elections generally.'" Given the difficulty of interpreting the article's meaning in this sentence, the court then looked at past interpretations of the regulation. Of particular importance was a statement published in 1976, the last time the SEC revised the election exclusion.
Since that time, according to the court, the regulation has not been applied consistently. According to the opinion, the SEC's amicus brief did not discuss action prior to 1990 and "characterize[d] the intermittent post-1990 no action letters which continued to apply the pre-1990 position as mere 'mistake[s.]'" The decision notes, "Although we are willing to afford the Commission considerable latitude in explaining departures from prior interpretations, its reasoned analysis must consist of something more that mea culpas."
The SEC was quick to respond. In a September 7 comment, Chairman Cox noted that shareholders rights in proxy process "are best secured under consistent national application of Rule 14a-8 to shareholder proposals." He added, "To provide certainty with regard to shareholder proposals in every judicial circuit, I have directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application."
Reaction to the decision, and to the SEC's plan to revisit proxy access, was immediate. Not surprisingly, AFSCME was thrilled, with President Gerald McEntee calling the decision "hugely significant for shareholders." He added, "This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process. Proxy access is considered the "holy grail" of corporate governance reform because it offers shareholders the opportunity to change the composition of boards. This ruling will make directors think twice before they put their own interests above the interests of their shareholders."
Harvard Law School Professor Lucian Bebchuk, who filed a brief in support of AFSCME's appeal with four other Harvard professors, characterized the decision as a "very strong outcome" and pointed out that the proxy rules exist to "facilitate the ability of shareholders to participate in corporate decision making."
Damon Silvers, AFL-CIO Associate General Counsel welcomed the SEC's announcement that it will be reviewing the proxy access rule, and issue a staff proposal for public comment. "I think investors would welcome a broad reopening of proxy access by the commission, particularly in light of failures of corporate boards in recent years, most recently the option disaster. I'm sure there are some in the corporate community that will be looking to take rights away from shareholders in this area, especially after the 2nd Circuit affirmed that shareholders do indeed have these rights. I'm sure that's not where Chairman Cox would want the commission to go."
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September 7, 2006 |
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Has SOX Led to Fewer Lawsuits?
Submitted by: Ted Allen, Director of Publications, and Tad Kopinski, Staff Writer
Are governance improvements by U.S. companies leading to less securities litigation?
The number of new securities class-action lawsuits this year is on pace for a 31 percent decline from 2005, according to a mid-year report by Stanford Law School and Cornerstone Research.
"While we lack the data necessary to determine the precise cause of the slowdown, the most intriguing hypothesis is that extensive and expensive corporate efforts to improve governance and accounting have reduced plaintiffs' ability to allege fraud," Stanford Law Professor Joseph Grundfest, who is a former commissioner of the Securities and Exchange Commission, said in a press release on the report.
As of June 30, investors had filed 61 "traditional" securities class actions (which excludes IPO, analyst, mutual fund, and derivative cases), the Stanford-Cornerstone report stated. At that pace, 123 cases will be brought this year, down from 179 securities lawsuits in 2005 and 213 cases in 2004. That 2006 total would be 36 percent less than the historical average of 194 cases per year from 1996 to 2005, according to the report.
Most U.S. companies have significantly improved their governance practices to comply with the Sarbanes-Oxley Act of 2002 and the stricter New York Stock Exchange and Nasdaq listing standards.
"I think companies are a lot more careful than they were a couple of years ago," Charles Elson, a law professor at the University of Delaware who also serves on company boards, told SCAS Alert. "The reason [class action suits] are down is it's like the python absorbing the mouse. It took a while for Enron and the other cases to filter their way through the pipeline."
Other Factors at Work
James Cox, a securities law professor at Duke University, said companies have improved their financial reporting and audit practices, which have led to less securities litigation. However, "other factors besides Sarbanes-Oxley are at work," he told SCAS Alert. After an unusually high number of cases in 2003 and 2004 that followed the collapse of the Internet stock boom or targeted the underwriters of Enron, WorldCom, and other bankrupt firms, "we're seeing the filings in 2005 and 2006 go back to a more normal level," Cox said.
In addition, U.S. stock markets have been rising over the past 18 months, which leads to fewer securities lawsuits. "People tend to bring more suits in a falling market," Cox noted.
Another factor that likely has contributed to the decline in this year was the indictment of Milberg Weiss Bershad & Weiss and two senior partners in mid-May. The historically prolific plaintiffs' firm has filed 17 cases in 2006, down from 55 cases in the first half of 2005, according to Reuters, which based its count on the firm's press releases. A Milberg Weiss spokeswoman said the firm is focusing on large cases and "is being more selective in its selection of new cases," and she noted that the pending indictment "also had an impact on this decision-making process," Reuters reported.
Cyclical Pattern
Max Berger, a founding partner at Bernstein Litowitz Berger & Grossmann, a law firm that represents investors in class actions, said directors have been more vigilant because of fears of personal liability. "Once board members realized that they'd have to dip into their pockets if they did anything wrong, they started being the kind of policemen they should be," Berger told Agenda, a weekly newsletter that covers corporate board issues.
However, Berger noted that securities class actions rise and fall in cycles and said he does not expect the decline in new cases to continue.
Dr. John Gould, vice president of Cornerstone Research, said it's too soon to predict whether the decrease in lawsuits is part of a long-term trend. "Although there is no doubt that there has been a considerably lower level of filing activity over the last year, it is still too early to tell whether this represents a permanent shift," Gould said in the Stanford-Cornerstone press release.
For more on the Stanford-Cornerstone report, please visit here.
While investors appear to be bringing fewer securities class-action cases, they are still going to court to address corporate wrongdoing. The Stanford-Cornerstone data does not include the growing number of derivative lawsuits filed by shareholders over corporate stock option practices. From Jan. 1 through Aug. 31, investors had brought derivative suits against 60 companies in state and federal courts around the country, according to The D&O Diary, a web log written by Kevin M. LaCroix, an attorney with OakBridge Insurance Services. Derivative actions are brought by investors on behalf of the company and typically seek to recover damages from board members and other insiders.
According to the SCAS database, 99 securities class-action cases had been filed as of Aug. 30. Of those cases, 16 include allegations that the timing of stock option grants was manipulated.
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September 1, 2006 |
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Professional Directors More Prevalent in Australia
Submitted by: Martin Lawrence, Lead Analyst of ISS Australia
The prevalence of professional non-executive directors at Australia's largest companies is growing, according to a recent study commissioned by the Australian Council of Super Investors (ACSI) and conducted by ISS Australia.
The study, which looked at several key corporate governance features detailed in the most recent annual report filing, focused on firms listed on the Australian Stock Exchange's (ASX) top-tier S&P/ASX 100 index. For the majority of companies, the most recent annual report covered the financial year ending June 30, 2005. For others, annual reports are for the year ended Sept. 30, 2005, or Dec. 31, 2005.
The study found that the prevalence of professional non-executive directors (NED)--defined as someone who holds two or more non-executive positions on S&P/ASX 100 boards--has increased over the previous period.
In 2005, for example, 173 individuals were appointed non-executive directors of an S&P/ASX 100 company, of whom 105 already held or had previously held a S&P/ASX 100 company directorship. Well over one-half of new non-executive director appointees in 2005 were therefore experienced large-company directors, the study found.
By comparison, in 2004, 25 of 93, or 27 percent, of new non-executive appointees were past or present S&P/ASX 100 company directors. Consequently, the study concludes that a key qualification for gaining entry to an S&P/ASX 100 company board in 2005 was to hold or have held a director position.
This trend also was reflected in the growing number of S&P/ASX 100 company directors holding multiple board seats within the top 100 firms. Their numbers have been growing steadily since 2001, when 72 professional NEDs held 164 board seats, or roughly 31 percent of all S&P/ASX 100 company board seats.
In 2005, 117 professional NEDs held 269 board seats, accounting for 42.8 percent of all board seats at the country’s top 100 companies. This was a modest though notable increase over 2004, when 99 professional NEDs accounted for 39.4 percent of all top 100 board seats.
Professional NEDs are well represented among the ranks of female non-executive directors, the study found. Of the 57 women on S&P/ASX 100 company boards, 35, or 61.7 percent, held more than one board seat at an ASX-listed company, compared with 40.9 percent of male S&P/ASX 100 directors.
The survey also charted a small drop in the proportion of seats held by independent directors. In 2004, independent directors accounted for 50.4 percent of all top 100 directorships, compared with 47.4 percent in 2005. The proportion of non-executive directorships, meanwhile, rose marginally from 79.6 percent in 2004 to 81.2 percent in 2005.
In 2004, ACSI considered all directors with more than nine years' service to be affiliated, whereas only those directors who had spent more than 20 years on a board were considered to be affiliated for reasons of tenure in 2005. If the new classification is used, the proportion of board seats held by independent non-executive directors in 2005 rose to 64.9 percent, however.
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