Liability concerns have become a major issue for directors of U.S. company boards.

Board members today must meet higher standards of conduct under Delaware law. They also face the possibility that they may have to make personal payments to resolve investor lawsuits, as former WorldCom directors had to do. Meanwhile, shareholders have filed dozens of derivative lawsuits this year against directors over the alleged backdating of executive stock options. These issues were among those discussed by panelists at the National Association of Corporate Director'' annual conference in Washington on Oct. 16-17.

At a panel on "Director Liability and Legal Responsibilities," former Delaware Supreme Court Chief Justice E. Norman Veasey discussed the gradual evolution of the standards of conduct required of directors under Delaware law. According to Veasey, the Delaware courts originally took the position, as shown in the Allis-Chalmers case in 1963, that liability would only be found in cases where directors ignored "red flags" waved in their faces. In 1986, the Delaware Court of Chancery ruled in Caremark that directors were subject to new duties. As Veasey noted, the court in Caremark mentioned in a footnote that directors are expected to put into place a compliance program to prevent corporate legal violations and that failure to do so could indicate a violation of directors' fiduciary duty of good faith. Veasey noted that the court, in announcing this legal standard, made reference to the advent of the Federal Sentencing Guidelines, which, in connection with sentencing for criminal offenses by a company, provide credit to corporations that have a compliance program in place.

As Veasey noted, present-day standards of required conduct for directors may well be even higher than in the Caremark era. Earlier this year, the Delaware Supreme Court held that Walt Disney directors were not liable in the shareholder lawsuit over the severance package for former executive Michael Ovitz, despite "sloppy practices" by the board. However, as Veasey indicated, the court in the Disney case was reviewing conduct that occurred in 1996, and the court's decision might well have been different had the court been reviewing more recent conduct under present-day standards.

Keeping Better Board Minutes
Veasey also discussed a second issue--the new imperative for directors to keep good minutes that accurately reflect business conducted at board meetings. According to Veasey, part of the reason why the investor plaintiffs in the Disney case were successful in defeating a motion to dismiss and taking their claims to trial was due to the "sloppiness" of Disney's corporate minutes. Veasey outlined 10 suggestions that boards should follow to document their actions. Veasey's comments are in contrast to the conventional wisdom practiced by many boards that minutes should be as sparse as possible to avoid disclosing the details of board discussions to non-board members (such as shareholders or litigants against a company).

Veasey gave the following suggestions:

*Minutes should fall somewhere in between a transcript and a cryptic, "bare bones" discussion of the meeting.
*Minutes should provide the names of those attending and times of attendance. As Veasey noted, Disney's board failed to do this; the case record included comments in minutes by a director listed as not present.
*Minutes should provide a list of topics discussed.
*There should be a rough proportionality between the length of the minutes regarding a certain issue and the time that such issue was discussed by the board. In the Disney case, one set of minutes relegated to a single sentence the record of the discussion of the compensation decision that was the central issue in the case, while commenting at length on a more minor issue of whether one director should receive a finder's fee in connection with bringing in the new executive (whose compensation was the issue in the Disney litigation).
*Minutes should reflect information and reports that directors used to prepare for or are relying on at the board meeting.
*Transaction terms or other issues discussed should be described in detail; however, there should be no direct quotes attributed to specific directors.
*Minutes should indicate who voted and how.
*Discussions held by directors before a meeting should be referenced in the minutes.
*The minutes should name the person who prepared them.
*The minutes should not be viewed as a ministerial function but should be taken by an executive, such as the company's general counsel, who would have a sophisticated understanding of the issues a board may discuss.

Personal Payments Remain Unlikely
The speakers at the NACD conference also discussed a third issue--the exposure of directors to new forms of liability in cases of director misconduct. Panelists commented on recent cases of alleged director misconduct in which shareholder plaintiffs sought recovery from the personal assets of corporate directors. Plaintiffs' attorney John P. ("Sean") Coffey of the Bernstein Litowitz Berger & Grossmann law firm discussed his role in reaching a settlement in the WorldCom securities litigation in which former directors paid part of the settlement from their personal assets (rather than from insurance funds). However, Coffey noted that in most cases where directors face liability, they are unlikely to be required to pay out-of-pocket damages.

Coffey noted that WorldCom involved a unique situation where the company had entered bankruptcy (making director indemnification by the company less likely), the company's auditor (Arthur Andersen) was defunct, the company's bankers wielded a due diligence defense for their role in the scandal, and the company's $100 million directors and officers' insurance policy had been exhausted. As a result, Coffey sought to have WorldCom directors pay back their board fees and contribute 20 percent of their net worth; investors ultimately received a total of $25 million from the WorldCom directors.

SEC Enforcement
University of Delaware Professor Charles Elson warned that directors may begin to face enforcement actions brought by the Securities and Exchange Commission. Traditionally, the SEC typically has targeted corporate executives rather than board members. However, as Elson noted, the agency may bring an enforcement action against directors at Mercury Interactive, which has disclosed that options dates were misstated. In June, three members of Mercury's audit and compensation committees received a "Wells" notice from the agency. A Wells notice is issued in enforcement actions and gives a potential defendant the opportunity to provide the SEC with a statement arguing that he or she did not violate the law and that no enforcement action is warranted. The Mercury directors have denied wrongdoing and have stepped down from their committee posts.

On Oct. 18, an SEC official said the agency is investigating whether board interlocks helped spread the practice of options backdating. "We are looking at the interrelationship between directors on boards of companies that may have problems," Timothy England, an SEC assistant director of enforcement, told Bloomberg News.

M&A Issues
At a separate NACD panel, "Role of the Board in M&A and Takeovers," speakers focused on the responsibility of directors to exercise oversight over potential mergers by carefully reviewing financial information provided by management. Mergers often raise corporate governance issues because of the potential for target company shareholders to receive a premium price for their shares and the potential danger of a company entering into a value-destroying merger. Fraud by management is not typically a concern for directors with regard to such financial information because the information typically involves projections and is intended for internal use. However, directors may be required to confirm that there is a reasonable basis for merger-related financial information presented to them in support of a deal.

Mark Sirower, a member of the transaction services strategy group at PricewaterhouseCoopers, commented that directors should ask management to provide disaggregated and "trackable" numbers to show the benefits of a potential merger. In particular, Sirower noted that directors should focus on whether "synergy" estimates in connection with a merger are accurate. Sirower suggested that a well-functioning board will require a break-out of the synergy numbers by specific area, such as revenue increases due to new products or cost savings due to elimination of specific types of duplicative costs.

Sirower noted that boards should be particularly watchful for management claims of synergies where a company is merging with a business in an adjacent industry, rather than consolidating with a firm in the same industry. When reviewing claimed merger synergies, target company boards should make sure that the capitalized amount of the claimed synergy is at least equal to the premium that target firm shareholders would receive in the transaction, he noted.

October 30, 2006

Politicians Express Concern About Executive Pay
Submitted by: Ted Allen, Director of Publications

With U.S. mid-term elections less than two weeks away, both Democratic and Republican politicians are expressing outrage over executive pay practices.

On Oct. 24, Democratic lawmakers released a study that found that the proportion of corporate earnings that is used for top executive pay has doubled from 5 percent in 1993-1995 to 10 percent in 2001-2003. "In addition to hurting shareholder returns, this dramatic increase in executive compensation has had a detrimental effect on America's rank-and-file workers," the Democrats on the House Financial Services Committee said in a press release.

"It is amazing to me that executive pay continues to increase at extraordinary levels," said U.S. Rep. Barney Frank of Massachusetts.

Frank is the ranking Democrat on the Financial Services Committee and is poised to become chairman of the panel if his party wins control of the House. He introduced legislation in November 2005 to give shareholders a vote on company pay plans, but the bill languished without support from House Republicans.

Last week, President George W. Bush voiced concern about executive pay practices. In an Oct. 23 interview with CNBC, the Republican president said he is "astounded" by some pay packages and urged investors to press companies to tie salaries to performance measures.

"These compensation packages can get out of hand," Bush said in the CNBC interview, according to Bloomberg News. While incentives for executives are necessary, Bush stressed that companies should "make sure the incentive pay is rational."

"I don't think government should control salaries," the president said, "but I would hope shareholders would take a close look at some of these compensation packages."

In July, the Securities and Exchange Commission adopted new pay disclosure rules that will apply to firms when they file their 2007 proxy statements. The rules call on companies to explain the methodology they use for determining pay and short-term incentives.

Meanwhile, investors have given greater support to shareholder proposals calling for performance targets. As of June 30, those proposals had averaged 36 percent support, up from 30 percent in 2005 and 19.2 percent in 2004. Also this year, a new proposal calling for annual advisory votes on compensation reports averaged 39 percent support at four firms.

Executive pay also is an issue in the election for Minnesota's governor, according to Bloomberg News. The state's Democratic party is running a television advertisement that criticizes Gov. Tim Pawlenty over the stock-option grant practices at UnitedHealth Group.

The Republican governor, one of four state officials who oversees Minnesota's pension funds, abstained from the vote on whether to withhold support from CEO William McGuire and three other directors. Two board members received 28 percent withhold votes at UnitedHealth's annual meeting in May after disclosure that McGuire had received option grants worth $1.6 billion, including those with grant dates that coincided with quarterly stock price lows.

The governor abstained from the vote on UnitedHealth because he had received campaign contributions from McGuire. A spokesman for the governor said Pawlenty acted properly and since has returned all the contributions from UnitedHealth executives, according to Bloomberg News. The company announced Oct. 15 that McGuire will step down as CEO by Dec. 1.

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October 27, 2006

NYSE Proposes to Bar Election-Related Broker Votes in 2008
Submitted by: Subodh Mishra, Managing Editor

The New York Stock Exchange (NYSE) announced this week it would move ahead to restrict voting by brokers in director elections beginning in 2008. The proposed rule change, which must get final approval from the Securities and Exchange Commission, is welcome news to investors who have long argued that the practice of allowing broker votes on elections skewed results in favor of management.

NYSE Rule 452 allows brokers to vote on certain "routine" proposals if the beneficial owner of the stock has not provided voting instructions to the broker at least 10 days before a scheduled meeting, according to the exchange. Director elections have been considered "routine," though shareholders and others have long argued against such a designation, particularly in recent years as institutional investors have pushed for majority voting in director elections and the ability to nominate board candidates.

"The goal of the NYSE has been to not allow the broker to vote on any proposal that substantially affects the rights of shareholders," Catherine R. Kinney, the NYSE's president and co-chief operating officer, said in an Oct. 24 press release. "[T]he election of directors is simply too important to ever be considered routine."

The NYSE estimates that 80 percent of all public company shares are held under the name of brokers. At some issuers this year, the casting of these undirected broker votes for incumbent directors may have spared them the embarrassment of failing to receive a majority of votes cast. At 20 S&P 500 companies this year, directors received withhold votes that exceeded 30 percent, according to ISS data.

The proposal follows recommendations of the Big Board's Proxy Working Group, created in April 2005 and chaired by Larry Sonsini of Wilson Sonsini Goodrich & Rosati, which is also looking at ways to improve the proxy and shareholder communications process. The group has created three subcommittees to: review the shareholder communication process; to examine the fees and costs in connection with the solicitation of proxies; and to educate investors to achieve greater shareholder participation in the proxy voting process.

Still, voting on directors has taken up much of the group's time, according to observers, with investors actively pressing members to eliminate broker votes on elections. "The election of directors is the most important shareholder franchise," Sonsini said, reflecting those views.

"It's certainly a step in the right direction," Council of Institutional Investors head Ann Yerger told the Dow Jones newswire. The plan would restore "some integrity" to the director election process, she said, because allowing discretionary voting for directors was the equivalent of saying that "ballot boxes should be stuffed" in favor of management-backed candidates.

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October 26, 2006

New Rules on Executive Compensation Disclosure in Canada
Submitted by: Sarah Cohn, Director of Communications

The Globe and Mail had an interesting article the other day by Janet McFarland and Elizabeth Church titled "New Disclosure Rules to Reflect Evolving World." The article states that Canadian investors will soon have the opportunity to learn more about executive pay packages as regulators prepare to revise compensation disclosure rules introduced more than a decade ago.

The Canadian Securities Administrators (CSA) expects to have a new set of rules ready early next year, requiring full disclosure of virtually every detail of executive compensation. Please let us know your thoughts on executive compensation disclosure in Canada.

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October 25, 2006

Stock Options Law Advances in France
Submitted by: Tad Kopinski, Staff Writer

On Oct. 11, France's lower legislative chamber passed a bill that tightens restrictions on executive stock options. To become law, the measure must still pass the senate, which is scheduled to consider the bill in early November.

In addition to tax breaks for companies that issue free shares to rank-and-file employees, the bill would limit executives from exercising part of their options during their tenure. The measure leaves it up to the company's board of directors, or the supervisory board at companies with two-tiered boards, to determine what percentage of option packages must be held while the executive is in office--as long as the option incentives are properly disclosed, according to Agence France-Presse.

The share ownership legislation that applies to listed companies is one of a series of measures promised by Prime Minister Dominique de Villepin to promote "economic patriotism" among investors and reduce French companies' vulnerability to foreign hostile takeovers, according to the Associated Press (AP).

Initially, the legislation, as introduced by opposition legislator and former Prime Minister Edouard Balladur, called on shareholders to decide on what proportion of options were to be subject to the holding requirement. This provision was strongly opposed by the French employer association, Medef.

The Minority Shareholders Defense Association (ADAM) said it would continue to push for stockholders to have a direct say on the conditions attached to any option grants, just as they now have the right to approve the issuance of stock options. "Ever since stock options came into being, company boards have proven themselves incapable of tackling their abuse," Colette Neuville, ADAM's executive director, told the AP.

The measure follows public and investor complaints over executives' stock option entitlements, as well as the timing of some of their transactions.

Perhaps the most spectacular was the sacking of Noel Forgeard, the co-CEO of the European Aeronautics Defense and Space (EADS), in June following revelations that he sold millions worth of shares a few weeks before the announcement of production delays on the A380 Airbus.

The French financial markets authority, AMF, which is investigating the case, alleged Forgeard made a 2.5 million Euro ($3.6 million) profit on the options sale, and each of his three children made a profit of 1.4 million Euro ($1.75 million) two days later. Several other senior EADS executives made substantial profits on their option sales at that time, according to The Times of London. A spokesman for EADS said those involved "had no specific information" about the production delays when they sold their shares, The Times reported.

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October 24, 2006

ISS Launches Governance Leadership Interview Series
Submitted by: Sarah Cohn, Director of Communications

ISS today announced the implementation of a new corporate governance leadership program designed to leverage the expertise of its own corporate governance experts as well as others in the industry to share knowledge and exchange viewpoints about key corporate governance issues facing investors, corporations and their directors. The Fall schedule for ISS' new Governance Leadership Interview Series includes interviews with a number of experts on a wide-range of topics.

The first interview in the series features Doug Cogan, ISS' Deputy Director of Social Issues Services, discussing why environmental and social issues are gaining traction among mainstream investors. To access the interviews directly, please click here.

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October 23, 2006

Court Rules Against Dutch Takeover Defense
Submitted by: Sarah Cohn, Director of Communications

The European Commission moved a step closer to its goal of establishing the fundamental shareholder right of "one-share, one-vote" when the European Court of Justice (ECJ) ruled late last month against the Dutch government's holding of "golden share" takeover defenses in two firms.

European governments should "avoid wasting their time in introducing special share arrangements," commission spokesman Oliver Drewes told the International Herald Tribune following the ruling. Drewes said the ruling would aid the commission as it turned its sights on Germany, where for years the body has sought to repeal defenses protecting Volkswagen.

In 2003, the commission filed suit against the Dutch government, arguing the golden shares it held in telecommunications giant Royal KPN and postal-services company TNT hindered foreign investment in those firms and violated the principle of the free movement of capital.

The two companies were privatized in 1994, but the government retained a 20 percent stake in KPN and a 35 percent stake in TNT, formerly known as TPG. The golden shares give the Dutch government veto power over stock issues; restrictions on, or removal of, priority rights of ordinary shareholders; acquisitions, disposals or dissolution; withdrawal of the special share, bylaw amendments; and dividend distributions.

The Dutch government argued that its golden shares complied with Article 56 of the European Community that prohibits restrictions on the free movement of capital across national borders. "Even if a link were to be established between the special shares at issue and the decision to invest, such a link would be so uncertain and indirect that it could not be regarded as constituting an obstacle to the free movement of capital," the Dutch government contended, according to court records. Amsterdam also argued its golden share in TNT was justified because it would guarantee "universal postal service" and thus represented an "overriding reason in the general interest."

The court agreed with commission officials who argued that the special shares convey disproportionate influence to the government over important management decisions such as the structure of the companies and business activities. The fact that the special shares could only be withdrawn with the government's approval also provided ammunition for commission lawyers arguing against the defenses.

The commission views the ruling as a critical step toward removing barriers to cross-border acquisitions in what many investors view as an environment of renewed protectionism in Europe. After Mittal Steel launched a takeover of Arcelor earlier this year, Luxembourg and France enacted laws making it easier for firms to deploy takeover defenses.

Last month's ruling, however, may discourage such initiatives and put greater pressure on Germany to remove limitations that bar any investor from acquiring more than 20 percent of Volkswagen's voting rights. Commission spokesman Drewes said he "was absolutely confident that this case [Volkswagen] will go in the way that is favorable to the opinion of the European Commission." In 2003, the commission won similar cases against the Spanish and U.K. governments' golden shares in national champion companies, including airport operator BAA in Britain and Spain's Telefonica and energy giant Repsol.

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October 20, 2006

A Record Year for CEO Ousters
Submitted by: Tad Kopinski, Staff Writer

UnitedHealth Group's announcement this week that CEO William McGuire will step down is the latest in a rash of chief executive departures at major U.S. corporations, which are on pace to set a new record this year. McGuire is the highest-profile executive so far to leave his job amid investigations into stock-option irregularities.

An unprecedented 152 U.S. chief executives--or 7.6 per business day-left their posts in September, according to executive recruiting firm Challenger, Gray & Christmas. Overall, 1,112 CEOs have stepped down through Sept. 30 of this year, up 10 percent from the same period last year. At this rate, the total number of CEO changes this year will easily surpass 2005's record of 1,322, which was twice the total in 2004, according to an Oct. 10 report by Challenger.

"The large number of CEOs resigning and stepping down is partly due to increased pressure from shareholders and boards to continue producing strong results quarter after quarter," John A. Challenger, founder of the Chicago-based recruiting firm, told Governance Weekly. "The options backdating scandal is really just beginning to take a toll on executives, but the impact will surely grow."

High-profile CEO departures have occurred this year at Ford Motor, Bristol-Myers Squibb, Viacom, Nike, Sun Microsystems, Pfizer, Kraft Foods, and RadioShack. Last week, Sovereign Bancorp's CEO stepped down amid a board revolt, while Sharper Image replaced founder and CEO Richard Thalheimer in late September.

As the Challenger report noted, "the pressure that CEOs are under are best demonstrated by the large percentage of CEOs leaving after relatively short tenures." Of the 387 CEO departure announcements this year for which tenure data is available, 28 percent of the executives were on the job for fewer than three years, the report said. In September, computer retailer CompUSA named its second CEO in four months. Computer manufacturer Gateway has had five CEOs in six years, the report said.

While other factors, such as the growing number of CEOs who are reaching retirement age, have led to departures, Challenger said the trend also reflects greater assertiveness by directors after the Enron and WorldCom scandals. "Boards realized that they can no longer simply be the CEO's rubber stamp," Challenger said.

Likewise, Jennifer Handt, the Business Roundtable's manager of communications, said the increase in CEO departures "reflects in part the fact that boards have become increasingly active and CEOs have much less time in which to perform."

More executive ousters may be on the horizon, as hedge funds and other activist investors press other companies for leadership change. At ImClone Systems, Carl Icahn, the second-largest stockholder in the New York-based biotech firm, is trying to oust interim CEO Joseph Fischer. Meanwhile, Knott Partners and Third Point are seeking to replace CEO Thomas McLain at Nabi Pharmaceuticals, a Florida-based drugmaker.

Option-Related Departures
In addition to McGuire, a growing number of other CEOs have left their jobs after internal or regulatory probes into whether stock option grants were manipulated to maximize executive compensation. On Oct. 17, Sapient, a Massachusetts-based technology consulting company, announced that CEO Jerry Greenberg resigned after an internal review found backdated option grants. The next day, SafeNet, a Maryland-based data-security software maker, replaced CEO Anthony Caputo after an internal probe found backdated options. Last week, McAfee, Cnet Networks, and Boston Communications Group announced CEO changes that stemmed from option probes. Stock options also were a concern at Sharper Image, as the San Francisco-based retailer plans to restate results for the three years to reflect option costs.

For some institutional investors, these CEO exits over stock options are evidence that boards are becoming more responsive. "The willingness of boards to shove executives out the door--via firings, resignations or suspensions--at companies where backdating probes have uncovered wrongdoing shows that directors are taking a strict view of their responsibilities," Amy Borrus, deputy director of the Council of Institutional Investors, told Governance Weekly.

The number of options-related CEO departures likely will increase as more companies review past grants. More than 140 companies have disclosed internal or regulatory probes into their option practices, and at least 60 firms have restated or said they plan to restate earnings, according to Bloomberg News.

Change at UnitedHealth
UnitedHealth, the largest U.S. health insurer, announced McGuire's planned departure on Oct. 15 and released a special board committee report on past option grants. The report, which was prepared by the law firm of WilmerHale, examined 29 grants and concluded that "there were few where a grant date was established on the particular day noted in the documents."

"Between Jan. 3, 1994, and Aug. 28, 2002, the company granted options on 16 separate dates that correspond to the lowest, second-lowest, or third-lowest price for the quarter," the report states. "The options granted on these 16 dates, prior to the passage of [the Sarbanes-Oxley Act], amounted to almost 80 percent of all options granted during this period."

McGuire, who relinquished the title of chairman and left the board, is to step down as CEO by Dec. 1, the company said in its press release. General Counsel David Lubben and Director William Spears also resigned. The board named President and Chief Operating Officer Stephen Hemsley to take over as CEO.

The company said McGuire had agreed to re-price his options from 1994 to 2002 at the annual high share price "to eliminate any possible financial benefit from the option dating issues identified" in the WilmerHale report. UnitedHealth also said that Hemsley had agreed to re-price his grants through 2002 at yearly highs and "expects similar actions" from Lubben and other senior executives.

On Oct. 18, U.S. Senator Charles Grassley, who chairs the Senate Finance Committee, asked the company to release details on McGuire's exit pay and benefits. "We are concerned by recent press reports that Dr. McGuire may have received a compensation package upon his separation of approximately $1.1 billion in spite of allegations that he had been actively involved and benefited from an options backdating scheme," Grassley, an Iowa Republican, said in a letter.

Also, this week, a Securities and Exchange Commission official said the agency is investigating whether board interlocks helped spread the practice of options backdating. "We are looking at the interrelationship between directors on boards of companies that may have problems," Timothy England, an SEC assistant director of enforcement, told Bloomberg News.

Governance Reforms
UnitedHealth was one of six firms profiled by The Wall Street Journal in an article in March on questionable option grants. That story prompted regulators, investors, and directors to start looking at grant practices throughout the healthcare and technology industries. In April, the Minnesota-based company disclosed that McGuire held $1.6 billion in unexercised stock options and received options dated when company shares were at their quarterly lows.

A day before UnitedHealth's annual meeting in May, the board tried to address shareholder concerns by eliminating golden parachute payments for senior executives, ending equity awards for some senior executives, and cutting board pay by 40 percent, but investors still withheld 28 percent support from two compensation committee members. Minnesota's Board of Investment and the California Public Employees' Retirement System were among the institutions that called for withhold votes.

In addition to the executive changes, UnitedHealth has unveiled additional governance reforms. In its Oct. 15 press release, the company said it would fill five board seats with independent directors in the next three years. The company also plans to establish a new chief legal officer and elevate the chief ethics officer to senior executive status. Earlier this year, the board agreed to ask shareholders to vote to establish annual board elections and to rescind supermajority-voting requirements. The company also has established new stock ownership guidelines, dropped certain executive perks, and limited the number of boards on which directors may serve.

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October 19, 2006

Buried Notice Will Not Die
Submitted by: Bruce Carton, Vice President of Securities Class Action Services

Let's put it this way. My company, ISS' Securities Class Action Services, has an entire business that focuses on researching and identifying new securities class actions. We have a team of people whose JOB is to research this stuff every day, 24X7. However, until today we did not have any record of a case filed October 2, 2006 against Forward Industries, which was the subject of a "notice" published to the class announcing the filing of the complaint. How is this possible?

Because the notice used was what many refer to as "buried notice," buried in the back pages of the Investors Business Daily. As I wrote almost two years ago,

Yes, the PSLRA does allow for notice by "widely circulated national business-oriented publication" or "wire service." As I have argued in the links above, however, (1) the industry standard in the year 2005 is to place such notices on a national business wire, and (2) there is no legitimate reason to deviate from this standard by providing "stealth" (but apparently legally adequate) notice through some random hard copy business publication such as IBD.

Two years later, this is even more true. Everyone who is interested in learning about securities class action filings monitors the wire services for announcements about such filings. No institutions or anyone else that I know of scans all of the "widely circulated national business-oriented publications" looking for random hardcopy announcements, nor should they be required to do so.

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October 18, 2006

New Heidrick & Struggles Study Focuses on Chinese Firms Views on Foreign Directors
Submitted by: Sarah Cohn, Director of Communications

An interesting article in today's Business Times of Singapore titled "China Firms Not Keen on Foreign Directors," by Jean Chua highlights a new study by Heidrick & Struggles and Fudan University in Shanghai. According to the study, about 26 percent of Chinese companies-whether they are state-owned or private enterprises-say they would consider hiring a foreign director. However, close to half of them say they will not consider having a foreigner on board. The study also found that there is room for growth in corporate governance in China.

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October 16, 2006

McGuire from UnitedHealth Group Joins the Growing List of CEOs to Step Down Amid Stock Option Probes
Submitted by: Sarah Cohn, Director of Communications

The New York Times today revealed that Dr. William McGuire, CEO of UnitedHealth Group, is now the latest CEO forced to resign due to irregular stock option practices. McGuire had been granted options over the years, which have led to criminal and civil investigations and public disapproval. McGuire along with the CEOs of McAfee, Cnet Networks and Boston Communications Group are among the latest executives to leave their jobs amid investigations into stock option irregularities.

McAfee, a maker of anti-virus software, announced Oct. 11 that CEO and Chairman George Samenuk had retired, while President Kevin Weiss had been fired after an internal probe into past option grants. The Santa Clara, California-based firm also said it will restate earnings over 10 years by as much as $150 million to account for misdated stock options.

Also on Oct. 11, Cnet Networks announced that CEO Shelby Bonnie had stepped down. In a statement, Bonnie apologized for the "options-related problems that occurred under my leadership." The company's general counsel and human resources chief also left their jobs, according to news reports. The San Francisco-based technology news provider said it had found instances of backdated stock options between 1996 and 2003. Cnet, which has delayed filing its third-quarter results, said some results would be restated, but the company did not estimate the potential cost.

On Oct. 12, Boston Communications reported that CEO and President E.Y. Snowden had left those posts to become the company's non-executive chairman. Chief Financial Officer Karen Walker resigned, while General Counsel Alan Bouffard agreed to accelerate his planned retirement. A company press release said those job changes were "in connection" with an internal review of option grants. Boston Communications, which provides billing services to mobile-phone firms, said it would restate past financial results, but it hasn't yet determined the amount of additional charges.

Overall, more than 30 U.S. executives have left their jobs in connection with the option-timing scandal, according to Bloomberg News. More than 140 firms have disclosed internal or regulatory probes into whether they backdated option grants to inflate executive compensation.

Also this week, KB Home, a Los Angeles-based homebuilder, disclosed that it had improperly accounted for option grants to CEO Bruce Karatz and may have to restate earnings. On Oct. 12, Sanmina-SCI, a maker of electronics for technology companies, said it will have to restate earnings, but the San Jose, California-based firm did not disclose the financial periods involved. Earlier, Asyst Technologies said it would revise its results to account for $19 million in additional option costs, while KLA-Tencor, a maker of computer-chip testing equipment, said it will restate results from 1997 to 2002. So far, more than 60 companies have restated earnings or announced plans to do so to address option errors, according to Bloomberg News.

After an outcry from institutional investors, federal regulators have moved to require companies to provide more disclosure on how they make option grants. The Amalgamated Bank's LongView Funds filed proposals at six firms for the 2007 season that call for fixed dates for option grants (such as 45 days after the end of the fiscal year) to avoid the opportunistic timing of grants.

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October 13, 2006

SEC Delays Access Hearing
Submitted by: Rosanna Landis Weaver, Research Analyst

The U.S. Securities and Exchange Commission has postponed consideration of proxy access from Oct. 18 until Dec. 13.

"We decided not to do some 'quick fix' next week," Commissioner Annette Nazareth told reporters on Oct. 12, according to Dow Jones Newswires. Nazareth said the commissioners may offer guidance for companies and shareholders at the December meeting. "I don't know where we will come out on this issue," she told Dow Jones.

The delay creates uncertainty for investors and companies, because the agency won't offer any guidance until after the filing deadlines at many firms for shareholder proposals for the 2007 season. Presumably, the SEC will need to reach an internal consensus on how to handle no-action requests by companies to exclude access resolutions. Four pension funds already have filed an access proposal at Hewlett-Packard, and more proposals are expected. The agency's staff typically rules on the bulk of no-action requests in late December, January, and early February.

The SEC issued an Oct. 11 press release noting that commissioners would discuss the agency's rules concerning director election proposals on Dec. 13, but that statement did not explain why consideration of that topic had been delayed.

"Chairman Chris Cox is a shrewd politician. I think that he's well aware of the controversy here and the fact that we're in an election year. By pushing past November, Cox keeps Congress out of the game," noted ISS Executive Vice President Patrick McGurn. "He also pushes commission action past the scheduled filing deadlines at most companies with Spring annual meetings. It looks like we'll see some access proposals on ballots during the 2007 season."

Before the postponement, institutional investors sent in a flurry of comment letters urging the agency not to block shareholders from filing access proposals next season. The Business Roundtable sent its own letter, calling on the SEC to continue to allow firms to omit those resolutions.

The SEC scheduled a hearing on proxy access after a U.S. appeals court ruled last month that the agency improperly allowed American International Group to omit a 2005 access proposal filed by the American Federation of State, County, and Municipal Employees (AFSCME) Pension Plan. That AFSCME resolution was modeled after a 2003 SEC draft rule that the agency abandoned amid corporate opposition and complaints that the process for allowing shareholders to nominate directors would be too complicated.

"Critically Important Issue"
Former SEC Commissioner Harvey Goldschmid said he is not surprised by the number of comment letters on proxy access submitted by investors. "It's a critically important issue," he told Governance Weekly, "and everyone understands that."

What Goldschmid and many investor advocates do not want to see happen is for the commissioners to explicitly reaffirm recent SEC staff determinations that companies may exclude access proposals. The appeals court faulted the agency for failing to explain why it changed its interpretation of Rule 14a-8(i)(8) in the 1990s to allow the exclusion of shareholder proposals that relate to proxy access and other director election procedures. "It would be a tragic mistake to simply turn the clock back," Goldschmid said.

Most of the correspondence by investors echoes that point. For example, Gerald McEntee, international president of AFSCME, wrote in a Sept. 28 letter: "Any attempt by the commission to preclude proxy access bylaw proposals would seriously undermine investor rights at a critical time for our markets."

Likewise, Teamsters President James P. Hoffa, warned in a Sept. 27 letter that, "any effort to weaken access to the proxy would represent a sea change by the commission in its mission to defend investors' rights." Similarly, Jon Walters, trustee of the International Brotherhood of Electrical Workers Pension Benefit Fund noted in a Sept. 25 letter, "Shareowner access to the corporate proxy remains a critical issue, especially in light of the ongoing stock option backdating scandal and other serious questions regarding board oversight and accountability."

A number of public fund representatives also urged the commission to allow proxy access proposals to go forward. Sean Harrigan, president of the Los Angeles Police and Fire Pension Board, recently told The Nation, "In light of the corporate fraud, deception, and abuse that has become so pervasive among corporate boards in recent years, access to the proxy is the most effective vehicle which would align the interest of the corporate board with that of corporate owners, rather than that of corporate CEOs."

Perhaps the most strongly worded letter was from Coleman Stipanovich, executive director of Florida's State Board of Administration, who warned that "any action by the commission to reverse the decision of the court in AFSCME will be perceived by the investing public as decidedly anti-shareowner."

In his Sept. 28 letter, Stipanovich said there is no need for the SEC to revise Rule 14a-8(i)(8) after the court's ruling. He noted that the SEC's announcement of a hearing on the issue within 24 hours of the appeals court decision "has given rise to widespread belief that ...the commission will be considering a [rule change] that would deprive shareholders of their existing rights as recognized by the court."

The Council of Institutional Investors (CII) called on the SEC to "clarify the current rule to permit carefully crafted resolutions on proxy access to be presented to shareholders." In a Sept. 28 letter, the group stated: "The issue at this point is not whether the concept is a good idea. Rather, the issue is whether the commission should construe the securities laws to deprive shareowners of an opportunity to discuss with their fellow shareholders how they want candidates for the board to be presented to shareholders in the proxy."

Corporations Argue for Exclusion of Proposals
The Business Roundtable (BRT) is urging the SEC to reaffirm its view that companies may exclude access proposals and other resolutions that relate to the process of elections. As Office Depot CEO Steve Odland, who chairs the BRT's corporate governance task force, wrote in a Sept. 29 letter, "There is nothing in the AFSCME decision that requires the SEC to engages in a notice-and-comment rulemaking to maintain its current interpretation of Rule 14a-8(i)(8), and we encourage the SEC not to do so."

Thomas Lehner, director of public policy at the BRT, believes that the appeals court's decision requires an explanation of the current standard, but not a change from it. "The court basically pointed out to the SEC that the commission used one standard in the [1970s] and a different standard for the past ten years. We're asking the SEC to reaffirm its current standard," he told Governance Weekly.

One critical issue for companies and investors is how the SEC will treat access proposals filed for the 2007 proxy season. In his letter, Odland encourages the SEC to issue guidance "that takes effect immediately," rather than undertake a lengthy administrative rulemaking. "If the SEC nevertheless determines to engage in notice-and-comment rulemaking--which we do not believe is necessary--it also should adopt a temporary rule or issue a statement reaffirming its current interpretation," Odland wrote. Lehner echoed the point, "A rulemaking now would lead to absolute chaos going into next proxy season, and that would just not be a very wise thing to do."

Goldschmid, now a law professor at Columbia University, suggests that the SEC revive part of its 2003 draft rule and set a 1 percent minimum ownership requirement for shareholders to submit proxy access proposals. He said access opponents might accept this compromise because "it would put some constraints on the process."

In AFSCME's letter, McEntee concludes by urging the commission "to craft a solution that clarifies the process, empowers shareholders, and opens up the proxy to shareholders in a sensible way, thereby creating a fair process that protects the investor and enhanced board accountability."

December Meeting
The agenda for the SEC's Dec. 13 open meeting also includes a final rule to allow companies to use the Internet for proxy communications, according to an agency press release. That rule change would reduce proxy solicitation costs for management, as well as for investors who decide to launch proxy contests. The commission is also slated to consider a proposal to make it easier for foreign firms to deregister and avoid U.S. regulatory requirements. The agenda also includes a proposed guidance to management on compliance with the financial reporting requirements of Section 404 of the Sarbanes-Oxley Act.

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October 12, 2006

Directors Say CEO Pay is Too High
Submitted by: Sarah Cohn, Director of Communications

CFO.com has an interesting article today by Stephen Taub about CEO Pay. According to a new Corporate Board Effectiveness Study, nearly 40 percent of directors believe that pay of chief executive officers is "too high in most cases," and 81 percent of the board members favor increasing the link between CEO pay and performance.

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October 11, 2006

A Global Framework for Climate Risk Disclosure
Submitted by: Doug Cogan, ISS' Deputy Director of Social Issues Services

A brand new initiative-the Global Framework for Climate Risk Disclosure-hopes to build on the progress made by the Carbon Disclosure Project (CDP) and Global Reporting Initiative (GRI) to help form a consensus around corporate reporting on climate change. The framework was formally unveiled at press events taking place in Boston and London today. It has four key reporting elements:

* Total GHG emissions from operations and projects-historical, current and projected
* Strategic analysis of climate risk and GHG emissions management
* Assessment of the physical risks of climate change
* Analysis of risks related to emerging GHG emission regulations

Eighteen months in the making, this framework has backing from 14 leading investor groups and other organizations, including CDP and GRI. Pension funds in California, Connecticut and the United Kingdom served on a steering committee, along with representatives from the United Nations Environment Programme Finance Initiative, Ceres and the Investor Network on Climate Risk, among others. More than 50 reviewers commented on this disclosure framework as it was being drafted.

The Global Framework for Climate Risk Disclosure is available for download at the CERES website.

With so many disclosure options now to choose from-and with so much backing from investors-one might think that companies would be responding in droves to keep up with this rising demand for information. Results from the field are mixed, however. Some companies appear to be suffering from "survey fatigue," while others have yet to see the value in producing any such sustainability reports.

In the case of the Carbon Disclosure Project, which has been sending out corporate surveys for four years, the response rate to its latest survey edged up by only one percent, compared with double-digit gains in prior years. This suggests the survey "may have reached a threshold" among FT500 companies, according to an evaluation by Innovest Strategic Value Advisors for CDP.

In 2006 CDP expanded its survey beyond the FT500 to include 1,500 other major companies around the world. But the response rate among these companies did not come close to what CDP achieved within its core group of FT500 companies:

* Among U.S. companies in the S&P 500, the response rate to the CDP4 survey was only 58 percent.
* In Canada, 23 percent of the 300 surveyed companies responded.
* In Japan, 37 percent of 150 companies responded.
* In Australia, 24 percent of 150 companies responded.
* Elsewhere in Asia, only five of 40 companies responded for a mere 8 percent response rate.

The Global Reporting Initiative, which was launched in 1999, has faced a similar challenge in building its corporate participation rate. Compared to CDP, GRI has attracted more interest from European and Asian companies, but has had less buy-in among U.S. firms. This prompted a recent appeal by institutional investors urging S&P 500 companies to adopt its reporting format. Overall, the GRI has struggled for several years to raise the number of total companies much beyond 1,000 that have issued sustainability reports according to its guidelines.

Whether the Global Framework on Climate Risk Disclosure can help break this logjam remains to be seen. Framework organizers have produced a companion guide that links together the key energy and climate-related disclosure elements of CDP and GRI with mandated disclosure requirements in U.S. securities filings. The hope is that this will "help ensure that investors receive comprehensive and consistent climate-related disclosure from companies," according to Mindy Lubber, president of Ceres, a key backer of this initiative. Nevertheless, companies still have considerable leeway in how they report, and in what format-if they choose to report at all.

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October 9, 2006

Surge in Proxy Contests in 2006
Submitted by: Chris Young, Director of M&A Research

So far, it appears that 2006 will be a record year for proxy fights. According to FactSet Research Systems' SharkRepellent.net Web site, there were 80 proxy fights during the first six months of the year. That exceeds the 54 fights in all of 2005, the 40 contests in 2004, and 74 contests in 2003. (SharkRepellent counts a proxy contest once an investor files a notice of an intent to submit proxy materials, so its numbers are higher than other firms that track only fights where actual materials are filed.) In addition to proxy fights, there have been 122 other activist campaigns this year where shareholders have advocated for stock buybacks, increased dividends, sale of the company, or other change, according to SharkRepellent.

Another factor that has led to more proxy fights has been the gradual erosion of poison pill plans, classified boards, and other takeover defenses. Fifty-four percent of S&P 500 companies don't have poison pills, while a majority of S&P 500 directors likely will be subject to annual elections by the end of 2006, according to ISS data.

This season, hedge funds have been successful in many of their dissident campaigns. According to investment bank Morgan Joseph, hedge funds have won board representation in 35 percent of their campaigns.

While the Heinz proxy fight generated significant attention from investors, many proxy fights have settled before going to a vote. By mid-August, 31 proxy fights tracked by ISS had culminated in a settlement. So far this year, 21 proxy contests have gone to a vote, as compared with 18 in all of 2005, according to ISS data.

The most notable company to settle a proxy fight this year was Time Warner, which reached an accord with Carl Icahn in February. Icahn, joined by Franklin Mutual Advisors, SAC Capital Advisors, and JANA Partners, raised concerns about the company's strategy to release value for shareholders. In early February, Icahn and his allies presented a report that called for Time Warner to be split into four publicly traded companies and to buy back at least $20 billion of stock. A week later, Icahn and the company announced a settlement, under which Icahn agreed not to run a minority slate, while management committed to increase the size of a share buyback, slash additional costs, and appoint two new directors. The Time Warner case is a prominent example of a recent trend of hedge funds banding together to advocate for governance, strategic, or financial change.

Other recent settlements include Acxiom's settlement with ValueAct Capital, the agreement by Pep Boys to nominate four directors proposed by Barrington Capital Group, and the settlement that Topps reached with Pembridge Capital Management and Crescendo Partners.

Settlements between issuers and activist shareholders are typical of the compromise a target company will "choose" when it becomes clear that it will lose a proxy fight. With a settlement, the issuer may be able to extract some concessions from the dissidents (usually a board seat or two) that it was unlikely to have obtained if the original slates had gone to a vote. Moreover, the company is able to save face by not officially "losing" the contest. At the same time, the dissidents often can get everything they asked for and appear reasonable, which can only enhance their options in future negotiations.

In addition to Heinz and Time Warner, other noteworthy proxy fights included:

BASF's Hostile Tender Offer for Engelhard: German chemical giant BASF launched a proxy contest for five seats on Engelhard's classified board along with a hostile tender offer. Engelhard, a New Jersey-based firm that makes pollution control equipment, countered by offering a recapitalization plan that called for a $45 per share cash self-tender for up to 20 percent of its shares. BASF originally offered $37 per share and then raised its bid to $39. On May 30, three days prior to the scheduled meeting, Engelhard announced a merger agreement with BASF and recommended that investors accept the German firm's $5 billion offer. Shareholders subsequently tendered more than 90 percent of the shares.

Massey Energy's Proxy Fight With Third Point: Massey Energy operates coal mines in West Virginia, Kentucky, and Virginia. Third Point nominated two directors, arguing that the board needed a "new voice." Third Point claimed that the company has "massively" underperformed industry benchmarks and had "lavished" compensation on its CEO. Management argued that its strategic plan has contributed to a significant increase in shareholder value in the past five years and that the board had been responsive to shareholder concerns. After a dispute over vote results, the company agreed in July to allow the dissident nominees to join the board and to reimburse some of their legal fees.

InfoUSA's Proxy Fight With Dolphin: Dolphin LP sought the election of three nominees to infoUSA's board. The dissidents faced an uphill challenge because CEO and Chairman Vinod Gupta and his family owned 43.6 percent of the Nebraska-based mailing list company. Dolphin argued that the company has performed poorly since 2001 and has traded at multiples that are below those of its public peers. Management countered that it delivered 4 percent organic revenue growth in the first quarter of 2006 and was implementing a strategic plan to position the company for continued growth. The incumbent directors narrowly survived, winning at least 50.7 percent approval in May. Dolphin reported that investors not affiliated with management supported the dissident slate by a 13 to 1 margin.

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October 6, 2006

ISS Seeks Comments on 2007 Policy Updates

The ISS Global Policy Board is encouraging investors, corporations, and other interested parties to submit comments on six major U.S. governance issues. The comments will be considered as ISS updates its proxy voting policies before the 2007 season.

Those six issues include: director election reforms; the definition of an independent director; the use of a corporate performance test for evaluating directors; stock-option grant practices; auditor ratification; and climate change disclosure.

"The need for open dialogue and respect for multiple viewpoints has never been greater. Shareholders and companies continue to debate key governance issues, such as majority voting, executive compensation, and climate risk," said Martha Carter, the ISS managing director who chairs the Global Policy Board. "At ISS, we believe that sharing feedback and listening to multiple views on these issues is critical for effective policy formulation."

Comments are due by Oct. 11. For more information on how to submit comments, please visit here.

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October 5, 2006

ISS 2006 Postseason Report
Submitted by: Sarah Cohn, Director of Communications

ISS has just released its 2006 Postseason Report, which highlights the key issues and voting statistics from the 2006 proxy season. This year's report covers executive pay practices in the U.S. and globally, the options backdating controversy, majority voting and board accountability, the current M&A and proxy contest environment, the rise in social shareholder proposals, Delaware law developments and international regulatory developments.

To view the full report, please visit here.

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October 4, 2006

New Study Details Investor Losses from Backdating
Submitted by: Ted Allen, Director of Publications

A new study by University of Michigan researchers concludes that investors have incurred significant losses at companies that have been accused of backdating executive stock options.

The researchers analyzed 48 firms that have been implicated in backdating and found that investors lost an average of 8 percent in market value (or $510 million per firm) during the 21 days around the disclosure of backdating allegations, according to Compliance Week. At most of these firms, the losses far outweighed the potential gains ($600,000 per company on average) that executives and directors could have received from backdating options. (The study didn't look at the potential gains that employees might have received from backdated options.)

"For a small gain to themselves, [executives are] putting their shareholders at huge risk," M.P. Narayanan, one of the study's authors, told Compliance Week. "Shareholders might have been better off if executives just asked for more money."

At those 48 companies, investors suffered abnormally negative returns at 35 firms, the researchers found. The most significant (market-adjusted) declines were at Vitesse Semiconductor (57 percent) and Jabil Circuit (31 percent).

The researchers also found that most of the investor losses (5 percentage points of the average 8 percent drop) occurred in the nine days before the first public disclosure of backdating accusations. According