Shareholder Activists Lobby Against Proposed Rule Changes
Submitted by: Subodh Mishra, Managing Editor
Two socially focused investor organizations are calling for the Securities and Exchange Commission to take no action on proposed rule changes affecting proxy access and non-binding shareholder proposals, arguing to do so may "irreparably harm the rights of shareholders."
The Social Investment Forum and Interfaith Center on Corporate Responsibility on Aug. 29 launched a Web site which aims to enlist 500 institutions and financial professionals to back their position. The site will facilitate the filing of comment letters, with copies going to both the SEC and lawmakers, forum and center officials said.
"We strongly oppose proposals at the SEC to either eliminate the shareholder resolution process or make it more difficult to sponsor resolutions," said Tim Smith, Social Investment Forum chairman and senior vice-president of Walden Asset Management, in a statement announcing the Web site’s launch. "We also oppose any step to make it more difficult for investors to help nominate directors."
Investors have until Oct. 2 to file comments on draft SEC rules, one of which would potentially allow for director nominations, or “proxy access,” while also modifying investors’ ability to file non-binding proposals. A second draft rule would effectively bar proxy access.
As part of the first proposed rule, the agency is seeking comment on whether a company or its shareholders should have the ability to propose and adopt bylaws that would establish procedures for including non-binding proposals in company proxy materials.
The draft proposal details a number of questions on implementing a bylaw governing such resolutions, while, notably, also seeking comment on potential changes to the existing economic, holding duration, and resubmission thresholds for filing non-binding resolutions.
For example, the draft rules seek comment on a potential increase in resubmission thresholds to 10, 15, and 20 percent over the first three years. Currently, resubmission thresholds for first-year proposals are set at 3 percent support of votes cast "for" and "against," while second-year proposals must get at least 6 percent, and proposals in their third year must achieve 10 percent support.
Such a change may lead to fewer socially focused proposals, activists say, which tend to get limited support in their first few years on corporate ballots.
Social Investment Forum and ICCR officials say their Web-based campaign aims to "surpass by a significant margin" a 1997-1998 campaign in which more than 300 socially responsible, religious, labor and other groups joined forces to oppose an earlier SEC staff plan to "gut" the shareholder resolution process. The groups prevailed in that fight and the SEC was forced to back down, withdrawing the widely criticized proposal, social issue advocates said.
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August 28, 2007 |
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Ohio Adopts a Law to Allow for Majority Voting
Submitted by: L. Reed Walton, Staff Writer
Ohio has passed a law making it possible for firms incorporated in the state to adopt majority voting in director elections.
The measure, signed on July 19 by Gov. Ted Strickland, was a response to requests from several union pension funds and Ohio companies for a change in the plurality-only standard set forth in the state’s corporations law. As of Jan. 1, companies will be allowed to amend their articles of incorporation to provide for a majority vote standard.
The legislation was introduced in March by Ohio Rep. Bill Seitz, a Republican, and it passed unanimously in both the state’s House of Representatives and the Senate.
Some of the pressure to amend the law stemmed from novel shareholder proposals, filed at 14 Ohio-incorporated companies this year, asking them to reincorporate in Delaware, where a majority vote standard is permitted. The major proponents of these resolutions, the United Brotherhood of Carpenters and Joiners of America and the Sheet Metal Workers International Association, withdrew most of the proposals when the companies agreed to lobby legislators to change the state’s law.
"Most companies said, 'We'd rather not take the reincorporation [proposal].' Most of them agreed to support the legislation," Ed Durkin, director of corporate affairs for the Carpenters, told Governance Weekly.
This willingness to back the legislation--although it does not mandate majority voting--might indicate a receptiveness on the part of Ohio companies in the future to either putting shareholder-sponsored proposals to a vote or amending their bylaws without shareholder pressure, Durkin said.
The three reincorporation proposals that were voted this year all received 30 percent support or higher. One Carpenters proposal, filed at human resources consulting firm Convergys, won 59.5 percent of the votes cast "for" and "against."
The passage of the law is part of a larger trend toward majority voting in the past two years. As of Aug. 7, 63.8 percent of the firms in the S&P 500 index had adopted board election reforms--either a plurality standard with a director resignation policy, or a full majority vote standard, according to Claudia Allen, a partner with the law firm of Neil, Gerber & Eisenberg in Chicago.
An updated copy of Allen’s paper, "Study of Majority Voting in Director Elections," will be available at the law firm’s Web site this fall.
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August 24, 2007 |
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Waiting for Action on Broker Votes
Submitted by: Ted Allen, Director of Publications
Ten months after the New York Stock Exchange (NYSE) first proposed the elimination of discretionary broker voting in board elections, investors are still waiting for the Securities and Exchange Commission to address the issue.
When the SEC issued draft rules on proxy access and sought comment on shareholder proposals in late July, some investors expected that the agency would also issue the proposed NYSE rule (which requires agency approval) for public comment. Broker voting was discussed during a trio of SEC roundtables on proxy rights in May, and Chairman Christopher Cox told lawmakers in June that the agency was looking at the issue during its review of the proxy process.
"It's strange that [SEC officials are] taking their time, since the stock exchange really wants this rule change," Brishen Rogers, a lawyer with the CtW Investment Group, which manages funds for the Change to Win labor federation, told Governance Weekly. "It’s really puzzling."
The NYSE has proposed changing Rule 452, which now permits brokers to vote client shares in uncontested elections and other “routine matters” if they don’t receive instructions within 10 days of a company’s meeting. Brokers generally cast these uninstructed shares in favor of management nominees, a practice that some investor advocates have likened to "legalized ballot-box stuffing."
The proposed rule change is supported by the Council of Institutional Investors (CII), CtW, and other shareholder advocates. They complain that broker votes can blunt the impact of “vote no” campaigns and can be decisive in whether a director receives majority support, which a growing number of U.S. companies now require. Investors point to the disputed election of CVS/Caremark director Roger Headrick (whom CtW contends was elected only because of broker votes) as an example how these votes can affect the outcome of board elections.
Broker votes account for a significant percentage of the shares in U.S. companies. About 85 percent of exchange-traded securities are held by brokers and banks on behalf of their clients, the SEC has noted in a briefing paper on voting mechanics. While most institutions now vote their shares or give instructions, only 30 to 40 percent of retail investors bother to vote their shares. According to Broadridge Financial, broker votes on average account for about 19 percent of the votes cast at U.S. corporate meetings.
The NYSE started looking at broker voting in April 2005 when it convened a “proxy working group” to assess Rule 452 and other rules that concern the proxy process. In June 2006, the group recommended that the election of directors should no longer be considered routine.
Last October, the NYSE proposed amending Rule 452 to bar brokers from voting their clients’ uninstructed shares in board elections after Jan. 1, 2008. While acknowledging that such a change would likely result “in some greater costs and difficulties for issuers, it is a cost required to be paid for by better corporate governance and transparency of the election process,” the NYSE said in its rule proposal to the SEC.
NYSE President Catherine R. Kinney declared in a press release that "the election of directors is simply too important to ever be considered routine, even where the election is uncontested. Shareholder voting on the election of directors is a critical component of good corporate governance."
At the SEC roundtable on May 24, Kinney defended the rule change against complaints that it would be too expensive, noting that companies raised similar concerns about costs when the NYSE in 2003 removed equity plans from the list of routine matters under Rule 452.
Most of the other roundtable panelists said Rule 452 should be changed, but they differed over how to do that. While John Endean, president of the American Business Conference, agreed that broker votes "serve as a thumb on the scale in vote-no campaigns," he argued that broker votes should only be barred from certain elections, e.g., those with an organized vote-no campaign.
In late May, the NYSE revised its proposal to exempt mutual fund companies after industry advocates warned that the funds, which already have trouble meeting quorum requirements, would see their proxy solicitation costs more than double.
"Stay Tuned"
During a U.S. House of Representatives hearing on June 26, Rep. Melvin Watt of North Carolina asked Chairman Cox about the NYSE proposal and expressed concern about the disputed election at CVS/Caremark. Cox noted that some small companies would have more difficulty meeting quorum requirements without broker votes, and he said the agency was looking at the issue as it reviewed other proxy process matters.
At an Aug. 14 speech, John W. White, director of the SEC’s Corporation Finance Division, said the agency staff is reviewing the comments made at the roundtables on broker votes, shareholder communications, empty voting, and other issues.
"Although we are aware of the issues in each of these areas, I can’t say when we will be in position to address them formally," White said. "I guess I would just ask that you stay tuned with regard to these and know that we’re thinking about them."
Jeff Mahoney, general counsel at CII, said the SEC’s failure to act on the NYSE proposal is "disappointing." "I don’t know what’s going on," he said.
Mahoney said he fears that the SEC may be waiting to issue the proposed rule for public comment so the commissioners can try to appease investors who would be angry if they lose their ability to file proxy access proposals (which investors won in a September 2006 court ruling, AFSCME v. American International Group).
"If I were a betting man, I would bet [the commissioners] would issue the [NYSE] proposal on the same day they roll back AIG so investors would have one piece of good news on an otherwise bad day," Mahoney told Governance Weekly
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August 20, 2007 |
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ISS to Hold August 21 Webcast: Analyzing Accounting and Legal Risk for Institutional Investors
Submitted by: Gary Hewitt, Director of Marketing Communications
ISS will hold a webcast, Analyzing Accounting and Legal Risk for Institutional Investors, on Tuesday, August 21, 2007 at 11:00am EDT.
In the current volatile market environment, it’s critical that investors manage today's risks before they become tomorrow's crises. CFRA (Center for Financial Research and Analysis), a global forensic accounting boutique, has a 13-year track record of uncovering companies and sectors facing deteriorating financial performance and increased risk – long before the market recognizes these problems.
Richard Leggett, head of RiskMetrics Group's ISS Governance Services unit, Marc Siegel, head of accounting and legal research at CFRA, and their colleague Garvis Toler will discuss how institutional investors can use forensic accounting and legal risk assessment as part of their investment process.
To register for the forum, please visit here.
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August 16, 2007 |
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Hedge Funds Can Lead to Better Governance, OECD Says
Submitted by: L. Reed Walton, Staff Writer
Private equity firms and "activist" hedge funds can help strengthen corporate governance by prodding other investors to become more informed about their rights, according to a new study.
The report was issued July 23 by the Steering Group on Corporate Governance of the Organisation for Economic Co-Operation and Development (OECD), a Paris-based economic think tank. The group studied not only the effects of reform-minded hedge funds on public company governance, but also how private equity firms have recruited other institutional investors for reform campaigns and turned around failing public firms with buyouts.
As opposed to many institutional investors, the report says, hedge funds often consult with other investors and make public announcements regarding proposed governance changes, instead of dealing quietly with company management. This approach, the OECD says, pushes other investors to become more knowledgeable about company strategy.
For instance, the report cites the example of German exchange Deutsche Börse’s proposed acquisition of the London Stock Exchange. Several hedge funds, including U.K.-based The Children’s Investment Fund, as well as U.S. funds Atticus Capital and Jana Partners, publicly opposed the transaction, preferring a proposed takeover of Euronext instead. Though neither deal occurred, Deutsche Börse withdrew its bid for the London exchange after the hedge funds’ combative, very public campaigns caused several of its institutional investors to sign on in opposition to the bid.
The report also addresses a number of issuer concerns with activist funds, including "short-termism" and proxy battles. The OECD committee suggests that hedge funds looking at a company’s long-term prospects can foster better market performance by the company even if the fund will only keep a short-term stake in the firm. The report posits that the lack of long-term strategies at certain companies is a major reason why activist funds target those issuers for reform in the first place.
Hedge fund activism has led to greater numbers of close votes, according to the report, especially in board elections and proxy contests. The OECD says that the numbers of close votes are unlikely to abate as hedge funds continue to push for reform. In fact, the report suggests that the only way companies can work to prevent proxy contests and other challenges is to remove barriers to shareholder participation so as to pre-empt activist funds.
Studies cited in the report show that failing companies that are bought out, not only by activist funds but by private equity of any stripe, tend to exhibit better short-term returns and perform better than their peers after the purchased company returns to trading with another public offering.
The conclusions reached by the OECD committee are preliminary, though, and the report calls for additional study of hedge funds in the markets in which they are predominant--the United Kingdom and the U.S. The report also calls for further examination of whether activism is catching on at hedge funds based in emerging markets.
Anxiety over the growing role of hedge funds has grown over the past few years, especially among European issuers, regulators, and lawmakers. In late May, the United Kingdom’s Financial Services Authority (FSA) released a report warning that hedge funds acquiring shares for the sole purpose of effecting corporate change may be tantamount to market abuse. A German Socialist politician has described hedge funds as “locusts,” while other leftist lawmakers in Europe argue that the funds overemphasize short-term gains.
Despite these complaints, Internal Markets chief Charlie McCreevy announced that the European Commission would not seek to regulate hedge funds. In July, the U.S. Securities and Exchange Commission adopted a rule that seeks to protect hedge fund investors from fraud, but the agency has not moved to curtail fund activism.
Meanwhile, a few European governments have tightened shareholding disclosure requirements in an effort to better monitor hedge funds. In June, the Dutch government proposed to lower the threshold for public disclosure of shareholdings in any company from 5 percent to 3 percent. Swiss legislators have voted to lower disclosure thresholds and to mandate greater disclosure of conversion rights, disposal rights, swap arrangements, and other derivatives.
The OECD, in spite of the anxieties caused by hedge funds and private equity firms, said that it believes the informational benefits to investors outweigh the possible risks.
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August 13, 2007 |
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Implicit Warnings for Japanese Companies Considering Pills
Submitted by: John Taylor, Principal Researcher, Governance Research Service
Recent developments would indicate that poison pills in Japan may be scrutinized if not frowned upon by regulators and the country’s judiciary despite a string of recent setbacks for opponents of such takeover defenses.
On Aug. 7, Japan’s Supreme Court backed lower court rulings that sanctioned the use of a pill-style defense used by Tokyo-based condiments maker Bull-Dog Sauce in response to a May bid from activist fund Steel Partners Japan Strategic Fund. The defense specifically targeted Steel Partners, whereby the company was able to issue warrants to selectively dilute the fund’s stake from 10.5 percent to less than 3 percent.
Fund officials, arguing the pill was discriminatory and in contravention to Japanese company law, which requires equal treatment for all shareholders, took their case to court in June.
But while a lower court ruling backed management fully and endorsed management’s contention that Steel was an “abusive bidder,” the recent Supreme Court ruling and a government white paper, also announced Aug. 7, would indicate that policy-setters’ view on pills may be more cautious about snuffing out hostile bids with potent takeover defenses.
Specifically, while the high court did back earlier rulings on BullDog’s pill, it tempered the lower court’s statements to the effect that Steel’s behavior provided strong evidence that is was abusive bidder. The court did not explicitly move to erase the abusive bidder judgment from the lower court record—as Steel head Warren Lichtenstein had demanded—but explicitly refrained from issuing an opinion of its own, according to the Japanese business daily, Nihon Keizai Shimbun.
Were that the end of the story, the stage would be set for the remaining 90 percent of Japanese corporations to strongly consider implementing pills over the coming year, but warning against doing so also are emerging from the government and the Tokyo financial community.
This year’s government white paper on the economy emphasizes the view that "hostile takeovers can boost productivity and corporate value by removing inefficient executives and improving management (the efficiency effect on management)," while criticizing managements opting for entrenching pill defenses.
An August 8 Financial Times article titled "Japanese Companies Warned on Defenses," provided its own translation of a passage, possibly drawn from this segment, characterizing it as "a rare example of the government openly supporting mergers and acquisitions activity."
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August 10, 2007 |
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Government Wins First Backdating Trial – Will More Indictments Follow?
Submitted by: Ted Allen, Director of Publications
Former Brocade Communications CEO Gregory Reyes, the first executive to go on trial for backdating stock options, was convicted Aug. 7 on 10 felony counts, including securities fraud, conspiracy, and filing false financial statements. He faces up to 20 years in prison and a $5 million fine when he’s sentenced in November.
The most significant part of this verdict may be that jurors were persuaded by prosecutors' arguments that backdating is a crime and not just an immaterial accounting mistake.
“The jury’s verdict recognized that backdating option grants with an intent to deceive as done in this case is a crime,” U.S. Attorney Scott Schools, whose oversaw the prosecution, said in a press release. "Shareholders, large and small, rely on the accuracy of the information provided to them by public companies like Brocade."
Last month, Securities and Exchange Commission Chairman Christopher Cox publicly pledged to accelerate the agency’s resolution of option backdating investigations, and recent weeks have seen a surge in enforcement activity by the SEC and federal prosecutors.
Since mid-July, prosecutors have announced criminal charges against former executives at SafeNet, Brooks Automation, and DRS Technologies’ Engineered Support Systems unit. Meanwhile, the SEC has unveiled civil settlements with KLA-Tencor and Integrated Silicon Solution and opened formal probes of Verint Systems, Verisign, Pediatrix Medical, and CNET Networks. Prosecutors have also filed criminal charges against Brocade’s former vice president of HR, Stephanie Jensen -- her trial date has not been set.
San Jose, California-based Brocade, which makes switches for data storage networks, reached a $7 million civil settlement with the SEC in late May. That settlement--and a $28 million accord with Hewlett-Packard's Mercury Interactive unit--were delayed for months amid disagreement among the SEC commissioners over the size of penalties the agency should seek from companies, according to news reports. Observers say the internal debate centered on how serious a problem options backdating should be considered.
More than 220 companies have disclosed internal and/or federal investigations into their option grants since March 2006. At least 100 have announced that they must restate financial results. So far, those restatements, financial revisions, and charges total $12.7 billion, according to Bloomberg News. Brocade restated its financial results twice in 2005, adding about $101 million in expenses to account for option irregularities.
Backdating on Trial
Prosecutors alleged that Reyes repeatedly used hindsight to select favorable grant dates between 2000 and 2004, so the options would be “in the money” when granted. Reyes and other company officials then falsified compensation committee minutes and other documents to make it appear that the options in fact were "at the money" on those dates, prosecutors said. At that time, U.S. companies didn’t have to record "at the money" options as an expense, so Brocade was able to reduce its compensation expenses and increase its earnings.
The verdict in Reyes’ eight-week trial surprised his lawyers and some legal observers because he didn’t benefit personally from the backdated grants and there was no direct evidence that he ordered the manipulation of option dates. But prosecutors pointed to SEC filings signed by Reyes that asserted that stock options were properly accounted for. Jurors apparently also were swayed by testimony that Reyes misled an outside lawyer who was retained to investigate the company’s option grants in 2004, according to The Recorder, a San Francisco legal newspaper.
Reyes’ lawyer, Richard Marmaro, argued that backdating isn't illegal and that the government failed to prove that Reyes knew about the detailed accounting rules that govern stock options. Marmaro also claimed that investors don’t pay attention to non-cash expenses like options when making investment decisions.
After the verdict, Marmaro said he would file an appeal and proclaimed his client’s innocence. "We are confident he will ultimately be exonerated. At all times, he acted in the best interests of the employees and shareholders of Brocade," the defense lawyer said in a statement.
Will More Indictments Follow?
U.S. Attorney Scott Schools was noncommittal when reporters asked whether additional indictments might follow, noting, “every case stands on its own facts.” But the Associated Press reported that prosecutors are considering charges against former executives at Apple, KLA-Tencor, and Broadcom.
"This is a pretty big win for the government," Peter Henning, a former prosecutor who is now a securities law professor at Wayne State University, told Bloomberg News. "It may well encourage more cases or push some investigations forward."
Several executives – including from Comverse Technology, Monster Worldwide, and Take-Two Interactive Software – have pleaded guilty to backdating charges. Others, such as the former general counsel of McAfee, former chairman of Engineered Support Systems, the ex-CEO of Brooks Automation, and former finance chief at SafeNet, have maintained their innocence in the face of the government’s charges related to options backdating.
Larry Ribstein, a law professor at the University of Illinois, expressed concern that the Reyes’ verdict will lead the government to seek more criminal indictments, instead of SEC civil penalties. “This will clearly embolden the government to seek more criminal prosecutions--and criminal prosecutions are a very blunt instrument with which to go after conduct that involves a lot of nuance and detail,” Ribstein told Business Week.
Jan Handzlik, a partner at the Howrey law firm who represents several executives in other backdating cases, told The Recorder: "As a result [of the Reyes’trial], the jury’s guilty verdicts will encourage prosecutors to bring more of these cases, relying in large part on the public's suspicion of anything to do with the timing of stock options."
Investors Taking Action
Meanwhile, investors have filed more than 400 lawsuits against at least 100 firms over alleged backdating, according to Bloomberg News. Most were filed as derivative cases in state court, rather than as federal securities class-actions, because most of the investors didn’t suffer the significant losses necessary to maintain a viable securities lawsuit (at most of the companies, shares usually rebounded after the initial disclosure of a backdating probe).
Shareholders also have responded by withholding voting support from directors. For instance, a compensation committee member at Brocade got 42.7 percent opposition this year. Three directors at KB Home received negative votes that ranged from 15 to 19 percent. And this week, even high-flying Apple disclosed that investors withheld between 23 and 36.8 percent support from six directors.
In addition, investors have given strong backing to a shareholder proposal from the LongView Fund that called for fixed dates for option grants. That resolution won 47 percent at Apple and 48.4 percent at CVS/Caremark.
Note: For an in-depth report on these developments, see the Aug. 10, 2007 edition of Governance Weekly.
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August 9, 2007 |
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Democratic Commissioner to Leave SEC
Submitted by: Subodh Mishra, Managing Editor
The Securities and Exchange Commission announced today that Democratic Commissioner Roel C. Campos intends to leave the agency in a month’s time and return to the private sector.
The departure of Campos, long a champion of investor rights, will come as a blow to advocates of proxy access and other measures deemed friendly to shareholders. Last month, Campos joined fellow Democratic Commissioner Annette Nazareth and SEC Chairman Christopher Cox in voting to propose a draft rule that allowed for director nominations.
Many investors are dissatisfied with the draft rule, arguing the requirement that a shareholder or group of shareholders hold 5 percent of a company’s equity to propose a bylaw allowing for access is too high.
Campos agreed, saying, "I have deep reservations that … the high threshold may make [the rule] useless," and called on investors to "make their views known." He suggested a scalable approach whereby economic thresholds for filing would be lower at larger companies and higher at small and mid-sized issuers. That, investors said, would be far more palatable.
Cox echoed the view of many investors and governance advocates in a press release announcing the Campos' departure. "Commissioner Campos has worked tirelessly, both at home and abroad, for the protection of investors and the betterment of U.S. markets," Cox said. "The nation’s investors have had a true friend in Roel Campos."
Under federal law, two of the SEC's five commissioner seats are to be filled by members of the political party that doesn't control the White House. Accordingly, Senate Democrats will recommend a replacement for Campos to President George W. Bush, who would then nominate the individual for confirmation by lawmakers. Senate Banking Committee members, who typically suggest the nominee, were not immediately available for comment.
Back in 2005, when Nazareth succeeded former Democratic Commissioner Harvey Goldschmid, securities lawyers told ISS that among the names under consideration were Columbia University law professor John Coffee, veteran Washington securities lawyer John Olson, and Joel Seligman, president of the University of Rochester.
Campos, now serving his second term, joined the SEC in August 2002.
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Investors Protest Apple’s Past Option Grants
Submitted by: L. Reed Walton, Staff Writer, and Ted Allen, Director of Publications
This week, Apple finally released the full vote results from its annual meeting in May. The results show that shareholders withheld between 23 and 36.8 percent of their votes from six directors in an apparent protest over the computer company’s past stock-option practices.
Cornish Hitchcock, an attorney for the Amalgamated Bank’s LongView fund, which filed an options reform proposal at Apple, said the significant withhold votes were a “surprise” because institutional investors didn’t wage a public “vote no” campaign.
"The vote is a wake-up call to the board to do its job," Hitchcock told Governance Weekly.
The significant withhold vote also is notable because the Cupertino, California-based company’s shares have soared 95 percent in the past three years. In 2006, every board member was elected with more than 97 percent support.
Apple is one of more than 220 companies that have disclosed internal or federal probes in the timing of past option grants. A 2006 special board committee investigation concluded that more than 42,000 grants between 1997 and 2002, including a grant of 7.5 million options to CEO Steve Jobs, were backdated. In December, the company announced a $105 million restatement to account for those options.
According to an Aug. 8 regulatory filing, compensation committee chairman William V. Campbell, former compensation committee member Arthur Levinson, and Jerome B. York, who helped conduct the special investigation, received 33.6 percent, 33.8 percent, and 36.8 percent opposition, respectively.
The special committee consisted of York, Eric Schmidt, and former U.S. Vice President Al Gore. Schmidt received a 23 percent negative vote, while Gore had 28 percent opposition.
York also served on the compensation committee in 2001 when Jobs’ options grants were approved. While York said he recused himself during the special committee discussions of the 2001 grants, his service on both committees may have contributed to the greater opposition that he received.
Investors withheld 23.9 percent of their votes from pay committee member Millard Drexler, while Jobs had 2.4 percent opposition.
Shareholders also expressed their concern over Apple’s compensation practices by giving significant support to three pay-related proposals. The LongView proposal, which asked the company to fix grant dates at the start of each fiscal year, received a 47.4 percent vote, even though the company plans to no longer issue options. A proposal asking for an annual advisory vote on executive pay won 46.7 percent support, and a resolution requesting a pay-performance link earned a 38.4 percent vote.
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August 8, 2007 |
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Cox Lauds Sarbanes-Oxley Act on Law’s Fifth Anniversary
Submitted by: L. Reed Walton, Staff Writer
When it comes to protecting investors, the Sarbanes-Oxley Act of 2002 has been successful, Securities and Exchange Commission Chairman Christopher Cox said after the fifth anniversary of the law’s passage.
The sweeping corporate governance legislation was enacted on July 30, 2002, in response to the accounting fraud scandals at Enron, WorldCom, and other companies that cost investors billions of dollars.
According to Cox, who came to the SEC two years after the law was signed, the primary aim of the legislation--better investor protection from fraud--has been attained. Since companies have begun complying with the major provisions of the law, the number of fraud-related securities class-action suits has gone way down, Cox told Renée Montagne, host of National Public Radio’s "Morning Edition" program on Aug. 7.
Also, an unexpected but beneficial side effect of the law has been an increase in company self-reporting, Cox said.
"[W]ith respect to the stock-option backdating … that the SEC is investigating in hundreds of cases, most of what we are busy working on is the result of self-reporting," Cox told Montagne. "That would never have happened prior to 2002."
The five-year-old law does have some detractors. Cox said he is often approached by company representatives who, while praising the newfound confidence of their investors, lament the costs of complying with the law.
Compliance costs are going down, though, Cox said in the NPR interview. In June, the SEC issued new management guidelines to help streamline the financial reporting requirements of Section 404 of the Sarbanes-Oxley law. The guidelines, paired with new auditing regulations prepared by the Public Company Accounting Oversight Board and ratified by the SEC, should bring costs down further, Cox said in an Aug. 2 speech at the Federal Reserve Bank of Chicago’s annual private equity conference.
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August 6, 2007 |
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Sudan Divestment Initiative Grows
Submitted by: L. Reed Walton, Staff Writer
Since 2006, the number of institutional investors withdrawing funds from companies that do business with Sudan's government has grown substantially.
More than 12 state pension funds, six cities, 31 universities--even two presidential candidates--have adopted Sudan-specific divestment policies since May of last year. Sudan is Africa’s largest nation by area; in its 200,000-square-mile Darfur region, more than 300,000 people have been killed and over 1 million displaced since 2003 by fighting between ethnic Sudanese and Arab militias backed by the country's government.
Part of the reason for the recent swell in divestment campaigns is the strategy of "targeted divestment," says Adam Sterling, director of the Sudan Divestment Task Force, a Washington-based project of the nonprofit Genocide Intervention Network.
There are more than 500 multinational companies that have operations in Sudan, including Coca-Cola and PepsiCo, which buy local resources or distribute in the country. However, most of these companies do not deal directly with the Sudanese government. The task force has targeted firms with direct business relationships with the government in Khartoum, which sends arms and aid to Arab militias.
According to Sterling, nearly all of the U.S. states that have adopted divestment legislation since 2006 use the task force’s strategy for targeted divestment. Most recently, the governors of Rhode Island, Hawaii, Texas, and New York adopted provisions for removing state-controlled funds from targeted companies.
When adopting a targeted divestment strategy, an institution or state does not simply sell off its shares in the "offending" companies. A divestment program is meant to be more of a dialogue between firms and investors, as the task force explains in its legislative model.
Once committed to a plan, a public fund examines its holdings and puts together a list of "scrutinized companies." The fund then sends letters to the companies who are actively involved in business with the Sudanese government, asking them to review their business ties and formulate a strategy for severing them, or face divestment.
If, 90 days after receiving written notice, the company has not addressed its active business interests in Sudan, the fund can begin selling its shares in the scrutinized companies.
"Divestment is a tool of last resort, once diplomatic resources have been exhausted," Sterling told Governance Weekly.
A targeted divestment strategy does involve a commitment of time and resources. The model legislation suggests that the list of scrutinized companies in a fund’s portfolio be updated quarterly, which requires significant monitoring by the fund or a third party on behalf of the fund. The Sudan Divestment Task Force itself--with a staff of five--does not have the resources to monitor progress for each divesting institution, which means that the institution incurs some costs in the divestment process.
So far, these costs seem to be mostly administrative, involving staff time in e-mailing and calling companies to engage them in divestment dialogues, said David Minot, director of finance and investment for the Office of the Treasurer of Vermont.
"In Vermont, we tend to try to do things as cost-effectively as possible," Minot told Governance Weekly. He said that tangible, invoiced costs involved with the engagement strategy "have been de minimis, if anything."
Vermont Treasurer Jeb Spaulding adopted Sudan Divestment Task Force guidelines for all state pension funds on Feb. 26, and so far, through the policy of engagement before divestment, the state funds have only had to fully divest from one company. That firm, oil industry equipment supplier Schlumberger, has since begun discussions with the task force on its business initiatives in Sudan.
A recent survey by research firm KRC Research--in affiliation with the Save Darfur Coalition--showed that seven out of ten American adults are likely to agree that companies should take severe human rights abuses, like genocide, into account rather than basing investment decisions on economic criteria alone. A total of 1,022 people were interviewed for the survey.
Responses to Targeted Divestment
The targeted model also helps states avoid overstepping legal bounds when directing how public pension fund assets should be allocated. The first state legislation directing state-controlled funds to divest from Sudan, adopted by Illinois in 2005, was struck down by a federal judge in Chicago in February.
The ruling stemmed from a lawsuit against the state brought by the National Foreign Trade Council (NFTC) shortly after the legislation was passed. The business group successfully argued that Illinois’ law interfered with the federal government’s ability to conduct foreign policy by setting sanctions above and beyond what the U.S. already had in place.
Some of the council’s member companies had complained in 2005 about early legislation in other states as well, NFTC Vice President Dan O’Flaherty told Governance Weekly. The group decided to pursue the Illinois law because “[it] was the most poorly drafted,” O’Flaherty said.
The original bill’s sponsor, Illinois State Senator Jacqueline Collins, oversaw revised legislation that was sent to Gov. Rod Blagojevich’s office on June 29. The governor has 60 days in which to sign the bill. A spokeswoman for Sen. Collins’ office said that Blagojevich is planning a public signing of the bill in Chicago this month.
Investor Initiative: Berkshire Hathaway
The number of company-specific investor proposals regarding Sudan, however, has been low. This year, shareholders at Berkshire Hathaway voted on a proposal by shareholder Judith Porter that would have asked Berkshire Hathaway to refrain from investing in companies that have ties to Sudan's government. The Securities and Exchange Commission initially approved the company’s request to omit the resolution as too vague, but the insurance company’s billionaire founder, Warren Buffett, decided to allow shareholders to vote on it at the May 5 annual meeting, even though he opposed it.
Porter’s main concern was Berkshire’s large holding in PetroChina, a subsidiary of the China National Petroleum Corporation (CNPC). PetroChina itself does not operate in Sudan, but according to a Sudan Divestment Task Force report, state-owned CNPC owns a 40 percent stake in Sudan’s oil industry, and its board membership overlaps with PetroChina’s almost completely.
Berkshire Hathaway is the second largest shareholder in PetroChina after CNPC. In opposing the proposal, Berkshire management contended that PetroChina could not be held responsible for the activities of its parent company or the Chinese government. It appears that most Berkshire shareholders agreed, giving the measure only 1.8 percent support.
However, on July 28, the Financial Times reported that Berkshire Hathaway had reduced its stake in PetroChina to just under 11 percent. The company did not say, however, that the move came in response to shareholder pressure, the paper reported.
Moving Forward
Largely because of targeted divestment strategies, the movement toward Sudan divestment shows no sign of slowing. On July 24, the state of Michigan announced it had begun considering a divestment program for its public pension funds. If adopted, it would make Michigan the 20th U.S. state to adopt some kind of Sudan divestment policy.
Organizations like the Save Darfur Coalition warn against a growing partnership between China and Sudan, centering on oil interests. CNPC and fellow Chinese oil company Sinopec have some of the largest drilling and extraction contracts in the region, along with India’s Oil and Natural Gas Corporation (ONGC) and the Malaysian Petroliam Nasional Berhad (Petronas).
News reports indicate, though, that U.S.-based companies with investments in companies working in Sudan have responded to the economic pressure of divestment. Forbes magazine reported in March 2006 that at least two large U.S. firms have ceased all non-humanitarian dealings with Sudan: Xerox cut ties with its distributor in the Sudanese capital of Khartoum, and 3M stopped sales to all entities except aid organizations. These firms were among the ones targeted by initial divestment campaigns like the one at the University of California and the California Public Employees’ Retirement System (CalPERS).
Longtime task force target Fidelity Investments cut its holdings in PetroChina by 91 percent, beginning just a few days after the Berkshire Hathaway meeting.
In early July, U.K. automaker Rolls Royce announced it will "progressively withdraw" its existing contracts to make engines for oil- and mineral-extraction companies operating in Sudan, BBC News reported. Canadian firm CHC Helicopter, the largest supplier of helicopter transportation to the foreign and offshore oil industry, stopped all business operations in Sudan in March 2007, a company press release reported. Both firms were then taken off the list of the task force’s "highest offenders" in contributing to the genocide.
Sterling, the task force director, hopes that additional divestment will increase economic pressure on the Sudanese government to the point that it cannot continue using oil proceeds to arm ethnic militias.
Targeted models for divestment also appear less likely to face legal challenges like the broad-based divestment law in Illinois that was recently struck down.
"We've really had a fantastic relationship with the Sudan Divestment Task Force," said Jake Colvin, director of USA*Engage, a diplomacy resource and advocacy group that works with the National Foreign Trade Council.
"Their model is thoughtful," Colvin told Governance Weekly. "They’ve been willing to work with the business community."
For individual investors, many investment managers offer "Sudan-free" funds. In late June, the SEC set up a web tool for identifying companies with business interests in Sudan and other countries labeled “state sponsors of terrorism” by the U.S. government--but the tool was suspended July 20 after registered companies complained that the searches brought up outdated information.
Legislators are beginning to respond on a federal level, as well. On July 31, the House of Representatives overwhelmingly approved legislation authored by California Democrat Rep. Barbara Lee, which would require the Treasury Department to establish a list of companies whose activities directly affect genocidal operations in Darfur. A companion bill has not yet been introduced in the Senate.
Investors Also Target Iran
The push for divestment has extended into other geopolitical spheres as well. Some states are pushing for legislation that would require public pension funds to divest from companies that do business in Iran, which the Bush administration has accused of supporting insurgents in Iraq and aspiring to build nuclear weapons.
Missouri’s pension funds have partially divested from several companies with ties to Iran, including Halliburton--which was formerly run by U.S. Vice President Dick Cheney. An Iran divestment bill passed the California Assembly by a wide margin, and will be voted in the Senate at an unspecified date. Texas Governor Rick Perry is considering directing the state’s pension funds to divest from companies with holdings in Iran, while New York State Sen. Craig M. Johnson introduced a divestment bill for all of New York's public pension funds. According to Johnson’s office, the bill is still under consideration by the state Senate’s committee on civil services and pensions.
Meanwhile, CalPERS sent letters to four multinational energy companies--ENI of Italy, Repsol YPF of Spain, the Netherlands’ Royal Dutch Shell, and Total of France--asking them to report on and minimize the risks of investing in Iran.
On July 31, the U.S. House of Representatives passed a bill requiring the Treasury Department to keep a list of companies with economic ties to the Iranian government. Lawmakers approved the bill by a vote of 408 to 6. Sen. Barack Obama, a Democratic presidential candidate from Illinois, has already introduced companion legislation in the Senate.
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August 2, 2007 |
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Analysis: Forces Fueling Engagement to Grow in 2008
Submitted by: Subodh Mishra, Managing Editor
Investors and U.S. corporate issuers came together as never before in 2007 to address a wide range of concerns and to better align views on corporate best practices.
That trend is expected to carry into 2008, observers on both sides of the divide say, particularly if the Securities and Exchange Commission empowers shareholders by eliminating undirected "broker" votes in uncontested director elections, and allows investors to nominate corporate directors.
If these key regulatory changes are approved later this year, investors will have additional tools to bring companies to the negotiating table, analysts say. These changes may also provide some activists an incentive to initiate "vote no" campaigns, conversely.
But such campaigns may never materialize if, as expected, the trend toward engagement and away from confrontation continues. While a substantial increase in the level of shareholder proposal withdrawals is the most tangible evidence of the trend toward dialogue, other indicators also suggest that engagement is taking root and is measurably altering the governance landscape.
The creation this spring of an investor-issuer working group to tackle the nuances of advisory voting on executive compensation is one key example. The decision by pharmaceutical giant Pfizer—a governance trailblazer on such issues as director resignation policies and compensation disclosure—to formally engage its top shareholders is another.
Meanwhile, the growing use of the Internet to foster and promote communication between corporate managers and owners, coupled with the relative paucity of high-profile "vote no" campaigns during the 2007 proxy season, also serve as potent reminders that investors and corporate issuers are favoring constructive engagement over confrontation.
To read more about the forces fueling engagement, please visit ISS’ Knowledge Center.
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