2008 Preview: Pay Proposals
Submitted by: Subodh Mishra, Publications
Investor calls for advisory votes on pay and other measures to reform executive compensation will resonate in 2008 as U.S. capital markets slide in the face of recession.
A network of investors, led by Boston-based Walden Asset Management and the American Federation of State, County and Municipal Employees, has so far filed more than 90 proposals calling for an advisory vote on pay, compared with 44 such resolutions at this time last year.
The network’s membership--which ranges from retail shareholders to pension fund giants including the California Public Employees’ Retirement System--also has grown from 2007. Nearly 75 investors have come together this year to file the measure at primarily large and medium-sized companies.
“Companies receiving the proposal include those where shareholders believe there has been non-performance, options backdating, and other major issues that shareowners need to address,” Timothy Smith, senior vice president at Walden Asset Management, told Risk & Governance Weekly. Abbott Laboratories, Capital One, Lexmark and Wells Fargo are among those targeted.
Spokeswomen at Capital One and Wells Fargo declined to comment on the filings, while officials are Abbott Laboratories and Lexmark did not immediately respond to requests for comment.
The proposal, dubbed “say on pay,” also will be filed at companies such as General Electric that are generally viewed positively by shareholders with respect to executive compensation and other facets of governance, according to Smith. “We believe [such companies] should provide leadership in adopting an advisory vote” on pay, said Smith, who also noted that dialogue on the issue has increased this year.
Governance watchers have in recent months called for increased communication between issuers and shareholders on a range of issues including compensation. “Improved communication and dialogue … may provide compensation committees with a broader perspective and balance in relation to the views provided by management,” wrote Weil, Gotshal & Manges attorneys Ira M. Millstein, Holly J. Gregory, and Rebecca C. Grapsas in a memo to clients earlier this month. “It may also lessen the push for an advisory vote on executive compensation.”
Last year, 20 companies and investors came together to form the “Working Group on the Advisory Vote on Executive Compensation” to study the issue.
Three companies--Par Pharmaceuticals, Verizon Communications, and Aflac—have so far taken steps to allow for advisory votes on pay following shareholder proposal filings in 2007 calling for the right. Aflac, the Georgia-based insurer, will be the first to give shareholders the vote when it holds its annual meeting on May 5. The company originally planned to allow for the vote in 2009.
Concerns over compensation in 2008 will not be limited to calls for advisory votes on pay, though. Novel proposals will include demands for companies to adopt a policy on the use of so-called 10b5-1 stock-selling plans, and those seeking to limit or bar tax gross-ups for senior executives. Another resolution seeks to place limits on executive employment agreements.
First year proposals generally do not fare as well as those in their second and third year, though this year may prove an exception.
“As the market declines, there’ll be more support for compensation reform,” notes Charles Elson, director of the University of Delaware’s Weinberg Center for Corporate Governance. “The downturn will only fuel the efforts of shareholders.”
Reports of record Wall Street bonuses at financial firms that sustained considerable losses in 2007 as a result of exposures to mortgage-related investments are likely to stimulate broad support for proposals tied to executive pay. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns together awarded roughly $39 billion in year-end bonuses, exceeding the $36 billion distributed in 2006 when the industry reported all-time high profits, Bloomberg News reported.
CEOs at Morgan Stanley and Bear Stearns forfeited bonuses in light of bad bets on subprime mortgage-backed securities. That may mollify shareholders who are expected to vote on a range of proposals including those calling for strengthened links between pay and performance. Labor funds, led by the United Brotherhood of Carpenters’ and Joiners of America, have so far filed more than 50 such resolutions at spring annual meetings.
Pay-for-Superior-Performance
More than three-dozen proposals requesting a pay-for-performance link received average support of nearly 30 percent in 2007, while roughly two dozen similar resolutions received more than 36 percent support in 2006.
This year’s proposals typically call for compensation committees to adopt a pay-for-superior-performance principle by establishing compensation plans that set strict criteria for achieving payout targets. For example, measures call for the establishment of performance targets for each plan financial metric relative to the performance of peer companies, as well as delivery of a majority of the plan’s target long-term compensation through performance-vested equity awards rather than time-vested awards.
Bear Stearns is one company that is challenging the proposal at the Securities and Exchange Commission. The firm is seeking permission from the SEC to omit the proposals on the grounds it has been “substantially implemented,” arguing its compensation committee “has historically followed the long-held principle that the executive officers should be rewarded based on both the [c]ompany’s and their own individual performance.”
In their Dec. 21 letter to the SEC, lawyers for the New York-based financial firm note that the commission has in the past stated that exclusion may be appropriate “…even if company practice does not mirror the proposal exactly.”
Thirty-two percent of Bear Stearns’ shares present and represented, including abstentions, voted in favor of a Carpenters’ pay-for-performance proposal at last year’s annual meeting.
The Carpenters have so far filed pay-for-superior-performance proposals at 33 companies, including Best Buy, Honeywell International, WellPoint, and Northern Trust, according to RiskMetrics records.
New Concerns Spotlighted
Troubled by the potential for executives to abuse certain benefits, labor pension funds are filing two new proposals in 2008.
AFSCME plans to submit proposals calling on companies to adopt tighter controls on executive stock sales under “Rule 10b5-1” plans. That SEC rule, enacted in 2000, was meant to provide flexibility to insiders who may not trade on information that is not available to outsiders by allowing them to set up automatic trading protocols that operate regardless of insider trading “windows.”
However, critics of the rule contend that loopholes allow executives to cancel trades when nonpublic information would indicate, for example, that a sale may not be beneficial. A September 2007 study by Stanford University researcher Alan D. Jagolinzer found that the rule “appears to enable strategic trade[s],” and SEC officials have warned that the study suggests the possibility of abuses, which they are investigating.
AFSCME's 10b5-1 proposal, filed so far at Safeway and SanDisk, seeks to close potential loopholes by tightening disclosure requirements and putting in place stronger controls. The resolution calls on boards to adopt principles to help ensure that 10b5-1 plans are not abused. For instance, one principle would limit amendments, or the early termination of plans. Another would require the broker handling 10b5-1 plan trades not to handle other trades for an executive in order to minimize the likelihood that the executive will inadvertently communicate material nonpublic information to the broker.
The proposal also calls for a 90-day gap between adoption or amendment of a 10b5-1 plan and initial trading under the plan, barring executives from trading in company stock outside plans, and a requirement to identify plan transactions on Form 4 reports, which are corporate filings on trades by insiders.
“We believe that 10b5-1 plans, with proper safeguards, can serve a useful function,” AFSCME notes in the proposal's supporting statement. “The disclosure-related principles aim to increase transparency regarding 10b5-1 plans.”
AFSCME also is submitting a new compensation-related proposal that seeks to limit the use of tax gross-ups, whereby companies cover the tax liability of executives, often following a change in control. Such payments have received widespread coverage in recent years as use of perks has proliferated and new SEC compensation disclosure rules make it easier for investors to identify such potential payments.
AFSCME’s proposal calls on companies to refrain from making or promising to make gross-up payments to its senior executives, except those “provided pursuant to a plan, policy or arrangement applicable to management employees” generally, such as those related to relocation or expatriate tax-equalization policies.
The proposal defines a gross-up as “any payment to or on behalf of the senior executive whose amount is calculated by reference to an actual or estimated tax liability of the senior executive.” The definition is designed to focus on the often large payments made in conjunction with severance packages awarded after takeovers.
“Gross-ups highlight the dubious effects of privilege that allow CEOs to avoid taxation, while ordinary Americans cannot,” said Richard Ferlauto, director of pension and benefit policy at AFSCME. Proposals have so far been filed at Nabors, American Express, Textron, CVS Caremark, Northrop Grumman and Clear Channel Communications.
Connecticut Retirement Plans and Trust Funds is seeking to bridge the gap between CEO pay and that of the next highest-paid named executive officer, or NEO. So far, the pension fund is calling on two companies--Abercrombie & Fitch and SUPERVALU--to adopt an internal pay equity policy. Under the proposal, compensation committees would be charged with conducting peer group and other analyses and then disclosing to shareholders “the role of internal pay equity considerations in the process of setting compensation for the CEO and other NEOs.”
We “believe that large CEO to NEO pay ratios may indicate inadequate succession planning, since large disparities may be seen as reflecting significant differences in contribution and ability,” fund officials wrote in the proposal.
Meanwhile, the AFL-CIO is submitting a new resolution that seeks to curb employment contracts for named executive officers. The limits include capping such agreements at three years, barring evergreen clauses that allow for renewal without shareholder approval, and barring the accelerated vesting of stock-based awards and the use of excise tax gross-ups.
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January 29, 2008 |
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Investors Face Big, Emerging Risks from Sea Level Rise
Submitted by: Doug Cogan, Climate Change Research Group
The latest news out of Antarctica should send shock waves around the globe. Or perhaps I should say a tidal wave, because some of its glaciers are melting surprisingly fast and could start to swamp our coastal cities, where half the world’s population lives, as the sea level rises. Owners of long-lived coastal assets—and those who insure them—should take heed.
As the last unpopulated and undeveloped continent on Earth, Antarctica hardly seems like a place worthy of much attention, but it is our world’s canary in a coalmine. Just as the discovery of the “ozone hole” over Antarctica 20 years ago led to a ban on man-made chlorofluorocarbons, the latest discovery speaks to the need to clamp down on greenhouse gas emissions from fossil fuels that are contributing to this melting.
Until recently, scientists thought that Antarctica’s climate and ice sheets would remain relatively stable and withstand the effects of global warming for at least many centuries. Now signs are that altered wind and ocean currents already are bringing warmer water to the continent’s perimeter, eating away at Antarctica’s frozen edges.
Especially vulnerable is the West Antarctic Ice Sheet, an area about the size of Texas, whose terrain is flat, shallow and mainly under sea level. As its boundary starts to melt, the effect is much like popping a cork from a bottle—unplugging a flow of ice that is hard to stop once it gets going. If all of the West Antarctic Ice Sheet were to melt, it would release enough freshwater to raise the global sea level by nearly 25 feet, flooding major urban areas like New York City, Florida’s “Gold Coast” and California’s Sacramento delta, to name but just a few U.S. examples.
Trouble at Both Poles
A similar melting process is at work in Greenland, whose ice sheet contains enough freshwater to increase the global sea level by another 23 feet. Here, too, the findings are so new and surprising that scientists have had a hard time keeping up with them. In fact, last year’s Nobel Peace Prize-winning report from the Intergovernmental Panel on Climate Change—which was subject to an extensive but time-consuming peer review—is already out of date.
In that report, the IPCC projected that neither Greenland nor Antarctica would contribute much to sea level rise in the 21st century. In the case of Greenland, it was thought that its mountainous terrain would lock ice mainly in place. Water evaporating off the ice’s surface would fall into the ocean as precipitation—a slow process to be sure.
On this basis, the IPCC projected that only between eight inches and two feet of sea level rise would occur by the end of this century, mainly from thermal expansion of the ocean’s surface as the global temperature rises. Glacial melting from Greenland or Antarctica would literally be drops in a bucket, or so the IPCC thought.
Now scientists have discovered that melt-water is pooling on Greenland’s icy surface and finding its way into deep crevasses and caverns that cascade down to the bedrock below. The result is that Greenland’s ice sheet is melting from below as well as above. More significant, the deep melt-water is dislodging ice from the bedrock, acting like a lubricant that allows the entire ice sheet to slip inexorably toward the sea.
Taken together, Greenland and West Antarctica already are depositing enough freshwater into the ocean to drain the equivalent of Lake Ontario every 18 months. And this rate of melting is accelerating—perhaps irreversibly—so that the amount of sea level rise in the 21st century may well end up being measured in several meters rather than in feet and inches. Rajendra Pachauri, the head of the IPCC, concedes this "frightening" possibility and says it will be examined in the group’s next report.
Awash in Risk
The consequences of such rapidly rising sea level would be devastating for investors. Trillions of dollars of coastal infrastructure could be laid to waste—airports, highways, power plants and water treatment systems, not to mention millions of homes and commercial properties.
Are investors and bankers paying attention to this important news? Amidst the enormity of the current sub-prime lending crisis, it’s easy to see how an issue like this might get lost in the wash. Yet these two problems bear some eerie similarities—namely that the financial community is failing to properly account for underlying risks to a huge class of assets, with tremendous repercussions for the global economy as these risks play out.
While the bad news is that sea level rise ultimately could affect a much larger share of property valuations than the sub-prime lending crisis, the good news is that it is not too late to head off this looming environmental and investment calamity. New private and public sector alliances can come together to make key decisions on building standards and land-use regulations in coastal areas, ensuring energy efficient and disaster-prone retrofits of existing infrastructure, and providing supportive insurance coverage. Most of all, a global consensus needs to form around the imperative to bring down greenhouse gas emissions and wean our dependence on fossil fuels—balancing this energy challenge against the emerging threat to our coasts.
Adaptation vs. mitigation has always been a huge undercurrent within the global warming debate. Now—with the latest findings from Antarctica and Greenland welling to the surface—it is becoming clear that both adaptation and mitigation strategies will be needed, and help shape some of the most important investment decisions of the 21st century.
* Doug Cogan is also the lead author of the 2008 report, Corporate Governance and Climate Change: The Banking Sector, commissioned by the Ceres investor coalition.
*This commentary expresses the views of the author alone and does not purport to represent the views of RiskMetrics Group or its clients.
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January 22, 2008 |
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2008 Preview: Subprime Proposals
Submitted by: Subodh Mishra, Publications
As the 2008 proxy season looms, a growing number of U.S. companies are finding themselves in the crosshairs of investors troubled by their involvement in, or exposure to, the subprime mortgage crisis that has roiled capital markets.
A number of labor funds are targeting homebuilders with mortgage lending operations as well as financial firms whose investments in mortgage-backed securities have resulted in deep losses. Shareholder proposals at those firms include calls to establish committees to review lending operations, as well as those to establish new policies on dealings with ratings agencies.
“Anyone who said [subprime lending] didn’t relate to shareholder value now looks silly,” noted AFL-CIO Associate General Counsel Damon Silvers, alluding to efforts by social activists in recent years to curb “predatory” lending practices.
To date, the AFL-CIO has not filed any subprime-related proposals, though labor federation officials suggest the focus on the issue may change in the coming months.
“As annual meetings approach, and more information is available … that suggests certain people weren’t doing their jobs in a way that cost investors a lot of money, we’re going to see a focus on those people,” Silvers warned in a December interview.
The CtW Investment Group, the investment arm of the Change to Win labor coalition, announced it would target the five members of financial giant Citigroup’s audit committee as well as the chair of Merrill Lynch’s nominating and governance committee following the release of fourth quarter 2007 results that included write-downs in the billions for subprime losses.
“Citigroup and several other major banks were at the epicenter of the mortgage meltdown,” CtW Investment Group Executive Director William Patterson noted in a statement. “This proxy season, the [group] will be working to hold individual directors at these companies accountable for their performance.” (For more on this story, please see the “Risk Management” section of this week’s edition of Risk & Governance Weekly.)
Other labor funds, meanwhile, are addressing subprime-related concerns via shareholder proposals. The Laborers’ International Union of North America, or LIUNA, has filed resolutions at a half dozen companies that call for enhanced disclosure of lending practices, according to RiskMetrics records. Companies including the Ryland Group and Beazer Homes are not providing sufficient information on their mortgage practices for shareholders to adequately monitor risk, LIUNA argues.
The labor fund cites a March 2007 Business Week article noting that federal investigators have opened a broad criminal probe into “lending practices, some financial transactions, and other dealings” at Beazer Homes to underscore the need for additional disclosures. The resolution to the Atlanta-based homebuilder calls on its board to report within 90 days of the annual meeting on lending practices and to specifically discuss the following:
The extent of the company’s mortgage originations in subprime, Alt-A, jumbo, and “exotic” mortgages including piggybacks/second mortgages, interest only loans, negative amortization loans, and low/no documentation loans, as well as what percentage of its mortgage originations may be classified as such mortgages;
Which of the company’s geographic markets are most reliant on those mortgages;
The identity of the purchasers that buy the company’s mortgage loans in the secondary market;
What percentage, if any, of the purchased loans have early payment default provisions that may require the company to buy back those loans as well as the time frame for those obligations; and
How many non-performing loans the company expects it will have to repurchase during the current and upcoming fiscal year.
Beazer asked the Securities and Exchange Commission for permission to omit the proposal, but the company’s “no action” petition was denied. (For more on the SEC staff decision, please see the Dec. 14, 2007, edition of Risk & Governance Weekly.)
Homebuilders are not the only ones being targeted over disclosures related to subprime mortgages. Financial institutions also are being called on to provide more details on their exposure to mortgage-backed securities. Many Wall Street firms were forced to write down assets valued in the billions of dollars during the second half of 2007 and into 2008 due to their exposure to high-risk loans.
LIUNA is asking Lehman Brothers, Washington Mutual, and Bear Stearns to report on mortgage originations and mortgage securitizations as “subprime, Alt-A, or other non-agency loan types.” The resolved clause of the resolution at Lehman’s also calls on the company to discuss the long-term strategic and financial implications of its decision to reduce resources and capacity in the subprime area and what the firm anticipates will be its “ultimate realized losses related to the mortgage securities crises.”
Compliance Committees Sought
About a half dozen companies, meanwhile, are being targeted by an Amalgamated Bank proposal calling for the establishment of a mortgage lending compliance committee. The committee would be composed of independent directors who would “conduct a thorough review of the [c]ompany's regulatory, litigation, and compliance risks with respect to its mortgage lending operations…” The committee would report findings and recommendations, as well as progress made, within six months of the 2008 annual meeting.
“As companies … face increasing regulatory pressure over their compliance and lending practices, we believe instituting a compliance committee will enable the company to safeguard shareholder value in the new legal and regulatory climate,” noted Scott Zdrazil, Amalgamated Bank’s director of corporate governance.
Pennsylvania homebuilder Toll Brothers, which in early December reported its first quarterly loss in more than two decades due to the weakened housing market, obtained SEC permission to exclude the measure. Zdrazil tells RG&W that the proposal remains outstanding at a number of firms, and has generated good discussion on how to strengthen compliance-related oversight.
Credit rating agencies also have been targeted over the subprime mortgage crisis. Both Moody’s and McGraw-Hill, parent company of Standard & Poor’s, have received proposals that call for the board to adopt policies to bar the employment of any individual who worked for a client within the past year. The proposal also calls for the lead analyst for a given client to be rotated every five years and for the audit committee to be “directly and fully responsible” for managing potential conflicts of interest with clients and to conduct internal audits to ensure compliance with the policy.
“As [regulators] investigate the role that credit rating agencies have played in the current mortgage and credit crisis, we believe that corporations like Moody’s and McGraw-Hill should be proactive in limiting both real and perceived conflicts of interests with their clients,” noted Jennifer O’Dell, LIUNA’s assistant director for corporate affairs. “We believe this duty falls squarely on the shoulders of the audit committees of these corporations.”
Lawmakers also have questioned the role of the ratings agencies, arguing that they gave high ratings to bonds backed by risky mortgages and failed to downgrade those ratings until markets began to collapse.
McGraw-Hill did not responded to requests for comment, while a Moody’s spokesman told R&GW that the company would comment only if the proposal showed up in the proxy.
Companies with subprime losses also are feeling heat in other ways. Proxy access proposals have been filed at lender Countrywide Financial, E*TRADE Financial, JP Morgan Chase, and Bearn Stearns, proponents say.
The Ryland Group, a Calabasas, Calif.-based homebuilder, has received an advisory vote on compensation proposal filed by TIAA-CREF. So far this year, the company is facing four shareholder proposals, according to RiskMetrics records, compared with just two last year and three in 2006.
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January 18, 2008 |
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Trends in Securities Litigation—What You Need to Know for 2008
Submitted by: L. Reed Walton, Staff Writer
How will current lawsuits on the docket and new settlements affect investors in the coming year? Will the credit crisis and market turmoil yield a new wave of settlements? These trends are the subject of an upcoming RiskMetrics Group white paper, part of our What You Need to Know for 2008 educational program.
RiskMetrics Group will also host a webcast exploring securities litigation trends for the upcoming year. Adam Savett, Head of Securities Class Action Services for RiskMetrics Group, will host a panel of noted industry experts, including Stuart Grant, Managing Partner at Grant & Eisenhofer, Lyle Roberts, Partner at Dewey & LeBoeuf, and Kevin LaCroix, Director at OakBridge Insurance Services.
To register for the webcast, please visit here.
Click here to view the full What You Need to Know for 2008 Educational Series.
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January 15, 2008 |
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CtW Investment Group to Wage “Vote No” Campaign at Tyson
Submitted by: L. Reed Walton, Publications
The CtW Investment Group on Jan. 11 released a letter urging shareholders to withhold votes from four Tyson Foods board members up for re-election.
CtW, the investment arm of the Change to Win labor federation, is calling on investors to vote against Don Tyson, John Tyson, Barbara Tyson, and Richard Bond at the Springdale, Arkansas-based meat processing company’s Feb. 1 annual meeting. The labor group claims that the four directors’ failure to establish an independent nominating committee does not ensure long-term value for shareholders.
Tyson Foods has a dual-class equity structure that provides 71 percent of the voting power to Tyson family members. Accordingly, the firm qualifies as a controlled company under New York Stock Exchange rules and is not required to have an independent nominating panel.
The labor group also cites other governance practices--such as unequal voting rights and a lack of board independence. CtW also notes that the company has underperformed its S&P 500 peers, engaged in “rampant” related-party transactions, and paid a $1.5 million fine to the Securities and Exchange Commission in 2005 over undisclosed executive perks.
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January 14, 2008 |
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Accounting Trends Webcast--What You Need to Know for 2008
Submitted by: Sarah Cohn, Marketing and Communications
Do you need the whole story about which accounting trends will impact you this year? Marc Siegel, RiskMetrics Group’s Global Head of Financial Research and Analysis, will give insight into the key accounting and financial reporting trends in 2008 in a webcast on Friday, January 18 at 11 a.m. EST.
This webcast will look back at aggressive reporting techniques and unconventional methods management has used to mask operational deterioration in their businesses and how you can learn to challenge a company's assertions on reported metrics going forward. Examples will be given where reverse-engineering company data through forensic financial accounting, or deep-dive analysis, has yielded results that have either corroborated or disproved the reported results.
In addition to uncovering companies' hidden risk in the marketplace, Marc Siegel will discuss accounting issues that should be at the forefront of investors’ minds, as well as what regulators are focusing on in 2008.
To register for the accounting trends webcast, please visit here.
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January 11, 2008 |
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2008 Preview: Director Elections
Submitted by: Subodh Mishra, Publications
This article is the first in a three-part series looking at key issues during the 2008 U.S. annual meeting season. This week’s segment looks at shareholder proposals related to board elections, while next week’s will examine those tied to the subprime mortgage crisis. The Jan. 25 edition of Risk & Governance Weekly will explore compensation-related proposals.
The 2008 U.S. proxy season could be one of the more contentious in recent memory following the Securities and Exchange Commission’s November decision to allow companies to exclude proxy access proposals. Thus far, labor and public pension funds have submitted five access proposals in a bid to test the agency’s decision in court, or otherwise force the issue onto corporate proxies.
Moreover, investors will press forward with old, new, and updated resolutions that seek to improve boardroom accountability. As in past years, scores of majority threshold voting proposals likely will be on the ballot during the 2008 annual meeting season. According to RiskMetrics Group records, the United Brotherhood of Carpenters and Joiners of America alone has so far filed nearly 60 such resolutions, with the vast majority targeting S&P 500 companies.
Resolutions seeking reimbursement for short-slate solicitation expenses are set to appear at a handful of companies this coming proxy season.
Meanwhile, uninstructed broker voting may also feature prominently as a topic of debate. In a 2008 shareholder proposal filing, the Service Employees International Union called for the exclusion of uninstructed broker votes at CVS Caremark. The labor fund recently withdrew that resolution, but SEIU officials tell Risk & Governance Weekly that it will seek other ways to highlight the issue.
Still, most attention this coming proxy season will be focused on efforts by investors to challenge the SEC’s decision to resume allowing companies to omit proxy access proposals under the agency’s Rule 14a-8(i)(8), which permits the exclusion of proposals that relate to director elections. (For more on the SEC decision, please see the Nov. 30, 2007, edition of Risk & Governance Weekly.)
As of this writing, the American Federation of State, County, and Municipal Employees (AFSCME) has filed or co-filed binding proposals seeking shareholder access at four companies, including Countrywide Financial and E*TRADE.
“Access is very much alive, and we intend to pursue the right through the proxy, litigation, legislation,” and other means, said Richard Ferlauto, director of pension and benefit policy for AFSCME. “We’re hopeful that within the next 18 months to two years, we will have established a proxy access right for investors and resolved an issue that has confronted the SEC for more than 50 years.”
CalPERS, the California Public Employees’ Retirement System, has filed an access proposal at Kellwood, a St. Louis-based apparel marketer, while the Connecticut Retirement Plans and Trust Funds is co-sponsoring the proposal at Countrywide Financial with AFSCME.
AFSCME and the state pension systems for North Carolina and New Jersey targeted financial firms Bear Stearns and JP Morgan Chase on the heels of the SEC’s November decision. The investors are seeking the right to nominate board candidates to appear on management proxy statements after both firms disclosed billion-dollar losses stemming from investments in mortgage-backed securities. Bear Stearns CEO James Cayne stepped down this week. Neither company has responded to requests for comment.
Those two Wall Street firms also were chosen because of their location, according to Ferlauto. The U.S. Court of Appeals for the Second Circuit, which in 2006 ruled that the SEC erred when it allowed American International Group (AIG) to omit an AFSCME-sponsored access proposal, has jurisdiction for New York.
Bear Stearns has filed for no-action relief, according to Ferlauto, who said AFSCME is now deliberating on how to move forward, with litigation being a “strong option.”
Many governance analysts expect the access debate to move back into the courtroom, arguing the SEC’s decision did precisely what agency Chairman Christopher Cox hoped to avoid--create uncertainty.
“The playbook will likely be a replay of what we saw earlier,” said Duke University Law School Professor James D. Cox, alluding to the AFSCME v. AIG litigation. He predicts that Bear Stearns will get no-action relief from the SEC, and that the decision will indeed be challenged in the courts.
“That’s why I thought the SEC was wrong in saying its action would reduce uncertainty,” Professor Cox said.
Reimbursement Proposals
AFSCME also is planning to submit a half dozen binding proposals calling for the reimbursement of solicitation expenses. Some observers believe this resolution may gain more attention in light of the SEC’s proxy access decision.
One such proposal, filed at Houston-based energy company Apache, calls for reimbursement of “reasonable expenses … incurred in connection with nominating one or more candidates in a contested election of directors to the corporation's board of directors, including, without limitation, printing, mailing, legal, solicitation, travel, advertising and public relations expenses …”
Limits would be placed on the repayment of expenses incurred. For example, reimbursement could only occur for elections after the bylaw is approved and for a “short slate” of nominees (i.e., less than half the board) where one or more is elected and cumulative voting is not allowed. The amount paid to the nominator may “not exceed the amount expended by the corporation in connection with such election.”
A similar proposal filed last year at Apache received 14 percent support, according to RiskMetrics data.
“If the reimbursement proposals do well, they may in the end supplant access,” says Charles Elson, director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “I think it's the ultimate solution.” Elson has long been a champion of such proposals, arguing that proxy-cost reimbursement is a more prudent alternative to access.
Another proposal, submitted by SEIU, had called on CVS Caremark not to count uninstructed broker votes in director elections. At the company’s last annual meeting in May, former Caremark director Roger Headrick received a 43 percent “against” vote over his role in approving the pharmacy-benefits company's sale to CVS. The labor fund argued that Headrick would have failed to get a majority of votes cast (which is required for election) had uninstructed “broker votes” been excluded.
SEIU officials say the binding proposal was recently withdrawn after being challenged at the SEC. Davis Polk & Wardwell, as counsel for CVS Caremark, argued implementation of the bylaw proposal would cause the company to violate Delaware law, noting that the law had no provision “permitting the [c]ompany to deprive record holders of their vote,” which, CVS argued, the SEIU’s proposal would effectively allow.
The New York Stock Exchange in October 2006 proposed to bar uninstructed broker votes (which routinely are cast for management nominees) in uncontested director elections by January 2008, but the SEC has yet to approve the rule change. Some investors expected the commission would approve the measure for 2008 in light of the agency’s decision to allow companies to exclude access proposals.
“We’re still exploring how to keep the broker issue front and center for companies, investors, and the SEC,” noted Tracey Rembert, senior corporate governance analyst at SEIU, after confirming the fund would indeed pull the CVS proposal.
In a Dec. 14 letter to the Council of Institutional Investors, the SEC said it is still examining “many of the complex issues” raised by the proposed NYSE rule change. The letter, written by Erik Sirri, director of the Division of Trading and Markets, did not say when the SEC would take action.
Majority Voting
A longstanding board reform proposal also will receive fresh attention in light of the SEC decision to allow the exclusion of proxy access proposals. Majority threshold voting proposals, which typically ask boards to require directors to receive a majority of votes cast “for” and “against” to win election, will be filed at dozens of companies, proponents say, including many larger firms that have yet to adopt the reform.
Delaware Chancery Court Judge Leo E. Strine Jr., writing in the October edition of the Journal of Corporation Law, noted that “shareholder access has gone nowhere,” but that this “does not mean that management won.” Strine, like a growing number of governance watchers including Stanford Law School professor and former SEC commissioner Joseph Grundfest, argued that majority voting represents a more “potent weapon” to change the composition of the board and that directors are now “running scared of withhold campaigns, and increasingly ready to make the bargains necessary to avoid being targeted.”
The Carpenters’ fund, which pioneered majority voting proposals in 2004, plans to submit up to 100 such resolutions in 2008, the vast majority of which will be at large-capital S&P 500 companies.
“We’re starting to settle this year’s resolutions already, and I expect at this pace to get us to where we were last year, when roughly two-thirds of proposal filings were settled,” Ed Durkin, corporate affairs director at the Carpenters’ fund, told Risk & Governance Weekly.
A recent study by Neal, Gerber & Eisenberg partner Claudia Allen found that 44 percent of S&P 500 companies have adopted a “true majority vote election standard,” with many more having in place resignation policies that call on directors to step down if they receive a majority of “withhold” votes. Moreover, the recent adoption of a majority vote bylaw by pharmaceutical giant Pfizer, whose groundbreaking director resignation policy in 2005 spurred others to take that partial step instead of adopting a majority vote standard, may also push more companies to adopt bylaws.
“It’s deja vu all over again,” noted Allen in a recent interview. “Majority voting was an outgrowth of the apparent failure of proxy access back in 2003. Frustrations with the SEC in relation to proxy access now will continue to move majority voting along.”
Meanwhile, at least one company is challenging a 2008 majority vote proposal. The New York Times Co. is seeking to omit a proposal filed by Legal & General Assurance Pension, a holder of the newspaper company’s publicly traded Class A stock.
In a Dec. 14 letter to the SEC, Rhonda L. Brauer, the company’s secretary and corporate governance officer, argues that the proponent cannot file the proposal due to restrictions on the rights attached to Class A shares that limit holders to voting on 30 percent of the company’s board, certifying the auditors, “certain acquisitions, and the reservation of stock for options to be granted to officers, directors, or employees.”
In her letter, Brauer notes that the company’s dual-class stock and voting rights differential are a “means to manage for the long term and to protect the long-term editorial quality and independence of the The New York Times …”
Last year, the company was allowed to omit a proposal filed by Morgan Stanley Investment Management Limited targeting the firm’s dual-class stock structure. The Morgan Stanley fund responded by joining with other investors to withhold support from directors who are elected by Class A shareholders. Last year, there was 42 percent opposition, up from 30 percent in 2006.
A version of this article first appeared in the December edition of RiskMetrics Group’s Corporate Governance Bulletin.
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January 10, 2008 |
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What You Need to Know for 2008--Corporate Governance and Climate Change: The Banking Sector
Submitted by: Sarah Cohn, Marketing and Communications
Today, Ceres and the Investor Network on Climate Risk released a new report on Corporate Governance and Climate Change: The Banking Sector, authored by RiskMetrics Group. The report examines how forty of the largest banks are preparing to face the challenges of minimizing climate risks, and utilizes a Climate Governance Index, developed by RiskMetrics Group in conjunction with Ceres and the Investor Network on Climate Risk. The index is comprised of fourteen indicators to evaluate five main corporate governance areas.
The full findings from the report will be revealed in a RiskMetrics Group webcast on Friday, January 11 at 11 a.m. EST. Part of RiskMetrics Group’s What You Need to Know for 2008 program, the webcast panelists Mindy Lubber, President of Ceres, and Doug Cogan, Head of Climate Change Research at RiskMetrics Group, will share why European banks lead in climate governance responses and how corporate governance and board directors are addressing the governance controls needed to minimize climate risks. Panelist Bruce Gillander, Division Director at the Florida Department of Financial Services Division of Treasury, will discuss how the Florida Division of Treasury is engaging with investment managers on climate change.
This report and webcast are the latest in a series of research projects by RiskMetrics Group that provide investors with actionable insights into how climate change will affect companies and financial markets. We've collected these efforts on a page in the RiskMetrics Group Knowledge Center dedicated to climate change.
To register for the webcast and download the paper, please visit here.
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January 8, 2008 |
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Agency Announces CEO Pay Comparison Web Tool
Submitted by: L. Reed Walton, Publications
A new function on the Securities and Exchange Commission’s Web site will allow investors to compare what 500 of the largest U.S. companies pay their top executives.
The Executive Compensation Reader, launched Dec. 21, is intended to build on the SEC’s 2006 pay disclosure rules, the agency said in a press release on the day of the launch.
“Through its new [disclosure] rules and the power of interactive data, the SEC has transformed the landscape of compensation disclosure,” SEC Chairman Christopher Cox said in the press release.
The initiative is part of a larger move by Cox to encourage the use of “XBRL” business reporting computer language on the SEC Web site.
To create the new tool, executive compensation figures from 500 companies that have filed online proxy statements with the agency were “tagged” in XBRL to make them easily searchable. XBRL tags include links to footnotes in the compensation disclosure and analysis, as well as company explanations of the rationale behind pay decisions.
The search function provides for a look at total annual pay as well as dollar amounts for salary, bonuses, stocks, options, and perks. Investors can also compile a list of companies and then use the online tool to generate a table or bar graph for comparison purposes.
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January 7, 2008 |
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RiskMetrics Group Webcast—Corporate Governance and Climate Change: The Banking Sector
Submitted by: Sarah Cohn, Marketing and Communications
With nearly $6 trillion in market capitalization, the global financial sector will play a vital role in supporting timely, cost-effective solutions to reduce global greenhouse gas emissions. Ceres, a leading coalition of investors, environmental organizations and other public interest groups working to address sustainability challenges such as global climate change, and the Investor Network on Climate Risk will soon publish a groundbreaking report, authored by RiskMetrics Group's Climate Change Research Group, that reveals how forty of the world's largest banks are preparing to face the challenge of minimizing climate risks.
Please join Mindy Lubber, President of Ceres, and Doug Cogan, Head of Climate Change Research at RiskMetrics Group, as they share the findings from the report, Corporate Governance and Climate Change: The Banking Sector. The forum will also provide insight into how corporate executives and board directors are addressing the governance controls that will be needed to minimize climate risks while maximizing climate-friendly opportunities.
Register for the webcast here.
Click here to view the full What You Need to Know for 2008 Educational Series.
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January 4, 2008 |
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Analysis: European Defenses
Submitted by: Subodh Mishra, Publications
Investors in European companies may sharpen their focus on takeover defenses this year following a recent decision by Europe’s top regulator to pull back on plans to promote the principle of one-share, one-vote.
The future of European corporate takeover defenses--such as multiple voting rights, voting rights caps, and “golden-shares”--has been a key focus of debate in recent months as governance watchers closely monitor the words and deeds of regulators, who, some argue, have taken an inconsistent approach to curbing their use.
For years, key European Union (EU) officials voiced support for investor efforts to promote the concept of one-share, one-vote, arguing the right was consistent with broader EU efforts to dismantle takeover defenses.
"The [c]ommission intends to undertake a study into the way in which the principle of one-share, one-vote can be translated into reality," Frits Bolkestein, head of the European Commission's (EC) Internal Markets, said in a 2004 speech. Ireland native Charlie McCreevy would succeed Bolkestein shortly after that speech, but the commitment remained, with McCreevy backing the right of one-share, one-vote during his own confirmation hearings.
In 2006, investors concerned with the widespread prevalence of takeover defenses on the continent again took heart when the European Court of Justice ruled against the use of “golden share” takeover defenses--giving the holder veto rights over certain transactions--at Holland's dominant telecommunications provider and postal carrier, holding that the use of such defenses restricted the free movement of capital.
To investors, regulators were taking the right approach, despite ongoing calls (and actions) by politicians in some member states to allow for the use of poison pills and other defenses.
But that sentiment would begin to change this summer when a key EU official backed calls by politicians to implement defenses as foreign investors took equity positions in European aerospace giant EADS. The German and French governments sought to install a golden share at the company following equity purchases by a state-controlled Russian bank and the investment arm of the government of Dubai.
EU Trade Commissioner Peter Mandelson tacitly backed their calls, arguing such a defense was warranted on national security grounds, despite the European high court ruling that just one year earlier that had chastised the Dutch government for doing so.
More recently, those who now question regulators’ commitment to dismantling corporate takeover defenses in Europe point to an October decision by McCreevy to back away from his long-held position on equal voting rights. Indeed, on Oct. 3, McCreevy told European lawmakers that he would no longer push companies to adopt a one-share, one-vote capital structure, leaving investors and other proponents of shareholder democracy frustrated.
“It's a shame that the capital markets integration project can’t muster the strength to take on entrenched positions,” noted Anne Simpson, executive director of the International Corporate Governance Network, on the heels of McCreevy’s announcement. McCreevy’s decision effectively sanctions companies’ continued use of the most common defenses, dubbed “control-enhancing mechanisms,” such as multiple voting rights and voting right limitations, which are common in markets ranging from France to Sweden.
In his comments to lawmakers, McCreevy said that shareholders should use their existing voting rights to push for better dialogue and enhanced transparency. But, he noted, a further layer of EU action is “not the right way to go,” given that existing legislation now helps ensure transparency. McCreevy defended his reversal on the one-share, one-vote principle by citing the results of an EU-commissioned study, published in May, which found control-enhancing mechanisms had little effect on a company’s financial performance and governance.
The EC has in recent years weighed the merits of two distinct approaches to concerns over control-enhancing mechanisms. One has centered on the so-called “proportionality approach” to shareholder rights, underpinned by the one-share, one-vote principle, while the other centers on the principle of the freedom of contract, whereby companies can choose the capital structure they deem most appropriate, and investors can choose to invest or overlook the stock.
The study, conducted by RiskMetrics Group’s ISS Governance Services unit and others, examined 464 listed European companies and the regulatory framework in 16 EU jurisdictions as well as Australia, Japan, and the United States. The study found that control-enhancing mechanisms are widely available in all those markets. That, the report's authors say, suggests the principle of freedom of contract is rooted in all legal cultures.
“The general conclusion is that [the study] is a balanced piece of work, which indeed sheds some useful light on this complex subject,” McCreevy told lawmakers.
But weeks later, investors would hear a different, albeit welcome, assessment on takeover defenses when, on Oct. 23, the European high court ruled that Volkswagen, Europe’s biggest carmaker, could no longer employ a 47-year-old takeover defense that capped voting rights at 20 percent regardless of a shareholder’s equity stake. The decision was a major victory for investors and was lauded by regulators as a boost to the nascent EU Takeover Directive, which since 2004 has struggled to level the playing field for defenses among member states.
In its decision, the court criticized provisions of the so-called “Volkswagen Law” that give the federal government and State of Lower Saxony--where Volkswagen is based--the right to appoint two supervisory board members, as well as an 80 percent supermajority requirement required to pass proposals at shareholder meetings. Lower Saxony holds roughly 20 percent of Volkswagen, while the court noted that just 75 percent support is required for the passage of proposals under German law.
The court dismissed arguments by the German government to keep in place protections for Volkswagen on the grounds that failure to do so would have social, regional, economic, and industrial consequences, stating it was unable to explain or demonstrate why the law was necessary to protect workers or minority shareholders. “By maintaining in force the provisions of the Volkswagen Law concerning the capping of voting rights … the Federal Republic of Germany has failed to fulfill its obligations,” to allow for the free movement of capital, the court held.
German justice ministry officials said the government “regretted that the court did not recognize [Berlin's] arguments about protecting Germany as a business location” but added the government would move quickly to rewrite the law, the Financial Times reported.
The European Court of Justice again struck down a national, defense-friendly law when it ruled in December that authorities in the Italian city of Milan could not appoint a majority of energy company AEM's board members. The city, which held 51 percent of the company’s outstanding stock when it was listed in 1998, now holds just 33 percent of the firm, the court noted in its decision.
“In that way they may exercise influence exceeding their levels of investment; that constitutes a restriction on the movement of capital,” the court wrote. Regulators also are weighing potential legal action against Hungary, which recently adopted a law to protect its national energy champion, Magyar Olaj-Es Gaz (MOL).
But while investors and capital markets have signaled their approval of the court’s stance on such defenses, regulatory action on shareholder democracy will not be forthcoming. Speaking to members of Britain’s House of Lords on Dec. 6, McCreevy reaffirmed his intent to take no action on one-share, one vote. The net effect may well mean a spike in shareholder activism in 2008 to dismantle takeover defenses.
This story first appeared in the December issue of RiskMetrics Group’s Corporate Governance Bulletin.
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January 2, 2008 |
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Share Lending: What You Need to Know for 2008
Submitted by: Gary Hewitt, Marketing and Communications
How can institutional investors mitigate the risks of securities lending and coordinate their corporate governance and securities lending policies? A new white paper from RiskMetrics Group examines these questions, providing investors with critical insight as they prepare for the upcoming proxy season.
The findings from this paper will be the topic of a webcast in RiskMetrics Group's "What You Need to Know for 2008" educational series, to be held this Friday, January 4, at 11:00 a.m. On the webcast, the paper's author, RiskMetrics Group's research analyst, Bimal Patel, and RiskMetrics Group's Head of Global Voting Operations, Peter Friz, together with Tracy Stewart, Corporate Governance Manager at the Florida State Board of Administration, will discuss best practices in securities lending and the issues investors are facing today.
To register for the webcast, click here.
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