RiskMetrics’ Latest “In the Market” Examines Daily S&P 500 Returns in Excess of +/-2%
Submitted by: Ron Papanek, Market Strategist
The April edition of RiskMetrics “In the Market” compares the equity price movements now to the previous high volatility period from 1998-2003. In that span, there were 19 extreme days which were greater than the biggest moves we’ve seen in the current environment. To read more and view the chart, please visit here.
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April 28, 2008 |
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U.K. Pay Plans Criticized
Submitted by: L. Reed Walton, Publications
After more than one-third of investors protested executive pay practices at energy firm BP, executive retention bonuses and stock plans at other large U.K. firms may also see opposition this year.
According to a BP release, 9 percent of shares were voted against last year’s pay packages at the April 18 annual meeting. An additional 27 percent withheld their votes, amounting to a cumulative 36 percent not cast in favor of the remuneration report, according to news reports. BP spokesman David Nicholas told Risk & Governance Weekly that the company does not count votes withheld as cast either “for” or “against.”
The protest votes, which are the largest at a U.K. company so far this year, came in response to the company’s award of £1.5 million ($3 million) retention bonuses to two executives who were passed over for the CEO’s post. The executives, Iain Conn and Andy Inglis, were in the running for the top spot at the London-based company after former CEO Lord John Brown resigned in 2007. The board decided to offer the retention bonuses to Conn and Inglis in February as incentive to stay with the company after a third candidate, Tony Hayward, was named CEO. Conn and Inglis will receive the bonuses in the form of stock awards that vest over the next three years.
Prior to the meeting, the Association of British Insurers (ABI), whose members hold approximately 20 percent of stocks listed on the London Stock Exchange, weighed in on retention bonuses. Though the association does not make vote recommendations for its members, the ABI sent a letter to compensation consultants warning them of possible shareholder opposition to one-off retention bonuses. In the letter, which was sent to many of the large global pay consultancies--including BP’s primary adviser Towers Perrin--the ABI wrote that non-performance-based awards to unsuccessful executive candidates should be the exception rather than the rule in pay decisions. The ABI letter did not mention any companies by name.
“The issue of retention pay-outs is becoming one which gives shareholders serious food for thought especially when no consultation is advanced,” Peter Montagnon, director of investment affairs for ABI, told the Financial Times.
DeAnne Julius, a director at BP who also previously served as chief economist for Royal Dutch Shell Group, defended the retention bonuses. Julius told the U.K. newspaper The Daily Mail that the payments were intended to signify important safety improvements and make up for the reduced bonuses paid in 2007 due to a legal action against BP officers and directors because of a 2006 oil spill in Alaska, and a 2005 Texas oil refinery explosion that killed 15 people. BP agreed to settle a shareholder derivative suit in early April by instituting a number of governance reforms. (For more on this settlement, please see the “Global Roundup” section of the April 11 issue of Risk & Governance Weekly).
Hayward’s 2007 bonus was about £1 million ($2 million) less than that earned by his predecessor, Lord Browne, the London-based Independent reported. The article also noted that Conn and Inglis received lower bonus payments for fiscal 2007.
These assurances did not seem to mollify investors, who expressed greater dissatisfaction than last year, when shareholders voted about 17 percent of shares against the pay report in protest of Lord Browne’s £5 million ($10 million) exit package. Shareholder Standard Life Investments has voted against BP’s remuneration packages since 2006. Standard Life spokeswoman Hilda Stewart told R&GW the organization could not comment on its BP proxy votes this year.
GlaxoSmithKline and HSBC
Like BP, pharmaceutical firm GlaxoSmithKline offered one-time bonuses to two company officers who were passed over for the CEO position, news reports indicate. In October, the London-based company--which holds its annual meeting May 21--announced that Andrew Witty, former head of GSK’s European pharmaceutical operations, would succeed CEO Jean-Pierre Garnier. The announcement was the culmination of an 18-month-long internal search for someone to fill Garnier’s post when the longtime executive steps down in June. GSK offered the runners-up, David Stout and Chris Viehbacher, “substantial payments” to stay with GSK, the London-based Telegraph newspaper reported. Stout opted to leave, while Viehbacher will remain with the company as head of the U.S. pharmaceutical division, with a promotion to the post of executive director, the London Times noted. According to company records, Viehbacher was given 111,750 depository shares that will vest over the next three years, provided that he remains employed at GSK.
The firm has faced shareholder ire over executive pay before. In 2003, there was 50.7 percent opposition to GSK’s remuneration report over a proposed £22 million ($43.9 million) exit package for Garnier. Another 10 percent of investors abstained from voting on the pay package, bringing the total dissent to 61 percent, the highest vote against a remuneration report at a large U.K. company since the country instituted advisory pay votes in 2003. GSK overhauled its remuneration plan for 2004 after extensive consultation with shareholders and pay consultants.
The ABI spoke out against Garnier’s compensation in 2003, marking the pay policy as a “red-top,” or a designation of serious concern. ABI spokesman Erfan Hussain told R&GW that it is too early to tell whether the organization will issue a warning on GSK this year. It is difficult to forecast the degree of opposition to pay reports before a company's general meeting, as few institutional shareholders and fund managers in Britain publicly announce plans to vote against a particular remuneration report. Only one shareowner, Morley Fund Management, reported to the press its intention to vote against the GSK package in 2003.
According to the Telegraph, other firms that are considering or now conducing chief executive searches with multiple internal candidates include telecom firm BT, defense contractor BAE Systems, and engine maker Rolls-Royce.
Another U.K. company that may face shareholder opposition to a remuneration report this year is financial firm HSBC. At its May 30 meeting, the London bank is proposing pay plan amendments that would give top officers opportunities to earn higher bonuses. In its 2008 meeting notice, the company says that the new plan will make compensation more performance-based, allowing for higher bonuses in times of high performance.
The plan has drawn criticism from some shareholders, including activist fund Knight Vinke Asset Management (KVAM), which owns less than 1 percent of HSBC. The new share plan is the result of a compensation overhaul--initiated in 2007 with the help of pay consultants Mercer Human Resources Consulting--to make executive pay more “competitive,” the company said. KVAM, in comments on the new pay proposal, said the plan still depends too little on shareholder return as a performance measure. KVAM CEO Eric Knight complained in a letter to independent HSBC director Simon Robertson that it appears that some of the independent directors “see shareholders’ concerns over HSBC strategy and corporate governance as little more than a ‘distraction.’” Knight has not confirmed or denied that the fund will vote against the pay package this year.
KVAM led a public campaign against the remuneration report at HSBC last year, urging governance reforms to unlock shareholder value. The remuneration report only had 2.6 percent opposition, with an additional 2.5 percent abstaining last year. If shareholders do not approve the amendments this year, the plan will default to the higher salary and lower bonus opportunities of the original plan adopted in 2005.
Other Contentious Meetings
Other large U.K. companies that may see shareholder protests over executive pay include health care equipment firm Smith & Nephew (May 1) and oil producer Royal Dutch Shell (May 20).
Smith & Nephew is asking for share plan amendments that would boost the maximum salary multiples for executives. The board has authorized an increase from 100 percent of salary for performance-related bonuses in 2007 to 150 percent in 2008, and from 150 percent of salary for performance share plans in 2007 to 225 percent this year. The company has raised performance targets for these share plans, but, as is the case at HSBC, the executives are eligible for larger bonuses.
Also, the remuneration committee has awarded CEO David Illingworth a “recruitment and retention” bonus for the second year in a row. He first received a bonus award in 2006 when he took the post of chief operating officer, and he was named successor to then-CEO Christopher O’Donnell in July 2007. In its meeting notice, the company noted that these options were granted to Illingworth to make up for the fact that his base salary was approximately 33 percent lower than O’Donnell’s.
According to a company report, Royal Dutch Shell is also proposing one-time retention bonuses to top executive directors in advance of the retirement of current CEO Jeroen van der Veer and executive board member Rob Routs. However, the company is asking shareholder permission to distribute the stock-based bonuses to the three remaining executive directors--Linda Cook, Malcolm Brinded, and Peter Voser--before they are given, which differs from the situation at BP and GSK. Under the proposed plan, Cook, Brinded, and Voser would receive options that will vest over the next three years if they remain with the company.
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April 25, 2008 |
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Governance Reforms on the Rise in Spain
Submitted by: German Vargas, Global Research Analyst
Spanish companies have begun committing to greater board independence and the unbundling of director elections because of a new corporate governance code that comes into effect this year. Though Spanish companies do not often disclose their efforts to recruit independent directors or detail their executive pay practices, more firms likely will seek to improve their governance in 2008.
In 2006, a number of Spanish corporate governance experts--including the Comisión Nacional del Mercado de Valores (CNMV or National Stock Market Commission)--published the Código Unificado de Buen Gobierno (Unified Good Governance Code). In crafting the code, Spanish authorities were also influenced by the European Union, which is putting pressure on all member and prospective-member nations to have companies in their markets comply with corporate governance best-practice guidelines. The EU does not employ a unified set of governance guidelines, but many member nations, like Spain, follow recommendations like those in the Organisation for Economic Co-Operation and Development’s Corporate Governance Principles and the principles of the International Corporate Governance Network.
Spanish companies could begin complying with provisions of the code when it was introduced in 2006. Although the recommendations in the code are not legally binding as it becomes effective this year, it states that companies should “comply or explain,” that is, each company must provide a corporate governance report stating whether has adopted the tenets of the code, and, if not, the reason(s) for noncompliance. Companies began to add resolutions to implement code provisions last year, but in 2008 the rate of voluntary compliance likely will rise, especially in the areas of board composition and shareholder rights. The Spanish proxy season begins in late April and peaks in May.
The code covers board composition, operation, and reporting to shareholders. Recommendation 15 of the code highlights the importance of women in Spain’s economy, particularly in managerial positions, and emphasizes the need for companies to seek out female candidates to fill vacancies on their boards of directors. Though the code specifies that gender diversity is a managerial responsibility, so far, no companies have put forward specific proposals on director diversity issues.
Recommendation 13 calls for at least one third of a company’s board members to be independent of management and major shareholders. However, it will be difficult to assess how many companies are actively pursuing greater board independence as opposed to those that end up with more independent boards this year because of the departure of an executive or shareholder representative from the board. Spanish companies largely do not announce to shareholders their intent to bring on more independent directors.
Under Recommendation 5, all directors should be elected with a separate resolution, rather than bundled together as one slate. Although this recommendation still falls under the comply-or-explain guideline, the unbundling of director elections reflects a new emphasis on shareholders’ right to vote on proposals individually. There is a similar trend among Spanish companies to present article and bylaw amendment proposals as separate requests. As of the end of 2007, most Spanish companies put forward individual resolutions. Some of the companies that have unbundled include telecom provider Telefónica, Banco Santander, and utility company Iberdrola--which first offered separate resolutions in 2007. Firms that still have bundled resolutions in 2008 include insurance company Mapfre, construction materials firm Grupo Uralita, and electric utility Red Eléctrica de España.
Finally, Recommendation 40 suggests that a “Director Remuneration” report be put up for shareholder approval annually. This year, the first year in which Spanish companies have put remuneration reports before shareholders, about eight have gone to a vote.
According to the code, an ideal report would include details of the remuneration for board members, the remuneration suggested by the board/compensation committee for the company’s executives, and changes to the company’s remuneration policies in the past year. A report would also include, when appropriate, planned remuneration policies for the future. Although the shareholder vote to approve this report is not binding, the level of disclosure and the possibility for shareholders to express their discontent with a company’s compensation policies are both significant steps toward improved governance, in line with changes made in other markets over the past few years. The United Kingdom and Australia have implemented mandatory annual non-binding votes on executive pay, while such votes are binding in the Netherlands and Norway. The issue is also receiving a great deal of attention in the United States (where seven companies have agreed to put an advisory vote on executive pay on the ballot) and Canada.
Spanish companies include director pay information in their annual reports, but the disclosure standard varies by firm. Most include general information that is focused on director as opposed to executive compensation. However, a few companies, like Banco Español de Crédito (BANESTO), this year provided detailed information on performance criteria, share-based compensation plans, and peer groups.
Advisory pay vote resolutions have differed greatly so far this year. Investors were asked to vote on a general remuneration report at BANESTO on Feb. 26, and at recycling company Befesa Medio Ambiente and commercial bank Bankinter on April 17. Pay reports for directors only went to a vote at Mapfre on March 8 and television production firm Gestevisión Telecinco on April 9--and will be voted on at paper manufacturer Iberpapel Gestión on June 6.
It is still unclear as to how Spanish companies would react if a majority of shareholders were to reject a remuneration report proposal. All resolutions have received majority support thus far, according to company reports.
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April 18, 2008 |
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European Boards Under Greater Scrutiny
Submitted by: L. Reed Walton, Publications, and Roland Escher, International Research Analyst
Scandals, concerns over control, and heavy losses at several large European firms have led some investors this year to consider voting against resolutions to ratify board actions.
Shareholders at many European companies are asked each year to retroactively “discharge,” or ratify the actions of, the management and supervisory boards and to indemnify directors against loss or legal action. At most firms, these management proposals are considered routine and pass with minimal resistance. However, at companies like Germany’s Volkswagen and Siemens, and Switzerland’s UBS, shareowners are expressing a greater reluctance this year to sign off on directors’ past decisions.
Wolfsburg-based Volkswagen likely will see resistance to its discharge resolutions and board nominees at its April 24 annual meeting. In October, the European High Court of Justice struck down a 47-year-old German law that capped investor voting rights in German companies at 20 percent regardless of equity stake. Dubbed the “Volkswagen Law,” the measure was primarily intended to prevent a hostile takeover of Volkswagen, Europe’s largest automaker. The law also imposed an 80 percent supermajority requirement to pass proposals at shareholder meetings, and gave the State of Lower Saxony--which owns a 20.1 percent stake in Volkswagen--the right to name two directors to the supervisory board.
Expecting the court ruling, Porsche--the German-based luxury automaker--increased its stake in Volkswagen to 31 percent, beginning in 2005, and said in January it would seek a majority stake to keep the company largely German-owned, the Associated Press reported. Porsche’s shareholders approved the strategy at a special meeting in March. Volkswagen also nominated Porsche’s chairman, Wolfgang Porsche, to the supervisory board at Volkswagen. These moves have drawn fire from investor groups who claim that management has allowed Porsche to gain control of the Volkswagen board with little resistance.
Vereinigung Institutionelle Privatanleger (VIP), a European association of institutional shareholder groups, on April 10 filed a counterproposal to Volkswagen’s discharge requests. The group complains that the company has done nothing to follow up on the “Volkswagen Law” court decision, nor has it endorsed either of two shareholder proposals to modify company practices in accordance with the ruling. Those proposals, one submitted by Porsche, and the other by Hannoversche Beteiligungsgesellschaft--the holding company for Lower Saxony--will be voted on at Volkswagen’s meeting.
Porsche is asking the company to scrap the 80 percent requirement. That move is opposed by Volkswagen’s works council (labor union), which has 10 representatives on the 20-member supervisory board. One of these labor representatives, director Bernd Osterloh, has denounced the actions of Porsche CEO Wendelin Wiedeking (also a supervisory board member), calling him a “Napoleon,” news reports indicate. Company insiders say that Volkswagen chairman Ferdinand Piech plans to oust Wiedeking to preserve his expansive powers at Volkswagen and maintain union strength, German newsmagazine Der Spiegel reported in March.
Lower Saxony has submitted a competing proposal that would retain the supermajority standard. This measure is opposed by Deutsche Schutzvereinigung für Werzpapierbesitz (DSW), which represents individual German investors and called the “Volkswagen Law” in any form an “anachronism,” the Associated Press noted.
In January, the German Ministry of Justice drafted new legislation that would end the voting rights cap but would keep the 80 percent supermajority rule and require shareholder approval of any plant relocation or construction. On April 14, European Commission Internal Markets Commissioner Charlie McCreevy sent a letter to German Justice Minister Brigitte Zypries, warning her that the supermajority requirements would not pass EU scrutiny. “All [the] provisions … need to be abolished in order to implement the ruling correctly,” McCreevy wrote.
EADS and Société Générale
Two other European firms that may see opposition to discharge resolutions at their annual meetings are Netherlands-based European Aeronautic, Defence, and Space (EADS) on May 26, and French financial firm Société Générale on May 27.
Several EADS executives and major shareholders are under investigation by the French Autorité des Marchés Financiers (AMF) on suspicion of insider trading. The investigation centers around stock sales by 17 people, including Ralph Crosby, head of EADS’ North American operations, and CEO Tom Enders of the company’s flagship aircraft construction company, Airbus, Bloomberg News reports.
Prosecutors allege that executives and major shareholders Lagardère Group and Daimler knew of delays in the production of the Airbus A380 superjumbo jet, and sold stock prior to the announcement of those delays, which resulted in a 26 percent stock price drop, news reports indicate.
Société Générale disclosed in January that a junior trader, Jérôme Kerviel, had made approximately $75 billion in unhedged bets on European stock futures. SocGen CEO Daniel Bouton held off notifying his board of the losses until he could guarantee a capital infusion by two U.S. investment banks, Fortune magazine reports. Bouton eventually whittled the losses down, but the company still lost about $7 billion. Since then, the French government and shareholders have lambasted Bouton and called for his resignation, blaming him and the company for a lack of vigilance. An internal investigation indicated that Kerviel’s supervisors overlooked or missed 75 alerts about his trading activities from 2006 to 2008, news reports indicate.
Another firm that likely faced opposition to board discharge was the Dusseldorf, Germany-based IKB Industriebank. At the company’s March 27 meeting, IKB supervisory board members faced shareholder wrath over an estimated €1 billion ($1.6 billion) fourth-quarter loss that stemmed from subprime mortgage investments, which have forced the company to consider a sale or face bankruptcy. Shareholder advocacy group Verbraucherzentrale für Kapitalanleger submitted a counterproposal asking investors to vote against ratifying directors’ actions for 2007. The company has not released vote results from the meeting yet.
Postponed Discharge Votes
Earlier this year, two major European companies postponed votes on their directors’ actions. Technology conglomerate Siemens, which held its annual meeting on Jan. 24, faces a corruption investigation that has spread to more than 10 countries. In 2006, a district court in the company’s home city of Munich initiated an investigation into bribery for contracts by Siemens’ former communications unit, the Com Group. Siemens hired U.S. law firm Debevoise & Plimpton to conduct an internal investigation in December 2006. The Munich district court eventually fined the firm €201 million ($319.5 million) for 77 acts of bribery, but the internal investigation is ongoing. The U.S. Department of Justice and the Securities and Exchange Commission are also investigating Siemens.
According to the International Herald Tribune, the law firm has uncovered “significant new information” relating to the involvement of several management board members in the alleged Com Group bribery scheme. As a result, shareholder group DSW urged the company to postpone the discharge vote pending the result of the Debevoise & Plimpton investigation, which the company agreed to do.
Swiss bank UBS also postponed a discharge vote this year after it recorded one of the largest mortgage-related losses of any bank worldwide--a total write-down of about $38 billion in the fourth quarter of 2007 and first quarter of this year. To offset the losses, the company brokered a CHF13 billion ($12.9 billion) capital infusion from the Government of Singapore Investment Corporation and an unnamed Middle Eastern investor, which was approved by shareholders at a special meeting in late February.
Swiss institutional shareholders Profond, Ethos, and ACTARES opposed the measure, arguing that a capital infusion by way of a rights issue to existing investors should have been made first. The groups also called for board chairman Marcel Ospel to step down. Amid the furor, the company has agreed to put forward a CHF 15 billion ($14.9 billion) rights issue for shareholders at its April 23 annual meeting and postpone the discharge votes. Ospel also announced that he would not stand for re-election to the board.
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April 14, 2008 |
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Muted Protest at Morgan Stanley
Submitted by: L. Reed Walton, Publications
Despite a “vote no” campaign supported by labor investors and public pension funds, all the directors at Morgan Stanley were re-elected with at least 90 percent shareholder support, the Wall Street firm announced after its April 8 annual meeting.
The shareholder campaign was led by CtW Investment Group, the investment arm of the Change to Win labor federation. CtW urged investors to vote against directors C. Robert Kidder, Sir Howard J. Davies--former head of Britain’s Financial Services Authority--and Chairman/CEO John J. Mack. Davies received a 9.5 percent withhold vote, while Kidder had 9 percent opposition. Mack received a 5.5 percent negative vote, according to a company press release.
The labor federation claimed that Kidder and Davies failed to stop Mack from implementing a business strategy focused on risk-taking and greater investment in residential mortgages and collateralized debt obligations (CDOs). Morgan Stanley announced $3.7 billion in losses for the fourth quarter of 2007, its first quarterly loss as a publicly traded company.
“We knew going into the meeting it wasn’t going to be a high vote, based on talking to shareholders over the past few weeks,” CtW Director of Value Strategies Michael Garland told Risk & Governance Weekly.
At the meeting, Mack told shareholders he appreciated their “strong support” in electing the board members by “substantial margins.” Morgan Stanley was the first of six U.S. financial firms with significant credit-related losses to hold its annual meeting this year. The results suggest that most Morgan Stanley investors were either satisfied by the steps that the company has taken in response to the credit crisis or didn’t think that board members should be blamed for the losses.
CtW also pushed Mack to step down as chairman of the board, claiming the combined positions created a captive board that was reluctant to challenge Mack’s decisions. Though many pension funds agree that Mack should step down as chairman, many institutional investors support Mack as CEO, Garland said.
Roy Bostock, a member of the board’s nominating committee, received the lowest support of all directors on the ballot: 90.1 percent, the company reported. Bostock’s re-election was opposed by the California Public Employees’ Retirement System (CalPERS) and the California State Teachers’ Retirement System (CalSTRS).
CalPERS spokesman Clark McKinley told R&GW that the pension system elected to vote against Bostock because he was classified as non-independent under the pension fund’s governance guidelines, which mandate independent directors on key committees such as nominating or governance committees. Bostock’s son-in-law is managing director of Morgan Stanley’s asset management division.
In addition to Bostock, CalSTRS voted against eight of the 11 directors, including Mack and Kidder, who chairs the compensation committee, Bloomberg News reported. The pension fund cited pay concerns as the reason for withholding support from the eight directors. Regulatory filings indicate that Mack received $1.6 million in salary and pension benefits, plus $8.43 million in vesting stock options last year, though news reports indicated he declined a performance bonus because of the company’s “embarrassing” fourth-quarter loss. Kidder’s fellow compensation committee members, Donald Nicolaisen and Erskine Bowles, received 93.5 and 96.9 percent support, respectively.
Overall, the level of dissent at Morgan Stanley was less than at last year’s meeting. In 2007, director Roy Bostock received almost 12 percent opposition due to independence issues, and director Laura Tyson had a 10.9 percent negative vote. Former director Klaus Zumwinkel had 25 percent opposition in 2007 and 12.5 percent in 2006 over concerns about the number of boards he sat on. In 2006, shareholders also withheld 3.5 percent support from Kidder and 2.8 percent from Mack amid criticism of the CEO’s compensation.
At this year’s meeting, investors gave 36.8 percent support to a shareholder proposal asking for an annual advisory vote on executive pay, the company’s press release indicated. The proposal, submitted by the American Federation of State, County, and Municipal Employees (AFSCME), was backed by CtW, CalPERS, CalSTRS, and the State Universities Retirement System of Illinois, among others. Richard Ferlauto, director of pension and benefit policy for AFSCME, said the measure likely didn’t pass because Morgan Stanley was able to explain its pay practices to shareholders, and has had good financial performance on average.
Investors Look Ahead
Though they weren’t able to send as strong a message as they would have liked to the board at Morgan Stanley, labor funds are pressing ahead to highlight governance problems at other firms with heavy subprime losses.
Both AFSCME and CtW are campaigning against directors at Seattle-based banking firm Washington Mutual. CtW, spurred by the company’s decision to shield 2008 executive bonuses from its subprime losses, announced it would vote against two committee chairs, James Stever of the human resources committee, and Mary Pugh of the finance committee, at the company’s April 15 meeting. AFSCME sent a letter on March 31 urging investors to vote against Stever and four other members of the human resources committee--Stephen Frank, Charles Lillis, Phillip Matthews, and Margaret Osmer McQuade--for authorizing the bonus exemptions.
Both Garland of CtW and Ferlauto of AFSCME said they expect higher withhold votes at WaMu. “The scale of the losses, the clear failures--both around risk and compensation--there is no well of support for the leadership at WaMu the way there is at Morgan Stanley,” Garland said.
WaMu sustained a $2.19-per-share loss in the fourth quarter of 2007, and may write down an additional $1.8 billion for this year. While the company’s shares rallied to around $13 this week after it announced a $7 billion cash infusion from a group headed by TPG Capital, the shares still lag far below WaMu’s $44 high in May of last year.
“[Washington Mutual’s] performance is some of the worst, and the board took specific action to hold the executives harmless from subprime losses caused by the company's business plan,” Ferlauto told R&GW.
The AFL-CIO briefly waged a “vote no” campaign at Citigroup, which reported $18.1 billion in subprime-related losses last year. In a draft letter to investors, the labor federation urged a vote against the re-election of C. Michael Armstrong, chairman of the audit and risk management committee. Armstrong, who has been a member of the committee since 1994--and chair since 2004, “failed to protect shareholders from excessive exposure to credit, interest rate, and liquidity risks,” the letter stated.
However, the financial company announced on April 7 that Armstrong would step down as chairman of the audit committee, and the labor federation ended the campaign. Citigroup said the end of Armstrong’s chairmanship was part of a regular rotation of committee chairs. “As stated in our [p]roxy, committee membership and chairs are rotated periodically, and we expect to begin the process of rotating chairs this summer,” Citigroup spokesman Michael Hanretta said in a statement.
Daniel Pedrotty, director of the AFL-CIO’s office of investment, told R&GW that the labor federation believes that Armstrong’s departure as committee chair eliminates the need for a “vote no” campaign.
CtW has also announced a possible opposition campaign at Citigroup, but Garland told R&GW that the federation is still in talks with the company over potential governance changes. Other financial firms that may face CtW campaigns against board members at their annual meetings include Wachovia (April 22), Bank of America (April 23), and Merrill Lynch (April 24).
At homebuilder Ryland Group’s April 16 meeting, CtW plans to oppose three directors on the compensation committee. The labor organization faults the William Jews, Norman Metcalfe, and Charlotte St. Martin for awarding “egregious” pay packages to top executives, and ignoring shareholder disapproval on the issue. Compensation committee members at the Calabasas, Calif.-based firm received more than 25 percent opposition in 2007.
According to regulatory filings, Chairman and CEO Chad Dreier has a provision for a bonus of 2 percent of the company’s pre-tax income built into his incentive plan. CtW disapproves of this bonus, given Ryland’s $201.9 million loss during the fourth quarter of 2007. Ryland says in its 2008 proxy statement that while Dreier’s incentive pay has increased, his base salary has not been raised since 2002.
Homebuilder Toll Brothers asked shareholders to approve a similar incentive plan for Chairman and CEO Robert Toll at its March 12 meeting. A “vote no” campaign led by the Laborers’ International Union of North America helped generate 33 percent shareholder opposition to Toll’s re-election.
Subprime-Related Shareholder Proposals
In addition to “vote no” campaigns against directors, shareholders filed a raft of proposals at financial firms and homebuilders aimed at improving disclosure and compliance in the wake of the credit crisis.
Many of the companies received permission from the Securities and Exchange Commission to exclude these proposals, but some will still go to a vote this year. On May 4, shareholders at home construction firm Standard Pacific will vote on a Laborers proposal asking for an annual board report on mortgage business risk--including an evaluation of the company’s practices and an account of how many of the firm’s mortgages are subprime, alt-A, or other “exotic” types. Another Laborers resolution on this issue may go to a vote at Beazer Homes, if the homebuilder is able to hold an annual meeting this year. The company is restating nearly 8 years of financial results and is under investigation by the FBI regarding its mortgage and foreclosure practices.
A proposal submitted by the labor-affiliated Amalgamated Bank asks homebuilders to establish a “compliance committee” to conduct a review of regulatory, litigation, and compliance risks associated with mortgage lending. The resolution went to a vote at the nation’s second-largest homebuilder, Lennar, on April 8, but those vote results were not immediately available. That proposal also will be on the ballot at MDC Holdings (April 29) and Pulte Homes (May 15). Pulte shareholders will also decide whether they would like the company to establish a committee on mortgage loans, aimed at establishing “prudent lending practices.” That proposal was submitted by the International Brotherhood of Electrical Workers.
Another subprime-related proposal, asking financial firms and credit rating agencies to adopt policies to limit conflicts of interest, will not go to a vote this year. The proposal, submitted by the Laborers, was excluded at Moody’s, McGraw-Hill (which owns Standard & Poor’s), Citigroup, and Wells Fargo--and withdrawn by proponents at Indymac Bancorp.
In addition, investors have filed proposals at Bank of America, Citigroup, and Wells Fargo that seek an independent board chair. None of the financial firms targeted by labor investors have independent board chairs, although Citigroup has separated the roles of chairman and CEO. At Morgan Stanley, CtW called on Mack to step down as chairman, but there was not an independent board chair proposal on the ballot.
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April 11, 2008 |
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Survey Assesses Director Views on Political Disclosure
Submitted by: Valentina Judge, Social Issues Service
A survey of U.S. corporate directors commissioned by the Center for Political Accountability, the Washington, D.C., group that has advised a five-year shareholder campaign for better disclosure and governance of corporate political contributions, finds evidence that its message is taking root in corporate boardrooms.
The survey, conducted by Mason-Dixon Polling & Research, showed corporate political giving to be a significant issue for directors, a strong majority of whom also support disclosure. However, the survey also indicated that directors possess considerably less knowledge about campaign finance rules and their own companies’ policies and activities than they say.
Read more about the survey results and corporate political giving here.
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April 9, 2008 |
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RiskMetrics Group Studies Find an Increase in Shareholder Activism and Litigation as a Result of the Credit Crisis
Submitted by: Sarah Cohn, Marketing
As the credit crisis evolves, the financial community is focusing on the corporate governance implications, especially board structure, oversight and risk management disclosure practices, and how the crisis is prompting a wave of securities litigation.
RiskMetrics Group today published two separate studies examining shareholder responses to the subprime credit crisis. The first report, Credit Crisis and Corporate Governance Implications, identifies the corporate governance factors involved in the credit crisis, how stronger provisions might have mitigated investor risk, and the ways investors are evaluating boards’ risk management and disclosure practices. The second report, The Subprime Meltdown Heads to Court, follows the consequences of weak risk oversight, providing an overview of the wave of securities litigation and regulatory enforcement actions beginning to swell. A major finding from both reports is that shareholder activism and litigation has increased as a result of the credit crisis.
To help investors better understand the implications of the credit crisis, RiskMetrics Group has created an educational resource center here. The center contains both reports as well as other information related to the current credit crisis. RiskMetrics Group will also share the findings from both reports in a special forum, Subprime Litigation and Liability, on April 11, 2008 at 11 a.m. EDT. To register for the forum, please visit here.
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April 4, 2008 |
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Infrastructure Funds: Managing, Financing and Accounting – In Whose Interests?
Submitted by: Sarah Cohn, Marketing
RiskMetrics Group has just published a new report, Infrastructure Funds: Managing, Financing and Accounting. Infrastructure as an asset class has commanded increasing attention from investors and the financial press over the last few years. Major asset sales in the UK - most notably of ports and water utilities such as Thames Water - and ongoing attention on road infrastructure in the United States and Europe, has been met with increased competition for assets, not from 'trade buyers' (such as utility companies) but from investment banks and asset managers. The asset manager model for infrastructure, where a sponsoring manager - usually but not always an investment bank - acquires assets and then on-sells them into a separate fund or publicly traded entity but retains management rights - was pioneered in Australia.
Even as the managed infrastructure model has grown in popularity, at least among potential and actual asset managers, there are some signs of investor unease with the existing model. At the basis of these concerns is the unique governance structure that has emerged among publicly traded infrastructure vehicles.
This report initially outlines the main features of infrastructure assets. It then explains the importance of distinguishing between infrastructure assets and infrastructure funds. The predictable, and steadily growing, cash flow associated with infrastructure assets is commonly highlighted as a basis for providing an attractive, and steady, yield. However, the yield delivered by several infrastructure funds is sourced from operating cash flows of the fund's assets and from capital.
The paper summarizes the key features of the infrastructure fund model and highlights a range of investment-related concerns with the model. The paper then describes a series of governance concerns with the infrastructure model. For instance, the existence of 'special shares' in some funds which entitle the external manager to appoint a majority of the fund's directors. The paper concludes with a series of reform proposals.
To read the report, please visit here.
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April 3, 2008 |
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RiskMetrics Group Study Identifies Key Governance Challenges for Investors in Greater China
Submitted by: Sarah Cohn, Marketing
RiskMetrics Group’s Governance Services unit just released a study contrasting the corporate governance protections available to investors in Hong Kong and China. The report, which examined the governance practices prevalent in these two markets, including regulatory and exchange requirements, found that Hong Kong enjoys a comparative advantage over mainland China in protecting minority investor interests.
RiskMetrics Group will hold a special forum, Corporate Governance in Greater China, to share the findings from the study on Tuesday, April 8 at 1:00 pm Australia EST, 11:00 am HKT, SGT, CST, 12:00 pm JST. To register for the webcast, please visit here. To read more about the study, check out today’s article in the Financial Times.
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