Insight

The Council of Institutional Investors (CII), which represents public, labor, and corporate pension funds, has released a new white paper on the issue of client-directed voting (CDV), which is being considered by the SEC during its review of proxy voting mechanics. 

The CDV concept--whereby retail investors provide standing voting instructions to their brokers or bank custodians in advance--has gotten more attention in the light of the decline in retail participation since the SEC adopted e-proxy rules in 2007. In addition, some corporate officials have raised concern about the need to boost retail voting after New York Stock Exchange Rule 452 was amended to bar broker discretionary voting in uncontested board elections. 

The paper was prepared by Alan Beller and two other lawyers at the law firm of Cleary Gottlieb Steen & Hamilton. Beller served as director of the SEC’s Corporation Finance Division from 2002 to 2006. While CII commissioned the paper to help it prepare a comment letter on proxy voting mechanics, the group said the paper “is an independent study and does not necessarily reflect the views of the Council or its members.”

The paper doesn’t endorse the concept of CDV, but instead calls for more study by regulators. “The complexity of CDV and the policy and regulatory issues it entails suggest to us that a robust CDV model is likely to have a long gestation period,” the authors conclude. 

As the authors note, CDV has the potential to influence the outcome of some corporate matters. “A CDV model that increases genuinely volitional RBO [retail beneficial owner] voting may be seen as facilitating the exercise of an important shareowner right and thus may have a role in evolving proxy mechanics, even if it does not also enhance RBO understanding of ballot items,” they write. “On the other hand, a CDV model that facilitates voting through a streamlined process, but that has the effect (even if unintended) of a standardized voting mechanism may be viewed as little different from uninstructed broker voting. That type of model would nullify the modifications to NYSE Rule 452 and be of great concern to institutional investors.” 
 

“Separate doctors from industry”: So read the headline of an Aug. 16 op-ed in the Boston Globe.  Few realize the headline could have appeared 180 years ago.

[See bottom of this article for links to other ESG Insight articles on the health care sector. – Ed.]

On August 24, the New York Times celebrated the huge progress made over the past 30 years on acid rain.

In an editorial, the Times noted regulatory action taken since 1990 has led to reduced toxicity in Adirondack lakes and forests, and they have rebounded. It called for further action, preferably legislative, to improve on these gains.

It’s worth recalling what a hot-button issue this was amongst eastern environmentalists 30 to 40 years ago, and drawing lessons from it for today.

Stephen Budiansky has published a New York Times op-ed critical of locavores’ math. He asserts that statistics showing that locally-grown food is always the most sustainable choice “are always selective, usually misleading and often bogus.”

The fuel usage numbers cited to justify the virtue of eating locally are unsupported, concocted, in Budiansky’s view. He concludes:

Eating locally grown produce is a fine thing in many ways. But it is not an end in itself, nor is it a virtue in itself. The relative pittance of our energy budget that we spend on modern farming is one of the wisest energy investments we can make, when we honestly look at what it returns to our land, our economy, our environment and our well-being.

After decades of consideration, the U.S. Securities and Exchange Commission voted 3-2 today to approve a final proxy access rule that will be in effect for most of the 2011 proxy season. The new rule, assuming it survives a potential corporate legal challenge, will require a 3 percent ownership threshold and a three-year holding period for investor groups that seek to nominate board candidates to appear on corporate proxy statements.  

“As a matter of fairness and accountability, long-term significant shareholders should have a means of nominating candidates to the boards of the companies that they own," SEC Chairman 
Mary Schapiro said at today’s open meeting. "Nominating a director candidate is not the same as electing a candidate to the board. I have great faith in the collective wisdom of shareholders to determine which competing candidates will best fulfill the responsibilities of serving as a director. The critical point is that shareholders have the ability to make this choice."

Investor advocates hailed the long-awaited adoption of the new rule, even though it includes a much longer holding period and a higher ownership threshold for access at larger companies than the SEC proposed in a June 2009 draft rule.

“This is ground-breaking for U.S. shareowners,” Ann Yerger, executive director of the Council of Institutional Investors (CII), said in a press release. “Access to the proxy will invigorate board elections and make boards more responsive to shareowners and more vigilant in their oversight of companies.”

After ten days of escalating public debate in which the Saudi Arabian government threatened to ban BlackBerry services because of security concerns, the Kingdom relented on August 9. Other governments have also expressed concern over BlackBerry’s stringent data encryption, including the United Arab Emirates, Algeria, Kuwait, Indonesia, India and Lebanon. The UAE has announced a ban on BlackBerry services as of October 11, and India has threatened to suspend all services unless  Indian authorities get access to encrypted communications by August 31.

Some governments believe that access to private communications is a necessary security measure. Critics maintain that Saudi Arabia and the UAE are at least partly motivated by a desire to limit freedom of expression and strengthen their already strict policing of the internet for political content.

This is the latest in a series of “tense standoffs” between governments and private corporations over questions of individual rights and national security, as described by a July 2010 ESG Insight article. Such conflicts include Google’s faceoff with China over questions of internet censorship and Nokia Siemens Networks’ provision of “lawful intercept” capabilities to Iran, which allegedly allowed authorities to monitor and censor internet traffic during the disputed June 2010 elections.

Saudis, Others Want the Same Access as US, Canada

Along with questions about whether Western companies should provide surveillance capabilities to undemocratic regimes, these disputes also highlight a possible double standard. Nations like the US and Canada, home of BlackBerry maker Research in Motion (RIM), are largely understood to have access to personal internet traffic. The US has an advantage in that many encrypted email services such as Gmail and Yahoo have servers on US territory, rendering them subject to court-ordered disclosure.

The Delaware Supreme Court has upheld a Chancery Court judge’s dismissal of a Michigan pension fund’s lawsuit over a board’s refusal to accept the resignations of majority-opposed directors. While the ruling was a defeat for the pension fund, it appears that this decision may help other shareholders sue companies over majority-opposed directors.  

In an Aug. 11 decision, the Supreme Court affirmed the dismissal of a lawsuit by the City of Westland Police and Fire Retirement System, which sued Axcelis Technologies after its board declined to accept the resignations of three directors who failed to receive majority support at the 2008 annual meeting. The pension fund filed suit under Section 220 of the Delaware General Corporation Law, which permits investors to inspect a company’s “books and records” if they demonstrate a “proper purpose.” Westland also sought records concerning the board’s rejection of two takeover bids by Sumitomo Heavy Industries, which fueled the majority withhold votes. 

At the heart of the case is the director resignation policy that Beverly, Mass.-based Axcelis adopted in 2005 while maintaining plurality voting. Resignation policies have become more widespread since then; about 70 percent of S&P 500 firms now have majority voting provisions, according to ISS data. The question of whether investors have any legal recourse if a board refuses to accept a resignation has received more attention in recent years, particularly as the New York Stock Exchange’s ban on broker votes in uncontested board elections has made it more likely that a director may receive majority opposition. 

The U.S. Securities and Exchange Commission plans to consider a final proxy access rule when it holds an open meeting on Wednesday, Aug. 25, at 10 a.m.

The SEC's meeting notice included no details on the content of the final rule that will be presented for consideration. The final rule may require that investor groups hold a minimum 3 percent stake for at least two years to be eligible to nominate board candidates to appear on management proxy statements, according to SEC observers and news reports. 

A Massachusetts pension fund has filed a derivative lawsuit against Hewlett-Packard’s board members and former CEO that seeks an independent board chairman, three shareholder-nominated directors, and other novel governance changes. 

In an Aug. 10 lawsuit in California state court, the Brockton Contributory Retirement System alleges that HP’s board members breached their fiduciary duties, committed gross mismanagement, and wasted corporate assets by agreeing to pay as much as $40 million in severance benefits to outgoing CEO Mark Hurd. The pension fund further alleges that Hurd and interim CEO Catherine Lesjak engaged in insider trading in violation of California state law because they sold HP shares while in possession of non-public information. 

Hurd was forced out by HP’s board on Aug. 6 after a company contractor made sexual harassment allegations, and a board-commissioned probe found that he falsified expense reports.  The Palo Alto, California-based technology company’s shares lost almost $9 billion in value on Aug. 9, the first trading day after Hurd’s departure. 

“Regardless of whether this was a firing ‘for cause,’ or a resignation, Hurd was not entitled to severance benefits under his employment agreement with HP, and the Board’s authorization of these payments was an abuse of their discretion and a violation of their duty of loyalty to HP and its shareholders,” the complaint asserts. 

HP has declined to comment on this lawsuit, according to news reports. 

“Economic reality confounds economic theory,” said Union Theological Seminary (Richmond) Prof. Mark Valeri to the Boston Globe.  The Globe interviewed him Aug. 1st about his new book, Heavenly Merchandize: How Religion Shaped Commerce in Puritan America.

For 250 years, scholars have argued about which drove the rise of capitalism: religious transformation – the Reformation and its offshoots – or economic change?