The following are excerpts from Chapter 2 of the 2006 ISS Global Institutional Investor Study. ISS will present the findings from its Global Investor Study the week of June 5 in a series of webcasts. To attend the online forums, please register here.

With the globalization of the world's capital markets, corporate governance has followed swiftly onto the world stage. We find universal views on the importance of corporate governance in every market we studied. Furthermore, global forces are shaping the continuing development of corporate governance, and institutional investors, with their expanding cross-market holdings, have become agents for change.

The importance of corporate governance is hardly limited to Anglo-American markets. Our study finds that investors share strong views on the value of corporate governance regardless of their region. A majority of investors in every market consider corporate governance to be "very important" or "important" to their firms. Answers range from a high of 90 percent of Chinese investors, who consider corporate governance a necessary building block for successful capital markets, to a low of 61 percent in Continental Europe. Conversely, the percentage of investors saying that governance is not important is limited to single digits in every market we studied.

Activists and academics have speculated for years that executives sometimes timed their option grants to occur before the release of good news that would spur market gains. But now, it seems, a number of them may have taken that questionable practice a step further by backdating their grants: After all, why bother to time your option award when you can simply ink in an optimal grant date? Specifically, a date coinciding with a low point in your company's stock price, which then becomes the price at which you can purchase the option shares during, typically, the next 10 years. Multiply each extra dollar of gain in the stock price over the exercise price of an option covering, say, 500,000 shares, and you are talking big money.

Enough money, it seems, to tempt at least some executives into manipulating the official date of their option grants. Accounting and tax rules stipulate that an option with an exercise price below the market value of the stock on the (actual) option grant date constitutes a discount-priced option, with negative consequences for both. And most stock incentive plans provide that the option price will be set at the stock's fair market value on the grant date, so determining a grant and then setting the exercise price at an earlier date would violate the terms of the plan. Not to mention stirring the wrath of investors if the practice is detected, as apparently has been the case recently with a number of mostly tech-sector companies. Every few days over the past weeks it seems another tech company has issued a vague statement about subpoenas received, requests from federal investigators for data, or internal reviews being conducted by boards regarding potentially back-dated options. A total of more than 20 companies have made such announcements recently.

The 2001 collapse of Enron defined an era where corporate malfeasance ran rampant and, as a result, wide corporate governance reforms were implemented to protect shareholders. So, nearly five years from the start of the Enron investigation Ken Lay and Jeffrey Skilling were both found guilty on multiple counts of conspiracy and fraud today.

Will shareholders finally feel vindicated? Use our blog to post a point of view.

According to a Reuters article today by Matt Daily and Dan Whitcomb, Ken Lay and Jeff Skilling have both been found guilty today on fraud and conspiracy charges. Lay was convicted of six counts of conspiracy and fraud and faces up to 45 years in prison, while Skilling was found guilty of 19 counts of conspiracy, fraud, insider trading and making false statements which, combined, carry a maximum sentence of 185 years. To read the full article, click here.

According to an Associated Press article today by Kristen Hays, a federal judge in the Enron securities class action case gave final approval to the $6.6 billion in settlements reached with defendants Citigroup Inc., J.P. Morgan Chase & Co. and the Canadian Imperial Bank of Commerce. In addition to the $7 billion (and counting) in Enron settlements, the SCAS database shows another U.S. $7 billion in pending securities class action settlements from shareholder actions at Sears, Nortel, AIG, HealthSouth, FreddieMac, the IPO Securities Litigation, Time Warner and dozens of other cases.

With over $14 billion in the settlement pipeline, there is now a huge amount of money waiting to be claimed by eligible shareholders. The "fun" part now for institutions is tracking these settlements, identifying the claim deadlines, and filing the proof of claims with the claims administrators.

Notably, however, a recent study by Professors Cox and Thomas entitled "Letting Billions Slip Through Your Fingers: Empirical Evidence and Legal Implication of the Failure of Financial Institutions to Participate in Securities Class Action Settlements" concluded, based on data from 118 settlements, that on average, roughly just 28% of eligible institutional investors filed claims in these securities class action settlements! 28%! Download file here to read the study.

The study further found that the institutions' mean loss was a very substantial $850,000, and the average median loss was roughly $275,000. Perhaps most importantly, the study showed that had these institutions filed claims, the average mean recovery would have been approximately $280,000 and the average median recovery would have been more than $90,000.

By almost any standard, those are big bucks to be leaving on the table time after time.

Japan's Pension Fund Association for Local Government Officials (PAL) has joined its corporate counterpart, the Pension Fund Association (PFA), in opposing "poison pill" defenses adopted without a shareholder vote.

Without targeting specific companies, PAL is publicly urging its external equity managers to vote against the election of directors at firms where boards have formally adopted poison pill defenses. The PFA adopted a similar policy while detailing plans to vote against specific incumbent directors at firms where pills were adopted.

Some shareholders advocate performance-based options as a potential tool to link pay to performance. But -- since no one disputes that a company's market price may be influenced by many factors beyond management control --the trick is how to make sure the performance being rewarded is the performance of the executives being rewarded. Funds affiliated with the Laborers Union decided last year that the residential homebuilding industry provided "a good vehicle" to consider some of the questions around pay for performance, according to Richard Metcalfe, the Laborer's director of corporate affairs. "Is management adding value or riding up a bubble?" asks Metcalfe, noting that the fund was interested in having discussions with companies on executive compensation. The fund filed proposals at a number of residential construction companies, including two proposals on performance-based options. Proponents report that this year 5.7 percent of shareholder at Lennar and 51.7 percent of shareholders at Pulte voted in favor of performance-based options.

Not surprisingly shareholder return performance graphs of these companies closely track graphs of home prices over the same period, a line moving sharply higher. Investors who had the foresight to see the looming decline of the NASDAQ in November 2000 and invest $100 in the Dow Jones Homes Construction Index would have been rewarded with $454 five years later. Executives, of course, reaped extraordinary rewards as well.

A labor union proposal regarding takeover defenses at Hilton Hotels has the potential to establish a legal precedent that could help clarify issues surrounding "binding bylaw" proposals.

The proposal by Unite Here'ss pension fund would amend Hilton's bylaws to state the "corporation shall not maintain a shareholder rights plan, rights agreement or any other form of 'poison pill' making it more difficult or expensive to acquire large holdings of the corporation's stock, unless such plan is first approved by a majority shareholder vote."

The bylaw proposal also states that a "majority of shares voted shall suffice to approve such a plan." The proposal calls on Hilton to "redeem any such rights now in effect," and states, "notwithstanding any other bylaw, the Board may not amend the above without shareholder ratification."

If the binding proposal is approved, Delaware-incorporated Hilton has said that it would refuse to recognize the bylaw change, arguing that the proposal is contrary to basic principles of Delaware law giving boards of directors the power to manage the business and affairs of a corporation.

Yesterday, the California Public Employees Retirement System (CalPERS) board announced that it would not permit its fund managers to buy shares in nine companies that do business in Sudan. (CalPERS does not currently own stock in any of the companies.) The list of prohibited companies (Bharat Heavy Electrical Ltd., China Petroleum and Chemical Corp., Nam Fatt Co., Oil & Natural Gas Co., PECD Bhd., PetroChina Co., Sudan Telecom Co., Tatneft OAO; and Videocon Industries Ltd.) is identical to that released by the University of California Regents in March. These companies, a CalPERS position statement said, "were clearly shown to be providing monetary or military support to the Sudan government, while showing little or no interest in the violence in Darfur or in helping to improve the welfare of the Sudanese people."

Companies associated with atrocities in Sudan pose "a serious risk to creating sustainable and responsible long-term value," a CalPERS Investment Committee staff memo dated May 15 reads. These risks include "federal and international sanctions, substantial fines and penalties imposed by authorities, an impairment of [companies'] ability to raise capital in public markets as well as long term reputational damage," the memo continued. "There is no place in for these companies in our portfolio until the atrocities and human rights violations end," CalPERS Board president Rob Feckner said in a press release.

The European Commission found that the French government did not overstep its bounds in its actions related to the planned merger between two French energy firms Suez and Gaz de France. The hastily arranged merger was used as a preemptive strike against a potential takeover bid from Italy's Enel energy company. The decision serves to highlight the difficulties involved in cross-border transactions in the EU and as a reminder that shareholders in European companies continue to be subject to the desires of governments over the desires of the marketplace. According to a report in the Financial Times the deal still must clear the regular competition commission, so there is still some chance that the market might still prevail.

While more large U.S. companies are dropping "poison pills" and investor support for mandating a shareholder vote on such takeover defenses remains strong, the number of shareholder proposals on this topic has declined significantly, according to a recent ISS report.

However, that trend may change next year. A recent Securities and Exchange Commission (SEC) ruling may prompt more shareholders next year to seek bylaw amendments to require an investor vote on pills. In addition, a Delaware court ruling may inspire some investors to press again to encourage companies to seek shareholder approval before adopting a poison pill.

With the launch of the Kyoto Protocol and the E.U. Emissions Trading Scheme, managing greenhouse gas emissions is now a part of doing business in global trading markets. As the United States catches up to this international effort to combat global warming, climate governance practices will assume an increasingly central role in corporate and investment planning.

A new report commissioned by CERES and written by Doug Cogan of ISS' Social Issues Service employs a "Climate Change Governance Checklist" to evaluate how companies are addressing climate change through board oversight, management execution, public disclosure, emissions accounting and strategic planning.

Join Doug Cogan and representatives of the pension and investment community for a one-hour ISS webcast beginning at noon EDT on Tuesday, May 16 for a discussion of this new report and how it can be used by company executives, board members, investors and Wall Street analysts to employ effective climate governance strategies. To register for the webcast, click here.

Shareholder proposals seeking majority voting in director elections continue to do well at U.S. companies that have not announced board election reforms.

So far this season, those resolutions are averaging 56.8 percent of votes cast at 13 firms that had not adopted a director resignation policy or other majority election alternative before issuing their proxy statements, according to ISS data. As of May 10, those proposals had won majority support at 11 of those firms, including a 53 percent showing at Union Pacific and 61 percent support at Verizon on May 4.

The two exceptions were the 27 percent vote at PepsiAmericas and a 32 percent vote for at Paccar. One explanation may be the significant insider shareholdings at those companies. PepsiAmericas has a 53 percent insider voting block, which includes a 43.4 percent stake owned by PepsiCo. At Paccar, directors and officers control 7 percent of the company's shares. This year's vote is slightly better than the 30 percent received by a similar proposal at Paccar in 2005.

By contrast, the strongest showing was a pair of 67 percent votes at Marathon Oil and Sprint Nextel in April. (For more details on other vote results, Download file here to see the table. This table includes 33 meetings where specific vote results were released and then collected by ISS. This data doesn't include the 95 percent vote on April 28 at Marriott International, where management supported the proposal by the Sheet Metal Workers.)

Meanwhile, majority vote proposals continue to lag at companies that have resignation policies like those adopted by Pfizer and more than 80 other firms. Those resolutions have averaged 37.3 percent of votes cast at 22 meetings this season.

However, majority vote proposals won 54 percent support at EMC and 51.8 percent at Chubb, which both have resignation policies. A binding proposal won a surprising 49 percent support at Honeywell International, which also has a resignation policy. (In addition, the United Brotherhood of Carpenters and Joiners report that their proposals won 60 percent support at PerkinElmer and 56 percent support at Raytheon. These two results were not received in time to be included in the table.)

The poorest showing was 19 percent at General Electric, which has adopted one of the strictest director resignation policies. (ISS' recommendation research staff did not support the proposal at GE.) If the GE vote is excluded, then majority voting is averaging 39.3 percent at companies with resignation policies.

CEO pay levels have been set for over a decade using a process that clearly is malfunctioning. This broken process has led to skewed results, for both performing and underperforming companies. And, while good CEOs can make a difference, it still can't hide the fact that some CEOs received their windfalls due to side affects caused by this broken process.

For example, CEOs were provided megagrants of options on an annual basis throughout the 1990s, primarily because boards began to think of option grants as part of the annual routine of reviewing a CEO's pay package - rather than the original purpose of them as one-time grants to proper incentive (we have now called on boards to use "wealth accumulation charts" so they can keep better track of outstanding equity grants and not "overly incentivize" a CEO).

Another example - now widely recognized - is that the commonly used peer benchmark has led to an incredible racheting up of CEO pay as each CEO wants to be paid in the top quartile; thus, creating inflation each year in the benchmark as everyone scrambles to be in the top 25%. Over 15 years, that inflation has gotten quite high. There are many other process elements that are askew, as we have laid out in three issues of The Corporate Counsel, freely available on the right side of www.CompensationStandards.com.

CEO pay is not set like your pay or mine. The process often lacks any real negotiation with the board of directors and CEOs can quite easily get what they ask for. Just because a company has performed well for the past 20 years (as has the entire stock market) doesn't necessarily entitle a CEO to name his or her price. Comparison of CEO pay to big-name entertainment stars has been widely discredited; their pay levels are set by the market - CEO pay levels are not.

Another interesting trend which emerged ISS' 2006 Global Investor Study is how investors are integrating corporate social responsibility (CSR) measures into their investment decision-making. The topic of corporate social responsibility produced diverse investor views, drawing passionate responses and splitting investors along geographic fault lines as well as investor groups. ISS found the strongest support among pension funds and in Europe, Canada, and Australia. While investors are far from consensus on CSR, its advocates contend that it represents the next frontier in corporate governance.

As a group, Canada's banks are a market heavyweight, accounting for about 19 percent of the entire S&P Toronto Stock Exchange Composite Index. They also have been among the corporate governance leaders in Canada.

This season is no exception, as the banks have led the way in adopting director election reforms and improving their disclosure of executive compensation. Nine major banks held their annual meetings in March, and governance developments at these companies often are a sign of what will happen during the rest of the Canadian proxy season.

Is it one small step for a group of progressive fund managers or a giant leap for the global investment community? That is the question raised by a new set of investment principles unveiled at ceremonies at the New York Stock Exchange on Apr. 27 and the Palais Brongniart in Paris on May 2.

At these launch ceremonies, 50 institutional investors with $4 trillion in assets signed on to the Principles for Responsible Investment. These principles contain six pledges and 35 action items that investors can take to integrate environmental, social and governance (ESG) issues into their portfolio management practices. (Download file here to read more about the six pledges.)

The Principles for Responsible Investment were more than a year in the making, with over 20 institutional investors and 70 experts involved in drafting this voluntary code. United Nations Secretary General Kofi Annan convened the process, with coordination by the U.N. Environment Programme Finance Initiative and the U.N. Global Compact. Mercer Investment Consulting was hired by the U.N. to help facilitate the development of the Principles, and the Ceres environmental coalition served as an advisor.

Sudan divestment regulation continues to grow, having added Maine as the most recent state requiring divestment by 2008. Two additional states, Vermont and Ohio, have joined California by passing broad-based resolutions that suggest but do not require divestment. And, cities have gotten into divestment, as Providence, RI and New Haven, CT, have become the first two cities to mandate Sudan divestment.

Concurrently, a debate is beginning to develop. Both fund managers and business groups are starting to question the impact that the various laws are having on fund performance on the people of Sudan. Yesterday's Wall Street Journal article by Jane Spencer below (continue reading) raises the question about whether divestment actually helps or hurts. We'd like to invite opinions from all sides of the issue.

Swedish companies are governed by the Public Companies Act, the Stockholm Stock Exchange listing requirements, and the Swedish Act on Annual Accounts. Recently these rules have been adapted to come more in line with EU regulations and best practice recommendations.

This article examines Swedish companies' practices relating to: board and committee structures, takeover defenses, shareholder rights, and audit issues. CGQ currently rates 51 Swedish companies (out of 2,365 companies covered outside the U.S.) Swedish shareholding structures are very much in line with those of continental Europe and many Asian markets in that shareholdings are not as widely dispersed as the shareholdings in Anglo markets. Since the late 1990s, however, family control of relatively high percentages of the market value of Swedish companies has been declining.

ISS' Securities Class Action Services (SCAS) has released its annual list of the top 50 plaintiffs law firms ranked by the total dollar amount of final securities class action settlements occurring in 2005 in which the law firms served as lead or co-lead counsel.

Topping the 2005 list for the second year in a row was Bernstein Litowitz Berger & Grossman, which served as lead or co-lead counsel in final settlements totaling $3.74 billion--almost 50 percent of the record $7.6 billion in securities class action settlement dollars obtained in 2005. Rounding out the Top 5 in ISS' SCAS 50 were Barrack, Rodos & Bacine (#2 for the second year in a row at $3.67 billion); Lerach Coughlin Stoia Geller Rudman & Robbins ($1.8 billion); Milberg Weiss Bershad & Schulman ($637 million); and Grant & Eisenhofer ($322 million). Bernstein Litowitz and Barrack Rodos' top standing in 2005 was fueled in large part by their performance as co-lead counsel in the massive WorldCom securities class action.

The Amalgamated Bank's LongView Collective Investment Fund has filed a resolution at CA Inc. (formerly known as Computer Associates International) seeking to oust two directors at the company's annual meeting in August.

The targeted directors are former U.S. Senator Alfonse D'Amato and Lewis Ranieri, who both were on the board before 2002 when regulators started investigating the company's accounting. Ranieri, who served as vice chairman of Salomon Brothers in the 1980s, is chairman of CA's board.

The labor-affiliated fund has sought change at the company before. In 2004, LongView filed a novel proposal that urged Computer Associates to establish a policy to recoup unmerited compensation awards following financial restatements.