This article, the first in a two-part series looking at diversity in the boardroom, is drawn from ISS' 2006 Board Practices/Board Pay study.

Board diversity has received increasing attention from institutional investors in recent years. This year, activist investors continue to press companies to add women or minorities to their boards. Church groups and social investment funds have so far filed board diversity resolutions at 15 companies including Bed, Bath & Beyond; CBS; Overseas Shipholding; and, for the second year in a row, at Torchmark, asking each to "publicly commit itself to a policy of board inclusiveness."

While support for the proposals has historically been modest--11.6 percent of votes cast supported the Torchmark proposal in 2005, and 10.2 percent this year, for example--some corporate governance experts believe that the engagement of different views and perspectives on diverse boards is fundamental to achieving board effectiveness, and so investors have continued to focus on diversity.

In light of the annual meeting today at Bed, Bath and Beyond (where certain BBB shareholders have submitted a proposal requesting that the company report on its response to rising regulatory, competitive, and public pressure to increase energy efficiency), the below article on energy and climate performance is an interesting and timely read...

Walk into any Home Depot or Lowe's department store and you're sure to find hundreds of Energy Star(R) appliances. But what if you're in the market for an energy efficient "Big Box" retailer or real estate investment trust? Soon investors will have information to help shop for those, too.

Thanks to a new shareholder campaign, The Home Depot in Atlanta, Ga., and Lowe's in North Wilkesboro, N.C., will report in coming months on their strategies and progress to make their operations more energy efficient and less harmful to the environment.

Corporate governance at its essential core is an attempt to measure and understand some hard to codify items. Ginny Rosenbaum, who died early last Thursday after a long battle with cancer, knew that precision, consistency and accuracy were the tools needed for such measurements. The balance of power between the trinity of management, board, and shareholders may rest on such arcane details as whether broker non-votes are counted in the tally of a particular resolution, or whether the company has erected an insurmountable hurdle to keep shareholders from calling a meeting. Ginny knew that details mattered and was passionate about getting them right.

When Ginny first interviewed at IRRC in 1976, if you wanted a proxy you needed to visit the SEC to get it. Thirty years later, with "corporate governance" now a household term turning up in PowerPoint slides everywhere, Ginny was still reading proxies. No one was better at finding the critical, and most hidden details. An intern commented last week that much of what Ginny did - still, and by her own choice - was "grunt work." In many ways it was, but Ginny's pleasure in "getting it right," and her understanding of the larger context, gave it great value.

In her honor and memory we commit to doing our best to get the details right.

We invite you to use comments on this blog to share memories of Ginny, which we will forward to her family.

ISS Australia's Geof Stapledon and Martin Lawrence had a piece published in the Australian Financial Review on why the Australian Stock Exchange (ASX) listing rule exception should be removed. We welcome your comments on the ASX listing rule.

Listing rules tilt level playing field
Geof Stapledon and Martin Lawrence. Geof Stapledon is managing director, and Martin Lawrence lead analyst, of Institutional Shareholder Services, Australia.

22 June 2006
Australian Financial Review

Stock exchange shareholders suffer at the hand of the ASX itself, write Geoff Stapledon and Martin Lawrence.

The merger of the Australian Stock Exchange and the Sydney Futures Exchange highlights an inequity in the way ASX listing rules apply to mergers and scrip-funded takeovers.

Due to a little-publicised exception in the rules, only the target company's shareholders get to vote on mergers. Despite often having their shareholdings diluted materially, the bidder's shareholders don't get a vote. At the moment it is the shareholders of the ASX - of all organisations - that are faced with being diluted, without any right to vote on the deal.

There are now dozens of companies under investigation for potentially backdating stock option grants and the list of companies coming under scrutiny seems to be growing daily. To keep investors informed on this fast-moving issue, Institutional Shareholder Services (ISS) has launched an Options Backdating Information Center. To visit the site, please click here.

To read the latest Governance Weekly article on the options controversy, please continue reading.

Shareholder support for proposals seeking majority voting in director elections has averaged 47.3 percent support at 80 meetings this season. Last year, those proposals averaged 44 percent at 60 firms. This season, majority vote proposals received an average of 54.5 percent approval at 33 meetings where companies had not previously announced board election reforms such as a director resignation policy. Support was lower at firms with director resignation policies such as the one at Pfizer and over 90 other firms, averaging 42.1 percent at 47 meetings this season.

To see the results so far this season, Download file

No one disputes the facts about the horrific genocide occurring in the Darfur region of Sudan. However, deciding how to influence change in this troubled region has been the source of significant debate, resulting in a variety of divestment strategies among many states' public pension funds as well as many college and university endowment funds.

ISS has been working on this issue since 2001 and has worked with many public pension funds, colleges and universities to meet the regulatory criteria of their respective states. ISS has also worked with student leaders who have been very successful in getting the issue on the agenda at Trustee meetings and state legislatures. What is significant about the students' approach is their thoughtfulness in recommending a targeted approach to divestment by making a distinction between companies that are financially benefiting the Sudanese government versus those that are benefiting Sudan's citizens.

By taking a more targeted approach to divestment, institutional investors have the flexibility to pursue the most effective approach that balances their funds fiduciary obligation to their shareholders while also influencing change in the Sudan region.

A recent story in the Chronicle of Higher Education discusses this move to a more targeted approach regarding Sudan Divestment. To read the story, Download file

We welcome your comments on the Sudan Divestment movement.

In March 2006, a new law on hostile takeovers of French companies was issued in application of an EU directive and proposed by the French finance minister Thierry Breton. The changes were seen by the market as a direct result of the country's growing protectionism.

Following this new law, companies subjected to a hostile bid would be able to issue free warrants convertible into shares at a potentially discounted price to existing shareholders. These poison pill measures can be used only if approved by shareholders at a general meeting, by a simple majority. Since April 2006, 15 companies, including big names such as Suez, Bouygues, and Compagnie De Saint Gobain, have requested shareholder approval for the issuance of free warrants during a takeover.

The resolution was approved by 55% of Saint Gobain shareholders and 63% of Suez shareholders. This means that in both cases, the resolution would have been rejected had an extraordinary majority been required. In Bouygues, 49.7% of which is held by three strategic shareholders, 85% of votes were cast in favor of the resolution. But based on the 59.7% quorum participating in the meeting, this corresponds to only 50.5% of total voting rights in the company.

Another recurring agenda item since April 2006, consists in authorizations to the Board to issue shares in the event of a public tender offer. This is a takeover defense with respect to the Law of Reciprocity (as for issuances of free warrants). It was submitted to shareholder approval by 15 companies as well, all small caps except for Bouygues.

Currently, we are not aware of any of these resolutions being rejected by the required simple majority. What are your thoughts on economic nationalism as an answer to globalization? We welcome your comments.

The California Public Employees Retirement System (CalPERS) and the Council of Institutional Investors (CII) have asked companies to explain how they determine the timing of stock option grants and to disclose if their executive pay practices are under investigation.

In addition, the AFL-CIO has sent letters to the compensation committee chairs at Countrywide Financial and seven other firms, asking them to disclose if any option grants were improperly timed and to adopt new safeguards.

More than 45 companies now face criminal, regulatory, or internal investigations into whether they backdated or otherwise manipulated the timing of stock option grants to maximize compensation for senior executives. Among the latest firms to disclose probes include: Macrovision, Meade Instruments, Monster Worldwide, Broadcom, Equinix, Applied Micro Circuits, and Cyberonics. Comverse Technology, Michaels Stores, Asyst Technologies, and Semtech have delayed filing financial reports as their option practices are investigated. In addition, investors have filed more than 60 lawsuits against more than 20 companies, according to Bloomberg News.

Does the topic of corporate governance resonate outside the confines of the world of corporate secretaries, pension fund activists and academics? Evidence that it does can be found today on DailyKos, a democratic blog that bills itself as the most highly trafficked blog on the internet. According to Sitemeter.com the site receives an average of over half a million visits per week, and has had 3.5 million visits in the past week. The blog includes a feature in which members can write essays, known as diaries, and readers can vote on the one they consider the most important or relevant. The number one recommended diary this morning wasn't about Karl Rove or the Iraq war but about the fact that Home Depot directors didn't attend the company's annual meeting. By 11 o'clock more than 225 comments had been added to the diary titled, "Why What Happened at Home Depot's Annual Meeting Matters," and while many discussed the political leanings of executives at Home Depot or the quality of service at the big box hardware store, several offered interesting thoughts on director independence, executive compensation and implications of corporate governance to the larger political picture.

Click here to read more.

With Japan's proxy season set to get under way next week, market observers are abuzz over this week's arrest of shareholder activist Yoshiaki Murakami, who admitted June 5 to engaging in insider trading.

The 46-year-old Murakami, whose $3.5 billion MAC Asset Management reshaped the governance landscape of the world's second largest economy, is best known for launching the first-ever hostile takeover by a Japanese company when he targeted real estate firm Shoei in 2000.

Since then, MAC, whose stated mission is to promote and unlock shareholder value through effective corporate governance, has been the bane of many old-guard corporate managers who fear the fund will target their cash reserves and non-core assets by forcing them to raise dividends, buyback stock, or sell off assets.

As stated in this press release last week by the SEC, the disbursement of $750 million to Bristol-Myers Squibb shareholders began on Thursday, June 8. This $750 million includes (1) $150 million BMS paid to settle the SEC's case against it, (2) $300 million BMS paid to settle a related securities class action, and (3) $300 million BMS paid in a deferred prosecution agreement with the U.S. Attorney's Office in New Jersey to address the company's criminal liability. The combined $750 million in funds from the SEC case, civil action and criminal case is being distributed all at once to shareholders who filed a claim last year with the claims administrator--The Garden City Group--in the BMS securities class action settlement.

As a result, we have what I believe to be the first claims filing "trifecta"--civil, SEC and criminal settlement money all rolled into one giant distribution. Shareholders who filed a timely proof of claim in the BMS securities class action settlement will actually receive a share of $750 million, not just the $300 million from the civil settlement. Conversely, shareholders who fail to file a claim in the BMS civil settlement miss out on the money from that settlement, as well as the additional $450 million from the SEC and criminal settlements.

The moral of the story, as usual: File those claims.

I see a stock option problem surfacing in Canada. Resource companies, buoyed by high resource prices, are stock option gold mines not only for management, but also directors. It seems that some directors at some of the smaller resource companies have seen fit to grant themselves ever larger option packages. Although non-executive director compensation has topped the $100,000 mark at some of Canada's largest companies, we are seeing some packages, driven by stock options, top $500,000 and even $1 million at some smaller ones.

For example, non-executive directors of Yamana Gold received a grant of 1.5 million Yamana options in 2006. Averaging 300,000 options per non-executive director, with an exercise price of just under $10, these options had a Black-Scholes value in excess of $1,000,000 per director at the time of grant. By the time we obtained the proxy circular, they had an intrinsic value of nearly $1 million per director. There was nothing in the proxy circular to support unusual board activity that would merit such an exceptionally large compensation package, which had mushroomed from that of the previous year. Unfortunately, there are others like Yamana.

What this means is that the concept of accountability needs to be reinforced with many boards. The language of Canadian proxy circulars with regard to directors' stock option compensation invariably reads "the company granted options to directors..." as if there were some superior being "the company" that was there to deal at arms length and look after shareholder interests. Is this what "independence" has come to mean? How independent are directors that pay themselves such fees?

Does casting a withhold vote punish these mega-grant directors? With our plurality system, they get elected. Usually even publicly filed vote results disclose that directors were elected "by show of hands" at the meeting, so even the embarrassment of a high withhold vote by proxy is unlikely to be felt outside the boardroom. Fortunately, we have the press, who are merciless on perceived abuses. Yet the press will not win the battle if shareholders are standing silently on the sideline.

As federal probes into corporate stock option grants widen, investors have filed 45 lawsuits against UnitedHealth Group (UHG) and more than a dozen other U.S. companies, alleging that the timing of option grants was manipulated to maximize compensation for executives.

On June 6, Securities and Exchange Commission Chairman Christopher Cox said the growing number of firms that are reviewing their option granting practices is "of serious concern to the commission." Investors also are calling for the agency to take action. On June 7, the AFL-CIO urged the SEC to address option grants as it finalizes new executive pay disclosure rules. Cox appears receptive to that idea; he told reporters that the agency's new rules "will improve our ability to deal with this issue," but he did not elaborate.

So far, at least 34 companies have disclosed criminal, regulatory, or internal investigations in option grants, according to Bloomberg News. Fifteen executives and directors, including five CEOs and three general counsels, have quit or been fired.

A column in today's Wall Street Journal by Alan Murray titled "Frustrated 'Greens' Turn to Boardrooms," highlights the gravity of the climate change issue. Murray underscores for Journal readers that climate change is an urgent problem that requires action by the U.S. government. And, while Murray goes on to say that businesses "do best when they stick to business," and the issue of climate change belongs in Washington, the messages from both the Ceres report and ISS webcast emphasize that climate change is a business issue, one that poses varying risks and opportunities to individual companies.

Please send along your comments to let us know your views on the connection between climate change and corporate governance.

What progress is China making in building modern capital markets? What are the prospects for success? What is the level of corporate governance among Chinese companies, and what role are institutional investors playing?

Two recent studies shed light on these questions, one focusing on investors and the other on companies:

* The ISS 2006 Global Institutional Investor Study, which features a Special Report on China.

* The Corporate Governance Assessment Report of the 100 Top Chinese Listed Companies in 2006, published by the Chinese Centre for Corporate Governance of the Chinese Academy of Social Sciences and the Faculty of Business of the City University of Hong Kong.

To see the ISS study, click here.

To see the Chinese Academy of Social Sciences Report, Download file

To see an analysis comparing the two reports, Download file

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.

What are your views on investing in China? We welcome your comments.

For the first time since the mid-1990s, the proliferation of takeover defense features at major U.S. corporations has begun to slow, and several defenses are now in decline, according to a new study by ISS' Governance Research Service (GRS).

For example, the study found that active "poison pills" are in place at barely more than half of the surveyed companies. Given this trend, maintaining a pill may soon no longer be considered "standard practice," along with classified board structures.

In 1995, Congress enacted the Private Securities Litigation Reform Act (PSLRA), which sought to encourage institutional investors to serve as lead plaintiffs in securities class action lawsuits. More than ten years later, it appears that many labor and public pension funds have answered that call.

Of the 108 settlements announced last year, union and public pension funds served as lead plaintiffs in a record 35 settlements, according to the recently released "2005 Securities Litigation Study" by PricewaterhouseCoopers (PwC). To download the study, please click here.

This participation by labor and public pension funds significantly exceeds the 26 settlements in 2004, the 19 accords in 2003, and 13 settlements in 2002, where those institutions served as lead plaintiffs. In addition, the PwC study projects that union and pension funds will serve as lead plaintiffs in 68 of the 168 new lawsuits filed in 2005. That total would be less than the all-time high of 71 cases in 2004, but it would surpass the 49 cases in 2003 and 59 in 2002 where those institutions served as lead plaintiffs.

These findings are consistent with other research. A recent study by NERA Economic Consulting found that 38 percent of the settled cases in 2005 had an institution serving as a lead plaintiff, up from 14 percent in 2000.