Four pension funds this week submitted a resolution that seeks to allow shareholder-nominated candidates to run for seats on Hewlett-Packard's board of directors.

This was the first proxy access proposal filed after a Sept. 5 federal court ruling that the Securities and Exchange Commission improperly allowed American International Group to omit a 2005 access resolution by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME).

The proposal at H-P was filed Sept. 25 by AFSCME, the New York State Common Retirement Fund, the Connecticut Retirement Plans and Trust Funds, and the North Carolina Retirement Systems. The resolution asks the company to change its bylaws to allow any shareholder group holding 3 percent of the shares outstanding for at least two years to nominate one or more directors. Collectively, the pension funds own more than 30 million H-P shares with a market value of $675.9 million, according to their press release.

"Proxy access is critical to insuring shareholder rights," New York State Comptroller Alan G. Hevesi said in a press release. "While we wait for the SEC to rule on this topic regarding all corporations, we are moving forward on a case-by-case basis to establish what should be a basic right for all shareholders."

H-P had no immediate comment on the shareholder proposal. The Palo Alto, California-based computer manufacturer has been embroiled in a controversy over a boardroom leak investigation authorized by former Chairman Patricia Dunn. Dunn resigned Sept. 22, two weeks after the company acknowledged that it hired a private investigator to obtain the phone records of directors and journalists. The SEC, federal prosecutors, and California Attorney General Bill Lockyer are investigating the company's handling of the leak probe, while U.S. lawmakers are holding hearings on the matter.

"The H-P board is completely dysfunctional and has been for a long time, which is an example of why shareholders have fought so hard for proxy access," Richard Ferlauto, AFSCME's director of pension investment policy, told Governance Weekly. "We seek to nominate directors at H-P who will make the board do its job better through an election process that is not stacked against investor interests."

The SEC has scheduled a meeting on Oct. 18 to review its rules on shareholder proposals concerning board elections. Given the lack of time before filing deadlines for the 2007 season, the SEC is not likely to revive a controversial 2003 draft rule that would have established procedures to allow shareholders to nominate directors. While Ferlauto has expressed hope that the SEC will allow shareholders to file proxy access proposals at individual firms, other observers, including Gordon Smith, a law professor at the University of Wisconsin, warn that the agency may revise its rules to bar such resolutions.

The WSJ had a Review and Outlook piece earlier this month entitled "The Milberg Effect," which argues that the projected drop-off in securities class action cases in 2006 suggested by a recent study is due to a reduction in the number of cases filed by the law firm Milberg Weiss. According to the WSJ piece,

According to Cornerstone, a research firm that tracks litigation, law firms filed 179 class actions last year. The first six months of this year saw only 61, a rate that would result in about 123 class actions for the year -- or a decrease from 2005 of 56 suits. Meanwhile, according to publicly available press releases, Milberg Weiss filed 91 of last year's suits. Yet in the first six months of this year, having come under prosecutorial scrutiny and lost many lawyers, the firm has filed only 17. At this rate, Milberg would tally about 34 suits for the year -- or 57 fewer than 2005.

These numbers are more than a coincidence, and should put to rest the assumption that Sarbanes-Oxley or
better corporate governance standards are producing fewer causes of legal action. Securities lawyers have
long understood that most class actions have little or no substance but are manufactured by the plaintiffs bar to pad their own pocketbooks.

This is simply wrong. Contrary to the conclusion in the piece above, the projected overall drop-off of 56 class actions in 2006 and the projected Milberg drop-off of 57 class actions filings is a coincidence. The flaw in the WSJ's analysis is that it rests on the false assumption that each of the companies that are the subject of a securities class action are sued by only one law firm. That is not the case.

To develop this point a bit, the Cornerstone study projects that at the current rate, 123 companies will be the subject of a securities class action lawsuit this year--56 fewer than in 2005. It is critical to note here, however, that virtually all (let's conservatively go with 90%) of these 123 cases will involve multiple complaints filed by multiple law firms. Indeed, many companies will be sued by a dozen or more different law firms. Using this conservative 90% figure, if Milberg does file 57 fewer complaints in 2006, this drop-off will only impact the total number of companies that are the subject of a securities class action in the 10% of Milberg's filings where it is the only law firm to file a complaint. So we're looking at a possible reduction of 5 or 6 cases (5.7 to be exact), not 57 cases.

The Milberg Effect? Not so much.

In the European Union, numerous mechanisms exist that allow limited numbers of shareholders to exercise significant influence on companies disproportionate to their financial contribution to the wealth of the company. For this reason, the European Commission has decided to take a closer look at the question of proportionality and capital in companies listed in the EU.

Those that advocate a move away from control-enhancing mechanisms and towards 'one-share-one-vote' being the norm, acknowledge that although there may be implementation challenges, these would be outweighed by the creation of a true single EU marketplace in which all shareholders could exercise their rights in a democratic manner.

Detractors point out that control-enhancing mechanisms in the EU are created by shareholders at the general meeting and are acquired voluntarily and knowingly by investors. They argue that many EU countries have applied the system of multiple voting shares, for instance, for over 100 years and have no knowledge of any difficulties or complaints.

The situation in the US is very different with 92% of market capitalization including companies that have voluntarily chosen to align cash flow and control rights. This is a high number compared to the EU.

ISS has been selected to lead an important research project, in collaboration with the global law firm Shearman and Sterling LLP and the European Corporate Governance Institute (ECGI), on the proportionality between ownership and control for the European Commission. This EC research initiative will tackle the important corporate governance concept of "one share-one vote" and lead to more insightful discussion within the industry.

Led by Managing Director of ISS Europe, Jean-Nicolas Caprasse, ISS' team of European researchers working from our Brussels, London, Paris and Amsterdam offices will produce profiles on the structure of over 450 companies in 16 EU member states. ISS has also been asked by the EC to survey institutional investors in European and international markets about their views on control-enhancing mechanisms.

The final report will include an overview of European regulatory frameworks by Shearman and Sterling plus a review of existing theoretical and empirical research by ECGI. Both the overview and review will contain a comparison of the situation in some key jurisdictions outside the European Union. To view the full announcement, please click here.

What are your thoughts on the one share-one vote principle? We welcome your thoughts.

Investors are looking with increasing favor on shareholder proposals asking companies to disclose and monitor their political contributions, to report on their fair employment policies, and to issue broad-based reports on sustainability. Investors also gave greater support to selected proposals on labor rights and environmental issues in the 2006 proxy season.

While shareholder proposals on social issues historically have not fared as well as governance resolutions, social proposals have received increased support this year. In fact, 27 percent of the social issues proposals that came to a vote through June 30 were supported by more than 15 percent of the shares voted; only 15 percent of the social proposals in 2004 and 2005 achieved this level of support, according to ISS data.

In contrast, investors overwhelmingly rejected proposals asking companies to drop equal treatment protections for gay employees, to review or improve animal welfare, and--in the case of tobacco companies--to restrict their marketing or to support smoking bans. Proposals along these lines averaged less than 6 percent support.

Leave it to governance misfit Cablevision Systems to bring the ongoing backdating scandal to a new low point. Disclosures of a backdated, after-life option grant to a close ally of the controlling and dysfunctional Dolan dynasty will provide new fodder for the headline writers of the nation's newspapers and will fuel calls for the mercy killing of stock options.

In coming days, you should expect to see banner headlines screaming: "Pay For No Pulse" and "Can't Fog a Mirror Grant." Leading the parade, Columbia Law Professor John Coffee dryly quipped to the WSJ this am that "trying to incentivize a corpse suggests (the board) was not complying with the spirit of shareholder-approved stock-option plans." I checked the plan text and I can say that Jack is right, shareholders didn't authorize Sixth Sense grants.

Shareholders looking for those to blame for the posthumous payout should push to learn the name of the compensation consultant who apparently received options in lieu of his or her fee (also not properly accounted for) and "directly participated in the options dating process." A career death penalty would be the appropriate investor response.

Two directors, who saw the "I pay dead people" grants take place on their watch, have surrendered their seats on several key boardroom panels. Shareholders might wonder why these directors haven't been shown the boardroom exit door.

Cablevison continues to earn its reputation as one of the worst governed companies in the US. The Zombie grant practices on display here are additional proof that the company's governance practices have been spirited away.

What's your view?

The WSJ has an interesting article today titled, "Proxy-Voting Systems Improve, But Investors Still Face Hurdles." The piece discusses the Asian Corporate Governance Association's (ACGA) Asian Proxy Voting Survey 2006, which addresses the obstacles shareholders face when voting in Asia.

According to the WSJ's summary of the report, often times institutions in Asia don't bother to vote due to cumbersome procedures and out of apathy. The ACGA estimates that no more than 20% to 30% of minority investors vote, however this is expected to change as foreign holdings in Asia rise.

What are your thoughts on proxy voting in Asia? We welcome your comments.

With the new Securities and Exchange Commission rules to enhance disclosure of executive compensation at U.S. companies, many domestic and international institutional investors are sharpening their focus on pay policies, practices, and disclosure requirements in overseas markets.

What they are finding is that while many markets lag far behind U.S. standards of compensation disclosure, some are, arguably, more advanced because, analysts believe, shareholders have a say on compensation policies.

While more companies are agreeing to submit future "poison pill" plans to a shareholder vote or modifying existing ones to make them more palatable, some individual investors are pressing ahead with shareholder proposals--including binding resolutions seeking bylaw or certificate of incorporation changes--to get companies to submit future defenses to a shareholder vote.

A case in point is the Aug. 21 announcement by Pep Boys, the automotive aftermarket retail and service chain, that it will modify its poison pill after reaching an agreement to resolve a proxy fight with Barington Capital Group, which holds a 9.9 percent stake in the company. As part of the agreement, the dissidents will get four director nominees at the company's Oct. 19 annual meeting.

Pep Boys said it will amend its anti-takeover plan to include a provision that requires a committee of independent directors to meet every three years to review the plan and determine whether the plan should be terminated or revised. The proposed change also calls for the elimination of the so-called "modified slow-hand provision," which requires a vote by directors unrelated to a potential acquirer to redeem the pill, and in its place permit the redemption of the plan by the entire board.

Corporations measure their performance all the time. In addition to public announcements of their financial performance as required by government regulations, corporations perform a wide-range of internal and external assessments of performance, from brand value analyses and product comparisons, to investor perception studies or customer satisfaction surveys. All of these analyses are important in helping a corporation manage its business, particularly with public perception and positioning itself in relation to peer companies. Due to its importance in driving investor and public perception, corporate issuers would also be well served to perform periodic assessments of corporate governance performance.

Why Assess Corporate Governance?
ISS' recent Global Investor study found that 70% of institutional investors describe the corporate governance of their portfolio companies as important. With this level of investor interest, demonstrating good corporate governance should be a priority for all issuers. Assessments, either internal or by third parties, can be a useful tool in this regard.

Assessments could also be useful in demonstrating corporate governance performance to other stakeholders, including officer and director liability insurance providers, credit rating agencies and regulatory agencies. In countries such as Austria, Belgium and Turkey, periodic assessments are included in Corporate Governance Codes. In some cases, results of such assessments need to be published as part of the issuer's annual report or otherwise made available to the public. All over Europe, the general notion of "comply or explain," under which issuers comply with a given code, or provide a public explanation for deviations from the code, supports the idea of periodic assessments of corporate governance practices.

As news continues to develop in the story of Hewlett-Packard Co.'s board, shareholders await the fate of board members, particularly the H-P board's Chair Patricia Dunn. At issue is the board's conduct during the investigation of its own board members regarding leaks to the media, the use of investigation tactics known as "pretexting," and the possible criminal and civil legal exposure that those tactics present. With H-P's annual meeting typically being held in March, there is no immediate opportunity on the horizon for shareholders to weigh in on the current dysfunction in the board room. We invite you to share your comments on the board's actions in this blog.

From a corporate governance perspective, we are usually exposed to disagreements between boards and their shareholders, shareholders and management, or boards and CEOs. Rarely have shareholders seen boardroom infighting to such a significant degree and in such a public light. But as pressures increase in boardrooms, it is likely that we will continue to see public boardroom disagreements. However, the investigation conducted by H-P's board goes beyond a boardroom disagreement. What could be more dysfunctional than board members investigating each other? The job of a public company director is already difficult and demanding. Do board members need to add to the list - the inability to have a dissenting opinion and the feeling that their fellow board members are tracking their phone logs?

When the results of the investigation were reviewed by the board last May, Director Keyworth was asked to resign. He refused, but he won't be renominated. In at least one respect, Keyworth got it right. In his refusal to resign, he said that he was elected by shareholders. Does the H-P nominating committee deserve a withhold vote for their swift refusal to renominate Keyworth? What is your opinion about the actions of Director Perkins (previously Chair of the Nominating Committee)? Slamming the briefcase and quitting in anger might have been the best move for Perkins, but was it the best move for the shareholders that he was elected to represent? What is the best course of action for board members when faced with a significant disagreement on the board? Does the entire board deserve a "vote of no confidence?"

A possible scenario is that the board's Chair Dunn will emerge to take the fall for the scandal. If Dunn is ousted, CEO Hurd may emerge in the combined Chair/CEO role. The significant share price rise during Hurd's 18 month tenure may inoculate him from the current crisis and give him an opportunity to help reshape a board that obviously needs better leadership. But would combining the chair and CEO roles be in shareholders' best interest? With all of the distraction going on in the boardroom and no voting opportunity until next March, we can only wonder whether this board is capable of doing the job for which it was elected - to represent shareholders.

In its September 5 opinion granting shareholders the right to place proxy access proposals on company proxy statements, the Second U.S. Circuit Court of Appeals was critical of the SEC staff's lack of support for varied interpretations of Rule 14a-8 (i-8). In his decision, Judge Wesley notes, "Although the SEC has substantial discretion to adopt new interpretations of its own regulations in light of, for example, changes in the capital markets or even simply because of a shift in the Commission's regulatory approach, it nevertheless has a 'duty to explain its departure from prior norms.'"

One of the arguments in the case depended on what the interpretation of the word "an" was. The regulation allows proposals to be omitted if they "relate to an election of directors." The opinion states that the language of the regulation was ambiguous. AFSCME argued that the rule was meant to address particular elections but the court also considered the interpretation of American International Group (AIG) and the SEC's amicus brief which argued for a "comparatively broader exclusion, one covering 'a particular election or elections generally.'" Given the difficulty of interpreting the article's meaning in this sentence, the court then looked at past interpretations of the regulation. Of particular importance was a statement published in 1976, the last time the SEC revised the election exclusion.

Since that time, according to the court, the regulation has not been applied consistently. According to the opinion, the SEC's amicus brief did not discuss action prior to 1990 and "characterize[d] the intermittent post-1990 no action letters which continued to apply the pre-1990 position as mere 'mistake[s.]'" The decision notes, "Although we are willing to afford the Commission considerable latitude in explaining departures from prior interpretations, its reasoned analysis must consist of something more that mea culpas."

The SEC was quick to respond. In a September 7 comment, Chairman Cox noted that shareholders rights in proxy process "are best secured under consistent national application of Rule 14a-8 to shareholder proposals." He added, "To provide certainty with regard to shareholder proposals in every judicial circuit, I have directed the staff to prepare recommendations for revisions to Rule 14a-8 that will assure its consistent nationwide application."

Reaction to the decision, and to the SEC's plan to revisit proxy access, was immediate. Not surprisingly, AFSCME was thrilled, with President Gerald McEntee calling the decision "hugely significant for shareholders." He added, "This ruling can give shareholders a meaningful voice in board elections by opening up the director nominating process. Proxy access is considered the "holy grail" of corporate governance reform because it offers shareholders the opportunity to change the composition of boards. This ruling will make directors think twice before they put their own interests above the interests of their shareholders."

Harvard Law School Professor Lucian Bebchuk, who filed a brief in support of AFSCME's appeal with four other Harvard professors, characterized the decision as a "very strong outcome" and pointed out that the proxy rules exist to "facilitate the ability of shareholders to participate in corporate decision making."

Damon Silvers, AFL-CIO Associate General Counsel welcomed the SEC's announcement that it will be reviewing the proxy access rule, and issue a staff proposal for public comment. "I think investors would welcome a broad reopening of proxy access by the commission, particularly in light of failures of corporate boards in recent years, most recently the option disaster. I'm sure there are some in the corporate community that will be looking to take rights away from shareholders in this area, especially after the 2nd Circuit affirmed that shareholders do indeed have these rights. I'm sure that's not where Chairman Cox would want the commission to go."

Are governance improvements by U.S. companies leading to less securities litigation?

The number of new securities class-action lawsuits this year is on pace for a 31 percent decline from 2005, according to a mid-year report by Stanford Law School and Cornerstone Research.

"While we lack the data necessary to determine the precise cause of the slowdown, the most intriguing hypothesis is that extensive and expensive corporate efforts to improve governance and accounting have reduced plaintiffs' ability to allege fraud," Stanford Law Professor Joseph Grundfest, who is a former commissioner of the Securities and Exchange Commission, said in a press release on the report.

As of June 30, investors had filed 61 "traditional" securities class actions (which excludes IPO, analyst, mutual fund, and derivative cases), the Stanford-Cornerstone report stated. At that pace, 123 cases will be brought this year, down from 179 securities lawsuits in 2005 and 213 cases in 2004. That 2006 total would be 36 percent less than the historical average of 194 cases per year from 1996 to 2005, according to the report.

Most U.S. companies have significantly improved their governance practices to comply with the Sarbanes-Oxley Act of 2002 and the stricter New York Stock Exchange and Nasdaq listing standards.

"I think companies are a lot more careful than they were a couple of years ago," Charles Elson, a law professor at the University of Delaware who also serves on company boards, told SCAS Alert. "The reason [class action suits] are down is it's like the python absorbing the mouse. It took a while for Enron and the other cases to filter their way through the pipeline."

The prevalence of professional non-executive directors at Australia's largest companies is growing, according to a recent study commissioned by the Australian Council of Super Investors (ACSI) and conducted by ISS Australia.

The study, which looked at several key corporate governance features detailed in the most recent annual report filing, focused on firms listed on the Australian Stock Exchange's (ASX) top-tier S&P/ASX 100 index. For the majority of companies, the most recent annual report covered the financial year ending June 30, 2005. For others, annual reports are for the year ended Sept. 30, 2005, or Dec. 31, 2005.