Do you want to hear about the latest developments on say on pay or compensation disclosure best practices? RiskMetrics Group has just posted an interview on trends in executive compensation with Carol Bowie of RiskMetrics Group's Governance Institute and Stephen Deane of RiskMetrics Group's Governance Exchange Team. The discussion covers where the say on pay issue is headed, how performance-based stock options did during the 2007 proxy season and emerging compensation trends. Stephen Deane specifically discusses best practices in compensation disclosure based on his new report, Compensation Disclosure: Best Practices and Examples.

To listen to the interview, please visit RiskMetrics Group's 2007 Fall Leadership Interview Series web page.

As a supplement to ISS Governance Services' recently released 2007 Postseason Report, we've published an article titled, Tracking Progress: A Look at Global Governance Developments, which summarizes corporate governance developments in a handful of international capital markets. The overview looks at key legal and regulatory changes in markets such as Denmark, Italy, the Netherlands, Poland, and South Africa, noting, for example, the adoption of a new corporate governance regime by Consob, the Italian regulator, as well as Dutch plans to lower shareholding disclosure thresholds from 5 percent to 3 percent. The article also examines governance developments in Belgium, Greece, and Singapore.

Notably, the article contains interviews with good governance advocates from Hong Kong, Switzerland and Turkey. David Webb, editor of webb-site.com, details changes affecting minority shareholder rights as well as other key governance developments in Hong Kong, while Dominique Biedermann, managing director of the Ethos Foundation, shares insights on recent controversies over executive compensation in Switzerland. Meanwhile, Prof. Melsa Ararat of Sabanci University in Istanbul discusses recent developments in the Turkish market and details an Organization for Economic Cooperation and Development report gauging the efficacy of governance in that developing capital market.

To read the article, please visit "News Articles" on the Trends in Corporate Governance Section of RiskMetrics Group's Knowledge Center.

Governance changes ranging from the separation of the chairman and CEO positions to executive pay reforms are among the demands on Countrywide Financial made by two U.S. labor groups.

The American Federation of State, County, and Municipal Employees (AFSCME) and the CtW Investment Group both have urged Countrywide's board to undertake reforms, root out possible fraud, and improve pay practices at the Calabasas, California-based mortgage financing company.

In an Oct. 19 letter to lead director Harley Snyder, CtW Investment Group, the investing arm of the Change to Win labor federation, asked Countrywide founder and CEO Angelo Mozilo to resign.

"While Mr. Mozilo played an instrumental role in building Countrywide into the nation's largest mortgage lender, he has failed to provide leadership as the company attempts to navigate its way out of the current U.S. mortgage crisis," wrote William Patterson, the CtW Investment Group's executive director.

Countrywide representatives did not return calls seeking comment on the union funds' letters.

Given the attention that Countrywide has received from investors, it appears likely that shareholders will file a variety of pay-related proposals for the company's 2008 annual meeting, likely to be held in mid-June. The proposal-filing deadline is Dec. 31, so it's not yet clear which proposals will be submitted.

AFSCME plans to re-file a "say on pay" resolution at Countrywide that seeks an annual investor vote on pay practices. That proposal received 34.7 percent support this year.

"Everyone can be assured that Countrywide will be held accountable to shareholders for the meltdown of the company and the abusive pay practices," Richard Ferlauto, AFSCME's director of pension and benefit policy, told Risk & Governance Weekly.

Ferlauto added that Countrywide would likely be the "Home Depot of 2008."

In 2006, 10 of Home Depot's 11 directors received more than 30 percent opposition amid investor complaints over the home-improvement retailer's pay practices. The company responded by replacing its chief executive and adopting various governance reforms, including a supermajority board vote for CEO pay packages.

Countrywide also must fill a board vacancy. On Oct. 24, Henry G. Cisneros, a former secretary of Housing and Urban Development under President Bill Clinton, resigned from Countrywide's board. Cisneros, who said he had "enormous confidence" in the company's leadership, said he resigned to focus on his chairmanship of CitiView, a firm that finances urban homebuilders, according to the Reuters news service.

After Cisneros' announcement, CtW Investment Group called on Countrywide's board to work openly with shareholders to find a replacement. In an Oct. 25 press release, the labor investor urged the company to appoint Lynn Turner, a former chief accountant at the Securities and Exchange Commission.

"Cisneros' successor must not be chosen through a closed-door process aimed at further entrenching the current CEO," Patterson said in the CtW press release. "The new director must come from outside the web of Mozilo relationships and be fully prepared to guide Countrywide Financial through a change in leadership."

There are a lot of market questions circulating right now whether the risk models worked properly given the current credit crisis. However, in assessing the models, we need to first decide which market we're trying to analyze. The most visible losses came in subprime-backed ABS and later in quantitative equity funds. It seems the story in equity funds is somewhat mode-related, but it pertains to the specifics of the models the funds were using to trade. Given this, let's focus on the current subprime story

To frame this discussion, let's first define what we mean by Value-at-Risk (VaR) models and stress tests. Broadly, let's say that VaR models do two things: 1) they look at the historical data on various market factors and try to apply statistical methods to forecast how much those factors might move in the future and; 2) they relate the moves in market factors to the moves in specific investment holdings. For example, for a portfolio of government bonds, the model first forecasts where the interest rate curve might go, and then it relates moves in the curve to price changes for specific bonds. The output of a VaR-like model is a statistical distribution that we forecast for our portfolio.

We can think of stress testing in the same framework, but for the first part (forecasting where the market factors will go), we replace statistical models with subjective scenarios. So rather than using a model to forecast how much the interest rate curve might move, we come up with specific scenarios we are particularly concerned with. How one decides on scenarios is much more art than science, and varies significantly across institutions. The second piece – relating market factor moves to specific holdings – is exactly the same as above. The output of stress testing is a series of answers to questions like "What would happen to my portfolio if …?"

So did stress tests work? If by that we mean did institutions test scenarios that were representative of what ultimately happened, there are probably a lot of answers. The events were hardly a complete surprise, so some institutions probably had a pretty good sense of what was about to occur.

Did VaR models work? The answer does depend on which model you mean, but forecasts of market factors were actually reasonably good, given the nature of the events. One specific case we tested was the spread on the ABX (an index of subprime-backed ABS securities). We ran a simple backtest applying one of our statistical models to the ABX spreads. In the test, we forecast on each day how large we think the 99% worst case move might be for the following day. We then observe what that actual move is. On average, if the model is working well, you would expect that the actual move is larger than our forecast 1% of the time. Call these days excession days. Over a year (250 trading days), this means on average 2.5 excession days. For the three of the five ABX contracts, we observed between one and five excession days, consistent with the model performing well. For the other two contracts, we observed five and seven excession days, a level that raises some questions, but does not call for dismissing the model.

The piece I have not addressed yet is the second piece of both models: the connection between market factors and specific investments. This is where there were significant problems. The bottom line is that many ABS securities do not trade at all, so there is no way to observe how they relate to market factors, as we can do with things like government bonds. So typically, the simple act of assessing the value of an ABS contract cannot be done by looking at where it trades, but rather relies on modeling the fundamental building blocks of the security and making assumptions about things like the market's appetite for such securities. This poses two big problems: the fundamental modeling is operationally difficult, due to the complexity of the structures; and we wind up only guessing at the market's appetite for the security, and certainly not factoring in the possibility that this appetite might change. The consequence here is that institutions either had no valuation capability at all, or else had to rely on models that ignored supply and demand effects going on in the market. In the end, we went through a period where the market turned against all subprime ABS, regardless of their fundamentals, which was something none of the valuation models even attempted to account for.

So in the end, the big lesson from this summer was about dealing with securities which do not trade and for which even coming up with a valuation is difficult. In a sense, the modeling problems are even more basic than stress tests or VaR.

Securities and Exchange Commission Chairman Christopher Cox still plans to hold a vote on a competing set of proxy access rules in November, even though the SEC likely won't have a full slate of commissioners.

Cox said he wants the SEC to approve a final nationwide rule on proxy access--the ability of investors to nominate board candidates to appear on corporate proxy statements--before the end of the year. "The commitment we have repeatedly made is to have [a rule] in place," Cox told reporters on Oct. 12, according to news reports. "The process remains the same."

Investor advocates and prominent Democratic lawmakers have urged the SEC to hold off voting on proxy access and possible restrictions on shareholder proposals until the agency has a full set of five commissioners. Commissioner Roel Campos left the SEC in September. The commission's only other Democrat, Annette Nazareth, has announced that she will not seek another term, but she has not disclosed her departure date.

In July, Nazareth and Campos joined with Cox in a 3-2 vote to issue a draft rule to allow shareholder groups with a 5 percent stake to file access bylaw proposals. The two other Republicans on the SEC voted for a draft rule that would bar those proposals. Proxy access advocates and governance observers predict that a commission without full Democratic representation may vote to prohibit proxy access.

After speaking at a conference of the National Association of Corporate Directors on Oct. 16, Rep. Barney Frank told reporters that it would be a "mistake" for the short-handed commission to vote on the issue. Proxy access is "much too important to do without a full commission," said Frank, a Massachusetts Democrat who chairs the House Committee on Financial Services.

Senator Christopher Dodd, who chairs the Senate Banking Committee, has written to Cox to urge the SEC not to take action until at least one of the two Democratic slots is filled, according to news reports.

Frank has urged the SEC to scrap its two proposals and start over. "Substantially, I think that both proposals have problems," he said this week.

Asked if he would introduce legislation if the SEC does vote next month to block access, Frank said it was probably too late in the current session of Congress to do that. However, Frank did say he could seek to attach a proxy access amendment to an appropriations bill.

Frank did praise Cox's efforts to build a consensus on the issue, which has sharply divided companies and investor advocates. In comment letters to the agency, corporate groups warned that proxy access would disrupt board cohesion and lead to "special interest" directors. While investors contend that access would help ensure accountability, they argue that the SEC's proposed ownership and disclosure requirements for filing an access resolution would be too onerous.

Damon Silvers, associate counsel for the AFL-CIO, said the labor federation has been in contact with Cox to express its views that the agency should not vote on proxy access next month. "Cox is trying to navigate politically treacherous waters," Silvers told Risk & Governance Weekly. "If Cox does have a vote, I expect that it won't be on anything meaningful."

Ernst and Young yesterday announced the publication of their Global Hedge Fund Survey 2007. To read some of the highlights, please click here. 100 of the top global hedge funds were polled for the survey.

Some interesting findings:

* Managers believe valuation transparency is the greatest regulatory challenge and the second largest area of operational risk. Therefore "greater emphasis is being placed in a consistent approach to pricing and reporting on portfolios."

* 58% of respondents reported that Risk Management technology systems will an area in which they will be investing heavily in the next two years.

* Reporting tied with client service for the #1 service for hedge funds prime brokers should focus on improving over two years.

RiskMetrics Group today announced its Fall 2007 Leadership Interview Series. The series is designed as a knowledge sharing initiative featuring brief audio interviews with experts in the important areas of risk and governance.

The schedule for the Leadership Interview Series includes interviews with a number of RiskMetrics Group and various industry experts on a wide-range of topics including: accounting practices, proxy access, executive compensation disclosure practices and context sensitive risk measurement and stress testing among other areas.

The first interview, Trends in Egregious Accounting Practices, with Marc Siegel, Head of Global Accounting Research at RiskMetrics Group, is now available here. To access the interviews directly and view the current Fall Leadership Interview Series schedule, please click here.

RiskMetrics Group's ISS Governance Services unit has just released a new white paper - "Proposed Best Practices in Executive Compensation Disclosure" - which is an early attempt to evaluate the clarity and effectiveness of the new disclosures. By proposing potential best-practice standards for these disclosures, we are hoping to stimulate thought and discussion - not only about the mechanics of disclosure, but also about how investors and companies hope executive compensation should work. Rather than providing a final word on best practices, this paper aims to foster discussion among three key groups - corporate directors, executives and investors - that will lead to the eventual development of widely accepted disclosure standards.

To access the study, please visit "White Papers" on the Trends in Corporate Governance section of RiskMetrics Group's Knowledge Center.

As part of its policy formulation process, ISS Governance Services' Global Policy Board invites you to share your thoughts on ten important corporate governance issues, which represent some of our policy changes under consideration for 2008. As investors and issuers engage more actively on governance issues, it's vital to understand the perspectives of a broad range of market participants. As such, we believe additional market feedback on these topics will benefit institutional investors.

Comments are requested for the following policies, covering audit, board, compensation and social issues:

* Aggressive Accounting Practices (U.S.)
* Cumulative Voting (U.S.)
* Director Attendance (Japan)
* Independent Chair (U.S.)
* Non-Employee Director Limit on Equity Plan Participation (Canada)
* Stock Options for Non-Executive Directors (Belgium and the Netherlands)
* Poor Pay Practices (U.S.)
* Stock Option Overhang in ISS Governance Services' Binomial Option Pricing Model (U.S.)
* Say on Pay – Principles for Evaluating Remuneration (U.S. and International)
* Product Safety (U.S.)

To provide feedback, and to learn more about how your comments will be used in the policy formulation process, visit ISS Governance Services' Policy Gateway.

In letters to the Securities and Exchange Commission, individual and institutional investors voiced opposition to any new limits on non-binding shareholder proposals.

Of the more than 15,000 letters the SEC received during a public comment period that ended Oct. 2, more than 10,000 of them defended the rights of investors to file non-binding proposals at public companies. Many of those letters stemmed from a joint campaign by the Social Investment Forum and the Interfaith Center on Corporate Responsibility, which set up a Web site (www.SaveShareholderRights.org) to encourage investors to contact the SEC.

Specifically, shareholders opposed higher thresholds for resubmission of proposals, greater stock ownership requirements to file resolutions, and the possibility of companies adopting bylaws to "opt out" of the shareholder proposal process altogether. While the SEC has not endorsed any specific limits, the agency sought public comment on a range of suggestions to reduce the number of non-binding proposals that appear on corporate proxy statements each year. These suggestions were included in a draft proxy access rule that was released by the SEC in July.

The SEC sought input on possible new limits on shareholder proposals after several corporate advocates and law professors expressed concern at agency roundtables in May about the time and expense that companies must devote to responding to investor resolutions. In addition, SEC staff members have expressed a desire to reduce their role under Rule 14a-8 in making decisions on corporate "no action" requests to omit proposals.

As of Sept. 15, 656 investor proposals had appeared on 2007 U.S. corporate ballots, up from 581 at the same time last year, according to data compiled by RiskMetrics Group's Governance Research Service (GRS), which covers about 4,500 U.S. companies. All but 2 percent of the 2007 proposals to go to a vote were "precatory," or non-binding.

In their letters to the SEC, the AFL-CIO labor federation and the American Federation of State, County, and Municipal Employees (AFSCME), characterized the potential limits on non-binding proposals as a "rollback" of shareholder rights.

The Council of Institutional Investors chided commissioners for considering limits on these proposals. "We are surprised and disappointed that at a time when companies are improving their corporate governance policies in response to shareholder precatory resolutions in record numbers, the [p]roposed [a]mendments appear designed to inhibit shareowners from pursuing these proposals," wrote Jeff Mahoney, CII's general counsel, in the group's comment letter.

It appears that companies have become more willing to engage with resolution proponents. As of Sept. 15, investors had withdrawn 306 proposals on various governance and social topics, often after constructive discussions with company officials, according to GRS data. That total was 27 percent of the 1,145 proposals tracked by GRS this year. During that same period in 2006, investors withdrew 189 proposals, or 20 percent of the 947 proposals tracked by GRS.

At the same time, investors have continued to give strong support to shareholder proposals that go to a vote. As of Sept. 15, 109 proposals had won a majority of votes cast, according to GRS data.

However, few pro-business letters to the SEC credited shareholder resolutions with spurring governance progress. "Five years after Enron and WorldCom, the capital markets are well into a cycle of unprecedented vigor, and no one seriously argues that shareholder activism, governance grandstanding, or the Sarbanes-Oxley Act deserves the credit," according to the law firm of Wachtell, Lipton, Rosen & Katz, which represents corporations in governance matters and securities cases.

International investors also opposed possible restrictions on U.S. shareholder rights. "We oppose the rollback of shareholder rights … which would only reinforce the growing belief amongst global investors that the U.S. regulatory environment favors company insiders at the expense of outside shareholders," according to a letter from nine investor groups from the United Kingdom and Australia.

During a hearing this week, most members of the U.S. Supreme Court appeared skeptical of investors' arguments in a closely watched securities case over the liability of investment banks, vendors, and others who help companies mislead shareholders.

The high court heard oral arguments Oct. 9 in Stoneridge Investment Partners v. Scientific-Atlanta, a case that arose from a class-action lawsuit by Charter Communications investors against two vendors who allegedly helped the cable television company improve its reported earnings.

The case, which one industry group has called the most important securities case in a generation, has attracted at least 30 briefs from investor advocates, labor funds, state officials, business interests, lawmakers, and former Securities and Exchange Commission officials. Donald Langevoort, a Georgetown University law professor, has compared the case to the high court's landmark Roe v. Wade ruling on abortion.

The Supreme Court's ruling in Stoneridge potentially could limit the ability of other investors to bring claims against other secondary actors, including Enron's and HealthSouth's former investment bankers. Billions of dollars may be at stake, as investment banks have funded most of the securities settlements obtained by WorldCom and Enron investors.

While the Supreme Court ruled in 1994 that investors couldn't bring securities fraud claims against "aiders" and "abettors," the Stoneridge investors contend that they should be able to sue firms that knowingly participate with company officials in schemes to defraud shareholders, even if those firms make no misleading statements to investors.

Business interests warn that this "scheme liability" theory would lead to more lawsuits and undermine U.S. competitiveness. They argue that a ruling for investors would contravene the intent of Congress, which corporate advocates contend, has only authorized the SEC to bring claims against secondary actors.

Investor advocates argue that scheme liability is necessary to maintain the integrity of U.S. capital markets. "If the Supreme Court rejects scheme liability in the Stoneridge case, in the future, banks, accountants, law firms, and others who intentionally commit fraud in order to deceive the investing public will be immune from any responsibility to their victims," the University of California, the lead investor plaintiff in the federal Enron class section, said in a press release.

While the justices' questions during oral arguments do not always signal how they may rule in a given case, most of them, except for Justices Ruth Bader Ginsburg and David Souter, appeared unsympathetic to the Charter investors' arguments.

Chief Justice John Roberts said the court should defer to Congress, which acted to limit class-action suits by investors in late 1990s. "Congress has kind of taken over for us . . . My suggestion is that we should get out of the business of expanding" securities fraud liability, Roberts told attorney Stanley M. Grossman, who represents the Charter investors.

Justice Anthony Kennedy expressed concern about the potentially broad scope of the scheme liability theory. "[T]here are any number of kickbacks and mismanagements and petty frauds that go on in business, and business people know that any publicly held company's shares are going to be affected by its profits, so I see no limitation to your proposal" for determining liability, Kennedy told Grossman.

Six of the justices who decided the 1994 case are still on the court. Those justices split 3-3 on whether to expand liability under Section 10(b) the Securities Exchange Act of 1934 to include those who aid or abet primary violators. The court's two newest appointees, Roberts and Justice Samuel Alito Jr., generally have sided with business interests in high profile cases. Justice Stephen Breyer, who has reported owning the stock of Scientific-Atlanta's parent, Cisco Systems, is not participating in the case.

The Supreme Court likely will issue a decision in the Stoneridge case by next June.

The U.S. Supreme Court will hear arguments today in Stoneridge Investment Partners v. Scientific-Atlanta, a high-profile case that concerns the liability of bankers, vendors, and other third parties who help companies commit securities fraud.

The Stoneridge case stems from claims by shareholders of Charter Communications against Motorola and Scientific-Atlanta, which manufactured set-top boxes used by Charter's cable television subscribers. The investors allege that the two vendors engaged in "wash" transactions in 2000 to help Charter meet its annual operating cash flow goals.

The closely watched case, which one industry group has called "the most important case in a generation," has attracted 30 amicus briefs from investor advocates, state officials, and industry groups.

The Council of Institutional Investors, the North American Securities Administrators Association, the University of California, the New York State Teachers' Retirement System, the Change to Win labor federation, and 30 state attorneys general have filed briefs in support of investors. The Bush administration disregarded the recommendation of the Securities and Exchange Commission and filed a brief in support of the Charter vendors.

While the Supreme Court previously barred suits against "aiders and abettors" in its 1994 Central Bank of Denver decision, the Charter investors argue that they should be able to bring "scheme liability" claims against vendors, bankers, and others who knowingly participate in transactions that help companies mislead shareholders, even if the third parties didn't publicly mislead anyone. Billions of dollars may be at stake in the case, as the high court's decision likely will have far-reaching implications and affect the ability of Enron investors to pursue a class lawsuit against the company's former investment banks.

On Sept. 20, the Supreme Court announced that Chief Justice John Roberts would take part in the court's deliberations in Stoneridge. Roberts, along with Justice Stephen Breyer, earlier recused himself from the high court's decision on whether to hear the case. Both justices reported in their 2006 financial disclosure forms that they own shares in Cisco Systems, the parent of Scientific-Atlanta, Legal Times reported. The Supreme Court did not disclose the basis for the chief justice's decision to rejoin the case.

Roberts' participation in the case presumably will help the defendants. During the past year, the chief justice joined court majorities in several rulings that favored business interests.

After two years of below-average filings of securities lawsuits, has that trend reversed?

Between Aug. 1 and Sept. 21, investors sued 37 companies, according to The D&O Diary, a weblog written by Kevin LaCroix, a lawyer with OakBridge Insurance Services. That rate of new lawsuits translates to an annual total of 296, which well exceeds historical averages. During the week of Sept. 17 to 21, eight companies were hit with first-time lawsuits, LaCroix noted.

Investors filed most of these new suits against subprime lenders and homebuilders, which saw their shares plunge after the collapse of the subprime mortgage market earlier this year. Investors also have targeted Moody's and McGraw-Hill, the parent of Standard & Poor's, accusing the rating firms of giving excessively high ratings to mortgage-backed securities. Investors also sued Bear Stearns, which operated two hedge funds that collapsed after investing in subprime mortgage securities.

In addition, lender Countrywide, homebuilder Beazer Homes, and Freemont General have been sued by their own employees over losses they suffered in their 401(k) accounts through their holding of company shares.

Overall, shareholders had filed 130 federal securities lawsuits as of late September, up from 100 during the same period in 2006, according to Securities Class Action Services data.

Meanwhile, defense law firms, which last year touted new practice groups to address stock option backdating, have been gearing up teams of professionals to address the fallout from the subprime mortgage market.

A Quiet First Half of 2007
This surge in new securities cases follows a rather quiet first six months of 2007, when investors brought lawsuits against 59 companies, according to a mid-year report released in July by Stanford Law School and Cornerstone Research. That total was 42 percent lower than the average filing rate from late 1996 through June 2005, and the first half of 2007 marked the fourth consecutive six-month period when new case filings have trailed that historical average, the report said. (For more on the Stanford-Cornerstone report, please see the August 2007 issue of the SCAS Alert.)

Another group of researchers, NERA Economic Consulting, recorded 76 federal cases as of June 30, and projected a total of 152 cases for the whole year. That total would be 12 percent more than the 136 cases in 2006, but it would still trail the more than 200 cases that were brought each year from 1997 to 2005, NERA noted in its mid-year report, which was released Sept. 13.

History suggests that the recent surge in lawsuits may be a temporary phenomenon, and future case filings may return to 2006 levels after investors file all their subprime-related lawsuits. For instance, the option backdating scandal spawned 22 federal securities lawsuits in 2006, but was the subject of just four lawsuits this year, the NERA report noted.

In 2001, investors filed more than 300 IPO-laddering cases, causing the total case filings to soar to 520, according to NERA. That surge in IPO-laddering cases was short-lived; during the next three years, total cases ranged from 251 to 280 per year, which were only slightly higher than the 237 to 270 cases filed annually in 1998 to 2000.

Unless the subprime mortgage crisis leads to a widespread collapse of corporate credit markets and a broader recession, it appears that the recent flurry of subprime-related lawsuits will result in just a temporary increase in litigation activity.

"Certainly, the collapse of the 1990s stock market bubble led to an active period of class action litigation filings and settlements--a similar drop in market values in the future might lead to a resurgence in filings, even in a post-[Sarbanes-Oxley Act] world," the NERA report noted.

Compensation is once again likely to top investors' list of issues to watch as the Australian annual meeting season gets underway.

There are about 1,700 listed companies in the country, with around 300 meetings of large-cap companies to take place between mid-October and mid-November.

Investors in Australia's public companies have an annual non-binding vote on the pay plan for top executives and non-executive directors, and Australian boards have been stepping up engagement with shareholders since those votes began in 2005. However, recent trends in compensation policy and regulation have investors keeping a closer eye on how companies give equity grants to executives and formulate performance-based pay.

All companies listed on the Australian Securities Exchange (ASX) are required to put any planned stock option grants for all directors (including executive directors) to a shareholder vote, according to ASX Listing Rule 10.14. The major exception to this rule--instituted in October 2005--concerns any shares bought on the market using company funds, because they are considered securities acquisitions. Shares purchased on-market (rather than created) cause no stock dilution, and therefore many companies did not disclose grants of securities bought on-market to shareholders.

The rule effectively coincided with the first releases of Rule 10.14 waivers granted to companies. According to documents the ASX began making public in February 2005, several companies had been obtaining listing rule waivers rather than put controversial equity grants to a vote.

The Australian Council of Superannuation Investors (ACSI), a non-profit advising group for the country's pension funds, pushed the ASX to mandate a vote on all equity grants except those involving salary sacrifice--when the director gives up some of his or her pay to purchase the shares.

"[R]equiring prior approval of equity grants … could reduce the potential for options being 'back-dated' or 'spring-loaded,'" the ACSI wrote in a comment letter in February. Options backdating is a phenomenon that is relatively unknown in Australia because of the standard of prior approval, but the ACSI fears that Rule 10.14 as it stands may lead to misdating of options to get better exercise prices.

Comment letters on the rule show a sharp divide along investor-issuer lines, with most companies advocating keeping the exception the way it is, and most investor groups pushing to refine or reverse it.

This year, investors are also watching the way companies shape long-term incentive plans for their senior executives.

In the past four years, the number of top 300 ASX-listed companies that link equity grants to total shareholder return (TSR) has risen. TSR incentive plans look at the change in share price plus dividend and capital, over three years, as a performance target.

When setting a TSR-based incentive, companies usually choose a set of peer firms in the same industry or same market capitalization for comparison. For instance, a plan may be structured so that if the three-year TSR is at the median of the peer companies, 50 percent of the incentive shares vest. If the company performs at the 75th percentile of the peer group, all shares will vest.

Standard & Poor's describes TSR performance hurdles as "the most transparent and accurate means of measuring and comparing the performance of companies." But Australian executives have begun to complain that the performance targets are too strict.

As this type of incentive plan is relatively new, executives have only begun to see incentive shares go unvested in the past year. A major concern among Australian companies is losing executives to private equity firms that are under no shareholder pressure to require performance-based pay. Some companies have indicated this year that they plan to ask shareholders to approve one-time retention payments for CEOs or institute time-vesting shares for some employees.

In the current credit environment, which European companies are more likely to be affected given their exposure to debt capital? To answer, RiskMetrics Group's Financial Research & Analysis team has sliced the universe of European companies (greater than $500 million market cap) in 3 different ways.

1) Companies which have higher short-term debt exposure and poor cash flow - We found 58 such companies, of which 5 had short-term debt in excess of 40% of their total capital.

2) Companies with overall high debt exposure and poor liquidity profile - These companies may potentially be in danger of breaching their debt covenants. We identify 28 such companies, of which 16 had negative free cash flow in either the last fiscal year or last 12 month period, or both.

3) Companies using debt capital to finance their acquisition driven growth - The current credit crunch may constrain these companies' near term growth prospects. We identify 18 such companies ; the ratio of debt/capital at three of these companies increased by more than 3000 bps in the last three years.

To learn more about European companies with higher exposures to an adverse credit environment , please join us for a webcast on Tuesday, October 9 at 11:30 a.m. EDT. We'll go over the findings from our new report, Identifying European Non-financial Companies with Potential higher Exposure to an Adverse Credit Environment. To register, please click here.

A survey released last week of 11 major capital markets in Asia finds Hong Kong to be tops when it comes to corporate governance practices, though more needs to be done regionally for Asian economies to catch up to governance standards in Europe and the United States.

The survey, CG Watch 2007, was produced jointly by brokerage house CLSA Asia-Pacific Markets and the Asian Corporate Governance Association, a Hong Kong-based good governance advocate. The survey, the groups' first since 2005 and the first to incorporate Japan, comprised 87 questions in five categories covering: corporate governance rules and practices; enforcement; political and regulatory environment; accounting and auditing standards; and corporate governance "culture."

Top-ranked Hong Kong was followed by Singapore, India, and Taiwan, with Japan rounding out the top five. Laggards included Indonesia and the Philippines which ranked last and second-to-last, respectively.

Hong Kong displaced Singapore atop the rankings because of "a palpable sense that the pace of policymaking [in Singapore] has slowed," the survey noted. "Hong Kong may not be attacking its problems with vigour or urgency, but at least it continues to progress." Hong Kong was also lauded for its efforts in the enforcement, political and regulatory environment category, and the corporate governance culture categories, while the survey noted that "its regulatory officials are well aware of the distance between local norms and international standards."

Newcomer Japan scored well in the categories of enforcement and culture, owing to recent company law changes and a new omnibus securities law dubbed "J-SOX." The survey points out, however, that Japan has far to go, given it "has no real concept of 'independent director,'" and lacks a code of corporate governance, unlike others surveyed. Ninth-ranked China, meanwhile, is praised for its achievement over the past two years in the regulatory realm, noting securities law and exchange listing rule changes that have helped shore-up governance practices, as well as efforts by officials to enhance the quality and quantity of English language material on regulatory Web sites.

Looking broadly, the survey warns that regulators, issuers, and investors have become complacent, placing less emphasis on corporate governance as capital markets in the region have roared in recent years. The lack of movement implies a "degree of regulatory perfection that does not yet exist in any Asian market," the survey's authors caution.

Copies of the report are available for purchase by contacting the Asian Corporate Governance Association.

RiskMetrics Group's ISS Governance Services unit today released its annual postseason report putting in context the most salient corporate governance issues and voting outcomes from the 2007 proxy season. Key themes from this year's proxy season include strong shareholder support for proposals seeking greater board accountability. Additionally, there was clear evidence that the effectiveness of shareholder-company engagement is increasing, as more than half of shareholder proposals on majority voting, stock option reforms and sustainability reporting were withdrawn by proponents after target companies took steps toward improved practices.

To hear more about the trends from proxy season 2007, the ISS Governance Services unit of RiskMetrics Group will hold a governance forum webcast on Tuesday, October 16 at 1 p.m. EDT. To register for the forum and download a copy of the 2007 Postseason Report, please click here.

Investors at Activision gave 69 percent support to a shareholder resolution asking for an annual advisory vote on executive compensation ("say on pay"), according to proponents.

Conrad MacKerron, director of the corporate social responsibility program at the As You Sow Foundation, reported the result--the highest ever for a "say on pay" proposal in the United States--after the company's annual meeting on Sept. 27.

Activision, a Santa Monica, California-based video-game maker, is now under formal investigation by the Securities and Exchange Commission in connection with the company's past stock-option granting practices.

In May, a special subcommittee of Activision's board found that about 63 percent of option grants made to former and current employees from 1997 to 2003 had been misdated. In many cases, grant dates reflecting the lowest or second-lowest exercise price for the month or year had been selected with the benefit of hindsight.

Even before the subcommittee presented its findings, the company replaced the director of human resources, dismissed its former outside counsel, and created a new "principal compliance officer" post. The officers and directors who had received misdated options that had already vested agreed to make up the difference in exercise price, per the subcommittee's recommendation.

The Activision result marks the seventh time this year that advisory pay vote measures have attained majority support. The proposal--now in its second year--has averaged 42.4 percent support over 42 meetings since January.