Investor calls for advisory votes on pay and other measures to reform executive compensation will resonate in 2008 as U.S. capital markets slide in the face of recession.

A network of investors, led by Boston-based Walden Asset Management and the American Federation of State, County and Municipal Employees, has so far filed more than 90 proposals calling for an advisory vote on pay, compared with 44 such resolutions at this time last year.

The network's membership--which ranges from retail shareholders to pension fund giants including the California Public Employees' Retirement System--also has grown from 2007. Nearly 75 investors have come together this year to file the measure at primarily large and medium-sized companies.

"Companies receiving the proposal include those where shareholders believe there has been non-performance, options backdating, and other major issues that shareowners need to address," Timothy Smith, senior vice president at Walden Asset Management, told Risk & Governance Weekly. Abbott Laboratories, Capital One, Lexmark and Wells Fargo are among those targeted.

Spokeswomen at Capital One and Wells Fargo declined to comment on the filings, while officials are Abbott Laboratories and Lexmark did not immediately respond to requests for comment.

The proposal, dubbed "say on pay," also will be filed at companies such as General Electric that are generally viewed positively by shareholders with respect to executive compensation and other facets of governance, according to Smith. "We believe [such companies] should provide leadership in adopting an advisory vote" on pay, said Smith, who also noted that dialogue on the issue has increased this year.

Governance watchers have in recent months called for increased communication between issuers and shareholders on a range of issues including compensation. "Improved communication and dialogue … may provide compensation committees with a broader perspective and balance in relation to the views provided by management," wrote Weil, Gotshal & Manges attorneys Ira M. Millstein, Holly J. Gregory, and Rebecca C. Grapsas in a memo to clients earlier this month. "It may also lessen the push for an advisory vote on executive compensation."

Last year, 20 companies and investors came together to form the "Working Group on the Advisory Vote on Executive Compensation" to study the issue.

Three companies--Par Pharmaceuticals, Verizon Communications, and Aflac–have so far taken steps to allow for advisory votes on pay following shareholder proposal filings in 2007 calling for the right. Aflac, the Georgia-based insurer, will be the first to give shareholders the vote when it holds its annual meeting on May 5. The company originally planned to allow for the vote in 2009.

Concerns over compensation in 2008 will not be limited to calls for advisory votes on pay, though. Novel proposals will include demands for companies to adopt a policy on the use of so-called 10b5-1 stock-selling plans, and those seeking to limit or bar tax gross-ups for senior executives. Another resolution seeks to place limits on executive employment agreements.

First year proposals generally do not fare as well as those in their second and third year, though this year may prove an exception.

"As the market declines, there'll be more support for compensation reform," notes Charles Elson, director of the University of Delaware's Weinberg Center for Corporate Governance. "The downturn will only fuel the efforts of shareholders."

Reports of record Wall Street bonuses at financial firms that sustained considerable losses in 2007 as a result of exposures to mortgage-related investments are likely to stimulate broad support for proposals tied to executive pay. Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Bear Stearns together awarded roughly $39 billion in year-end bonuses, exceeding the $36 billion distributed in 2006 when the industry reported all-time high profits, Bloomberg News reported.

CEOs at Morgan Stanley and Bear Stearns forfeited bonuses in light of bad bets on subprime mortgage-backed securities. That may mollify shareholders who are expected to vote on a range of proposals including those calling for strengthened links between pay and performance. Labor funds, led by the United Brotherhood of Carpenters' and Joiners of America, have so far filed more than 50 such resolutions at spring annual meetings.

The latest news out of Antarctica should send shock waves around the globe. Or perhaps I should say a tidal wave, because some of its glaciers are melting surprisingly fast and could start to swamp our coastal cities, where half the world's population lives, as the sea level rises. Owners of long-lived coastal assets–and those who insure them–should take heed.

As the last unpopulated and undeveloped continent on Earth, Antarctica hardly seems like a place worthy of much attention, but it is our world's canary in a coalmine. Just as the discovery of the "ozone hole" over Antarctica 20 years ago led to a ban on man-made chlorofluorocarbons, the latest discovery speaks to the need to clamp down on greenhouse gas emissions from fossil fuels that are contributing to this melting.

Until recently, scientists thought that Antarctica's climate and ice sheets would remain relatively stable and withstand the effects of global warming for at least many centuries. Now signs are that altered wind and ocean currents already are bringing warmer water to the continent's perimeter, eating away at Antarctica's frozen edges.

Especially vulnerable is the West Antarctic Ice Sheet, an area about the size of Texas, whose terrain is flat, shallow and mainly under sea level. As its boundary starts to melt, the effect is much like popping a cork from a bottle–unplugging a flow of ice that is hard to stop once it gets going. If all of the West Antarctic Ice Sheet were to melt, it would release enough freshwater to raise the global sea level by nearly 25 feet, flooding major urban areas like New York City, Florida's "Gold Coast" and California's Sacramento delta, to name but just a few U.S. examples.

As the 2008 proxy season looms, a growing number of U.S. companies are finding themselves in the crosshairs of investors troubled by their involvement in, or exposure to, the subprime mortgage crisis that has roiled capital markets.

A number of labor funds are targeting homebuilders with mortgage lending operations as well as financial firms whose investments in mortgage-backed securities have resulted in deep losses. Shareholder proposals at those firms include calls to establish committees to review lending operations, as well as those to establish new policies on dealings with ratings agencies.

"Anyone who said [subprime lending] didn't relate to shareholder value now looks silly," noted AFL-CIO Associate General Counsel Damon Silvers, alluding to efforts by social activists in recent years to curb "predatory" lending practices.

To date, the AFL-CIO has not filed any subprime-related proposals, though labor federation officials suggest the focus on the issue may change in the coming months.

"As annual meetings approach, and more information is available … that suggests certain people weren't doing their jobs in a way that cost investors a lot of money, we're going to see a focus on those people," Silvers warned in a December interview.

The CtW Investment Group, the investment arm of the Change to Win labor coalition, announced it would target the five members of financial giant Citigroup's audit committee as well as the chair of Merrill Lynch's nominating and governance committee following the release of fourth quarter 2007 results that included write-downs in the billions for subprime losses.

"Citigroup and several other major banks were at the epicenter of the mortgage meltdown," CtW Investment Group Executive Director William Patterson noted in a statement. "This proxy season, the [group] will be working to hold individual directors at these companies accountable for their performance." (For more on this story, please see the "Risk Management" section of this week's edition of Risk & Governance Weekly.)

Other labor funds, meanwhile, are addressing subprime-related concerns via shareholder proposals. The Laborers' International Union of North America, or LIUNA, has filed resolutions at a half dozen companies that call for enhanced disclosure of lending practices, according to RiskMetrics records. Companies including the Ryland Group and Beazer Homes are not providing sufficient information on their mortgage practices for shareholders to adequately monitor risk, LIUNA argues.

The labor fund cites a March 2007 Business Week article noting that federal investigators have opened a broad criminal probe into "lending practices, some financial transactions, and other dealings" at Beazer Homes to underscore the need for additional disclosures. The resolution to the Atlanta-based homebuilder calls on its board to report within 90 days of the annual meeting on lending practices and to specifically discuss the following:

The extent of the company's mortgage originations in subprime, Alt-A, jumbo, and "exotic" mortgages including piggybacks/second mortgages, interest only loans, negative amortization loans, and low/no documentation loans, as well as what percentage of its mortgage originations may be classified as such mortgages;
Which of the company's geographic markets are most reliant on those mortgages;
The identity of the purchasers that buy the company's mortgage loans in the secondary market;
What percentage, if any, of the purchased loans have early payment default provisions that may require the company to buy back those loans as well as the time frame for those obligations; and
How many non-performing loans the company expects it will have to repurchase during the current and upcoming fiscal year.
Beazer asked the Securities and Exchange Commission for permission to omit the proposal, but the company's "no action" petition was denied. (For more on the SEC staff decision, please see the Dec. 14, 2007, edition of Risk & Governance Weekly.)

Homebuilders are not the only ones being targeted over disclosures related to subprime mortgages. Financial institutions also are being called on to provide more details on their exposure to mortgage-backed securities. Many Wall Street firms were forced to write down assets valued in the billions of dollars during the second half of 2007 and into 2008 due to their exposure to high-risk loans.

LIUNA is asking Lehman Brothers, Washington Mutual, and Bear Stearns to report on mortgage originations and mortgage securitizations as "subprime, Alt-A, or other non-agency loan types." The resolved clause of the resolution at Lehman's also calls on the company to discuss the long-term strategic and financial implications of its decision to reduce resources and capacity in the subprime area and what the firm anticipates will be its "ultimate realized losses related to the mortgage securities crises."

How will current lawsuits on the docket and new settlements affect investors in the coming year? Will the credit crisis and market turmoil yield a new wave of settlements? These trends are the subject of an upcoming RiskMetrics Group white paper, part of our What You Need to Know for 2008 educational program.

RiskMetrics Group will also host a webcast exploring securities litigation trends for the upcoming year. Adam Savett, Head of Securities Class Action Services for RiskMetrics Group, will host a panel of noted industry experts, including Stuart Grant, Managing Partner at Grant & Eisenhofer, Lyle Roberts, Partner at Dewey & LeBoeuf, and Kevin LaCroix, Director at OakBridge Insurance Services.

To register for the webcast, please visit here.

Click here to view the full What You Need to Know for 2008 Educational Series.

The CtW Investment Group on Jan. 11 released a letter urging shareholders to withhold votes from four Tyson Foods board members up for re-election.

CtW, the investment arm of the Change to Win labor federation, is calling on investors to vote against Don Tyson, John Tyson, Barbara Tyson, and Richard Bond at the Springdale, Arkansas-based meat processing company's Feb. 1 annual meeting. The labor group claims that the four directors' failure to establish an independent nominating committee does not ensure long-term value for shareholders.

Tyson Foods has a dual-class equity structure that provides 71 percent of the voting power to Tyson family members. Accordingly, the firm qualifies as a controlled company under New York Stock Exchange rules and is not required to have an independent nominating panel.

The labor group also cites other governance practices--such as unequal voting rights and a lack of board independence. CtW also notes that the company has underperformed its S&P 500 peers, engaged in "rampant" related-party transactions, and paid a $1.5 million fine to the Securities and Exchange Commission in 2005 over undisclosed executive perks.

Do you need the whole story about which accounting trends will impact you this year? Marc Siegel, RiskMetrics Group's Global Head of Financial Research and Analysis, will give insight into the key accounting and financial reporting trends in 2008 in a webcast on Friday, January 18 at 11 a.m. EST.

This webcast will look back at aggressive reporting techniques and unconventional methods management has used to mask operational deterioration in their businesses and how you can learn to challenge a company's assertions on reported metrics going forward. Examples will be given where reverse-engineering company data through forensic financial accounting, or deep-dive analysis, has yielded results that have either corroborated or disproved the reported results.

In addition to uncovering companies' hidden risk in the marketplace, Marc Siegel will discuss accounting issues that should be at the forefront of investors' minds, as well as what regulators are focusing on in 2008.

To register for the accounting trends webcast, please visit here.

This article is the first in a three-part series looking at key issues during the 2008 U.S. annual meeting season. This week's segment looks at shareholder proposals related to board elections, while next week's will examine those tied to the subprime mortgage crisis. The Jan. 25 edition of Risk & Governance Weekly will explore compensation-related proposals.

The 2008 U.S. proxy season could be one of the more contentious in recent memory following the Securities and Exchange Commission's November decision to allow companies to exclude proxy access proposals. Thus far, labor and public pension funds have submitted five access proposals in a bid to test the agency's decision in court, or otherwise force the issue onto corporate proxies.

Moreover, investors will press forward with old, new, and updated resolutions that seek to improve boardroom accountability. As in past years, scores of majority threshold voting proposals likely will be on the ballot during the 2008 annual meeting season. According to RiskMetrics Group records, the United Brotherhood of Carpenters and Joiners of America alone has so far filed nearly 60 such resolutions, with the vast majority targeting S&P 500 companies.

Resolutions seeking reimbursement for short-slate solicitation expenses are set to appear at a handful of companies this coming proxy season.

Meanwhile, uninstructed broker voting may also feature prominently as a topic of debate. In a 2008 shareholder proposal filing, the Service Employees International Union called for the exclusion of uninstructed broker votes at CVS Caremark. The labor fund recently withdrew that resolution, but SEIU officials tell Risk & Governance Weekly that it will seek other ways to highlight the issue.

Still, most attention this coming proxy season will be focused on efforts by investors to challenge the SEC's decision to resume allowing companies to omit proxy access proposals under the agency's Rule 14a-8(i)(8), which permits the exclusion of proposals that relate to director elections. (For more on the SEC decision, please see the Nov. 30, 2007, edition of Risk & Governance Weekly.)

As of this writing, the American Federation of State, County, and Municipal Employees (AFSCME) has filed or co-filed binding proposals seeking shareholder access at four companies, including Countrywide Financial and E*TRADE.

"Access is very much alive, and we intend to pursue the right through the proxy, litigation, legislation," and other means, said Richard Ferlauto, director of pension and benefit policy for AFSCME. "We're hopeful that within the next 18 months to two years, we will have established a proxy access right for investors and resolved an issue that has confronted the SEC for more than 50 years."

CalPERS, the California Public Employees' Retirement System, has filed an access proposal at Kellwood, a St. Louis-based apparel marketer, while the Connecticut Retirement Plans and Trust Funds is co-sponsoring the proposal at Countrywide Financial with AFSCME.

AFSCME and the state pension systems for North Carolina and New Jersey targeted financial firms Bear Stearns and JP Morgan Chase on the heels of the SEC's November decision. The investors are seeking the right to nominate board candidates to appear on management proxy statements after both firms disclosed billion-dollar losses stemming from investments in mortgage-backed securities. Bear Stearns CEO James Cayne stepped down this week. Neither company has responded to requests for comment.

Those two Wall Street firms also were chosen because of their location, according to Ferlauto. The U.S. Court of Appeals for the Second Circuit, which in 2006 ruled that the SEC erred when it allowed American International Group (AIG) to omit an AFSCME-sponsored access proposal, has jurisdiction for New York.

Bear Stearns has filed for no-action relief, according to Ferlauto, who said AFSCME is now deliberating on how to move forward, with litigation being a "strong option."

Many governance analysts expect the access debate to move back into the courtroom, arguing the SEC's decision did precisely what agency Chairman Christopher Cox hoped to avoid--create uncertainty.

"The playbook will likely be a replay of what we saw earlier," said Duke University Law School Professor James D. Cox, alluding to the AFSCME v. AIG litigation. He predicts that Bear Stearns will get no-action relief from the SEC, and that the decision will indeed be challenged in the courts.

"That's why I thought the SEC was wrong in saying its action would reduce uncertainty," Professor Cox said.

Today, Ceres and the Investor Network on Climate Risk released a new report on Corporate Governance and Climate Change: The Banking Sector, authored by RiskMetrics Group. The report examines how forty of the largest banks are preparing to face the challenges of minimizing climate risks, and utilizes a Climate Governance Index, developed by RiskMetrics Group in conjunction with Ceres and the Investor Network on Climate Risk. The index is comprised of fourteen indicators to evaluate five main corporate governance areas.

The full findings from the report will be revealed in a RiskMetrics Group webcast on Friday, January 11 at 11 a.m. EST. Part of RiskMetrics Group's What You Need to Know for 2008 program, the webcast panelists Mindy Lubber, President of Ceres, and Doug Cogan, Head of Climate Change Research at RiskMetrics Group, will share why European banks lead in climate governance responses and how corporate governance and board directors are addressing the governance controls needed to minimize climate risks. Panelist Bruce Gillander, Division Director at the Florida Department of Financial Services Division of Treasury, will discuss how the Florida Division of Treasury is engaging with investment managers on climate change.

This report and webcast are the latest in a series of research projects by RiskMetrics Group that provide investors with actionable insights into how climate change will affect companies and financial markets. We've collected these efforts on a page in the RiskMetrics Group Knowledge Center dedicated to climate change.

To register for the webcast and download the paper, please visit here.

A new function on the Securities and Exchange Commission's Web site will allow investors to compare what 500 of the largest U.S. companies pay their top executives.

The Executive Compensation Reader, launched Dec. 21, is intended to build on the SEC's 2006 pay disclosure rules, the agency said in a press release on the day of the launch.

"Through its new [disclosure] rules and the power of interactive data, the SEC has transformed the landscape of compensation disclosure," SEC Chairman Christopher Cox said in the press release.

The initiative is part of a larger move by Cox to encourage the use of "XBRL" business reporting computer language on the SEC Web site.

To create the new tool, executive compensation figures from 500 companies that have filed online proxy statements with the agency were "tagged" in XBRL to make them easily searchable. XBRL tags include links to footnotes in the compensation disclosure and analysis, as well as company explanations of the rationale behind pay decisions.

The search function provides for a look at total annual pay as well as dollar amounts for salary, bonuses, stocks, options, and perks. Investors can also compile a list of companies and then use the online tool to generate a table or bar graph for comparison purposes.

With nearly $6 trillion in market capitalization, the global financial sector will play a vital role in supporting timely, cost-effective solutions to reduce global greenhouse gas emissions. Ceres, a leading coalition of investors, environmental organizations and other public interest groups working to address sustainability challenges such as global climate change, and the Investor Network on Climate Risk will soon publish a groundbreaking report, authored by RiskMetrics Group's Climate Change Research Group, that reveals how forty of the world's largest banks are preparing to face the challenge of minimizing climate risks.

Please join Mindy Lubber, President of Ceres, and Doug Cogan, Head of Climate Change Research at RiskMetrics Group, as they share the findings from the report, Corporate Governance and Climate Change: The Banking Sector. The forum will also provide insight into how corporate executives and board directors are addressing the governance controls that will be needed to minimize climate risks while maximizing climate-friendly opportunities.

Register for the webcast here.

Click here to view the full What You Need to Know for 2008 Educational Series.

Investors in European companies may sharpen their focus on takeover defenses this year following a recent decision by Europe's top regulator to pull back on plans to promote the principle of one-share, one-vote.

The future of European corporate takeover defenses--such as multiple voting rights, voting rights caps, and "golden-shares"--has been a key focus of debate in recent months as governance watchers closely monitor the words and deeds of regulators, who, some argue, have taken an inconsistent approach to curbing their use.

For years, key European Union (EU) officials voiced support for investor efforts to promote the concept of one-share, one-vote, arguing the right was consistent with broader EU efforts to dismantle takeover defenses.

"The [c]ommission intends to undertake a study into the way in which the principle of one-share, one-vote can be translated into reality," Frits Bolkestein, head of the European Commission's (EC) Internal Markets, said in a 2004 speech. Ireland native Charlie McCreevy would succeed Bolkestein shortly after that speech, but the commitment remained, with McCreevy backing the right of one-share, one-vote during his own confirmation hearings.

In 2006, investors concerned with the widespread prevalence of takeover defenses on the continent again took heart when the European Court of Justice ruled against the use of "golden share" takeover defenses--giving the holder veto rights over certain transactions--at Holland's dominant telecommunications provider and postal carrier, holding that the use of such defenses restricted the free movement of capital.

To investors, regulators were taking the right approach, despite ongoing calls (and actions) by politicians in some member states to allow for the use of poison pills and other defenses.

But that sentiment would begin to change this summer when a key EU official backed calls by politicians to implement defenses as foreign investors took equity positions in European aerospace giant EADS. The German and French governments sought to install a golden share at the company following equity purchases by a state-controlled Russian bank and the investment arm of the government of Dubai.

EU Trade Commissioner Peter Mandelson tacitly backed their calls, arguing such a defense was warranted on national security grounds, despite the European high court ruling that just one year earlier that had chastised the Dutch government for doing so.

More recently, those who now question regulators' commitment to dismantling corporate takeover defenses in Europe point to an October decision by McCreevy to back away from his long-held position on equal voting rights. Indeed, on Oct. 3, McCreevy told European lawmakers that he would no longer push companies to adopt a one-share, one-vote capital structure, leaving investors and other proponents of shareholder democracy frustrated.

"It's a shame that the capital markets integration project can't muster the strength to take on entrenched positions," noted Anne Simpson, executive director of the International Corporate Governance Network, on the heels of McCreevy's announcement. McCreevy's decision effectively sanctions companies' continued use of the most common defenses, dubbed "control-enhancing mechanisms," such as multiple voting rights and voting right limitations, which are common in markets ranging from France to Sweden.

In his comments to lawmakers, McCreevy said that shareholders should use their existing voting rights to push for better dialogue and enhanced transparency. But, he noted, a further layer of EU action is "not the right way to go," given that existing legislation now helps ensure transparency. McCreevy defended his reversal on the one-share, one-vote principle by citing the results of an EU-commissioned study, published in May, which found control-enhancing mechanisms had little effect on a company's financial performance and governance.

How can institutional investors mitigate the risks of securities lending and coordinate their corporate governance and securities lending policies? A new white paper from RiskMetrics Group examines these questions, providing investors with critical insight as they prepare for the upcoming proxy season.

The findings from this paper will be the topic of a webcast in RiskMetrics Group's "What You Need to Know for 2008" educational series, to be held this Friday, January 4, at 11:00 a.m. On the webcast, the paper's author, RiskMetrics Group's research analyst, Bimal Patel, and RiskMetrics Group's Head of Global Voting Operations, Peter Friz, together with Tracy Stewart, Corporate Governance Manager at the Florida State Board of Administration, will discuss best practices in securities lending and the issues investors are facing today.

To register for the webcast, click here.