A coalition of more than 60 investors has called on President-elect Barack Obama to reverse Securities and Exchange Commission (SEC) rulings that allowed companies to exclude shareholder proposals on mortgage and environmental risks.

The investors include the New York City funds, Calvert Group, Domini Social Investments, Trillium Asset Management, Boston Common Asset Management, Catholic Healthcare West, and shareholder advocates Robert A.G. Monks and Amy L. Domini. Among the groups that also endorsed the letter are the Investor Network on Climate Risk, the Investor Environmental Health Network, and the Interfaith Center on Corporate Responsibility.

In their Dec. 11 letter, the investors urge Obama "to reverse a pattern of recent SEC staff decisions that have been closing the door to important dialogues between shareholders and management. The SEC has disallowed many shareholder resolutions that ask companies to disclose the financial implications of an array of environmental, community, public health, and human rights concerns and issues."

The investors contend that the agency has improperly granted "no action" requests since 2003 to omit proposals that request "risk evaluation." The investors contend that the staff of the Corporation Finance Division has "disregarded the reasonable and principled approach that had governed at the SEC for decades," and replaced it "with a radical interpretation of the rules." The letter specifically criticizes the commission's decision last February to allow Washington Mutual to omit a proposal that asked for details on the lender's potential exposure as a result of the subprime mortgage crisis.

The investors' letter is part of a growing chorus of complaints by activist shareholders over exclusions of proposals under Rule 14a-8(i)(7) that relate to a company's "ordinary business operations." Labor funds--including the Laborers' International Union of North America, the Service Employees International Union, and the International Brotherhood of Teamsters--have expressed frustration over rulings that permitted companies to bar proposals on CEO succession planning, climate change, mortgage risks, and compliance committees. The agency staff also has allowed firms to omit proposals concerning director conflicts of interest, share buy-back programs, and off-balance sheet liabilities and derivatives.

The SEC had no direct comment on the letter. In an e-mail to Risk & Governance Weekly, agency spokesman John Nester said "the staff agrees with the signatories on the importance of disclosing material financial risks to companies, and notes that Item 303 of Regulation S-K requires companies to identify and disclose known trends, events, demands, commitments, and uncertainties that are reasonably likely to have a material effect on a company's financial condition or operating performance."

David Lynn, a former SEC lawyer who is a partner at the Morrison & Foerster law firm, said he doesn't expect that the investors' letter will prompt the SEC staff to change its approach to "ordinary business" requests. He said the agency would need to issue a new staff bulletin or undertake a full rule-making proceeding.

Keir Gumbs, a lawyer with Covington & Burling who reviewed "no action" requests while at the SEC, also doesn't expect the staff to change its position this season, but he said shareholders could ask the full commission to revisit the issue after their proposals are excluded. "A strong case can be made, given the current economic crisis, for the commission to reconsider its position," he told R&GW.

"I understand why shareholders care about this, but I'm not sure this issue will be at the top of the commission's list," Gumbs said, noting the turnover in SEC leadership, the challenges posed by the credit crisis, and the need to improve enforcement after the Bernard Madoff fraud case.

"We think this should be a priority for the commission in light of the current economic crisis, but that remains to be seen," Sanford Lewis, a lawyer for the Investor Environmental Health Network, told R&GW.

An update to our May 2007 paper Accountability Goes Global, this paper explores recent trends in non-US investor interest in US Securities Class Actions. It highlights the growth in non-US investors taking a lead plaintiff role in US cases, the countries with the most such plaintiffs and the law firms working on behalf of these plaintiffs.

To access this research, please visit here.

The credit market fallout continues overseas with foreign banks strapped with liquidity shortages while governments struggle to keep their country's credit-worthiness in good shape.

Just last month, the Greek government set aside EUR 28 billion ($33.6 billion) to support the banking system, making it an equity stakeholder of the country's largest banks (see our RiskMetrics Group report, "Greek Government responds to Credit Crisis"). But not all banks readily accept government money – case in point: London's Barclays Bank, whose denial of public funding for controversial private funding put its shareholders in a tailspin and its board on the defensive – arguing government's involvement would influence the company's strategic direction (see out report, "A Change of Perception: The Fallout from Barclays' Decision to Decline Government"). In Iceland, where the economy's reliance on the banking industry has it teetering on the brink of financial collapse, the government passed an emergency law transferring powers of shareholder meetings of its three top banks to the Financial Supervisory Authority (FME) (see our report, "Unprecedented Measures Transfer Powers of Shareholder Meeting to Icelandic Government.") We are seeing that government bailouts come in all shapes and sizes; while the change of power may foster greater transparency, the lines of shareholder voting rights are usually blurred.

Today Ceres and the Investor Network on Climate Risk published a study, authored by RiskMetrics Group, titled, Climate Change and Corporate Governance: Consumer and Technology Companies. The report is the first comprehensive assessment of how 63 of the world's largest consumer and information technology companies are preparing to deal with the challenges and opportunities posed by climate change. The report spans 11 industry sectors: Apparel, Beverages, Big Box Retailers, Grocery & Drug Retailers, Personal & Household Goods, Pharmaceuticals, Real Estate, Restaurants, Semiconductors, Technology and Travel & Leisure.

While progress is being made, consumer and technology companies still have more to do in confronting the business challenges posed by climate change. With millions of customers and massive operations and supply chains, consumer and technology companies face broad impacts from climate change, whether from higher energy costs due to emerging climate regulations or growing global demand for products that use less energy and contribute fewer greenhouse gas (GHG) emissions.

The Ceres report found that select companies in various consumer and technology sectors are responding to the risks and opportunities presented by climate change, primarily by setting GHG emissions reduction targets, boosting energy efficiency efforts, expanding renewable energy purchases and integrating climate factors into product design. But the report found that many other companies are still largely ignoring climate change, especially at the board and CEO level. For example, only 11 of the 63 companies have their boards receive climate-specific updates from management, only seven of the CEOs among these firms have taken leadership roles on climate change initiatives and none of the companies have linked C-suite executive compensation directly to climate-related performance. The mixed performance was evident in the report's final scores.

Using a 100-point scale, the three highest scoring companies were IBM, UK-based grocery retailer Tesco and Dell, with 79, 78 and 77 points, respectively. More than half of the 63 companies scored under 50 points, with a median score of 38 points.

The scoring methodology behind the report utilizes a Climate Change Governance Framework, developed by RiskMetrics, and which is comprised of 14 indicators to evaluate five main governance areas: board oversight, management execution, public disclosure, emissions accounting and strategic planning. For this report the framework has been adapted to highlight companies' climate change performance in three key areas particularly salient to the 11 sectors reviewed: energy efficiency and renewable energy; product design and promotion; and supply chain management. Individual scores are based on a 100-point scoring system.

To access the full report and key findings, please visit here.

As the filing deadlines start to pass for many 2009 U.S. annual meetings, investors already have submitted a significant number of proposals that seek compensation and board reforms, including several novel resolutions stemming from the ongoing financial crisis.

RiskMetrics Group is tracking 215 governance proposal filings by shareholders as of Dec. 4. That number will grow in the coming months as investors continue to file resolutions. The total number to appear on company ballots will depend on how many proposals are withdrawn after negotiations or excluded by firms after obtaining "no action" rulings from the Securities and Exchange Commission.

As in past proxy seasons, investors are filing most of their proposals at widely held S&P 500 firms. For the second consecutive year, shareholder activists are targeting financial and homebuilding firms that have suffered significant losses from the collapse of the U.S. subprime mortgage market and the widening global credit crisis. So far, investors have filed more than 60 proposals at financial, homebuilding, or other firms that have sought government assistance.

The federal bailout of the financial industry has inspired labor investors to file a new proposal that seeks stricter compensation limits than those required by the government's Troubled Asset Relief Program (TARP). That resolution calls for: limiting annual incentive compensation and severance payments; greater use of performance-vested equity instruments; a freeze on new stock option awards, unless the options are indexed to peer group performance; requiring executives to hold 75 percent of their shares obtained through equity grants through their term of employment; and no accelerated vesting for unvested equity awards.

The investors--including the Laborers' International Union of North America, International Brotherhood of Teamsters, and the United Brotherhood of Carpenters and Joiners–plan to file this proposal at 25 financial companies. Seventeen have been filed so far at firms such as Citigroup, American Express, and Goldman Sachs. The labor funds had planned to file about 50 proposals, but they were unable to identify some of the TARP participants until after the firms' filing deadlines had passed, said Jennifer O'Dell, assistant director for corporate affairs at the Laborers.

On Nov. 21, SunTrust Banks asked the SEC for permission to exclude this proposal and made four separate arguments. Invoking Rule 14a-8(i)(7), the Atlanta-based banking company asserted that the proposal improperly relates to the firm's "ordinary business operations" and seeks to regulate its capital raising activities and compensation for its general workforce. SunTrust also argued that it has "substantially implemented" the proposal through its compliance with the government's TARP pay requirements. The company also contended that the resolution contains "false and misleading" statements and actually consists of nine separate proposals.

Other financial firms likely will make similar arguments in their requests to exclude the TARP proposals. O'Dell said Bank of America raised the argument about nine separate proposals in a letter to the union.

The AFL-CIO, the Connecticut Retirement Plans and Trust Funds, and the American Federation of State, County, and Municipal Employees (AFSCME) also are filing new proposals that urge directors to extend the minimum period that senior executives must hold onto shares obtained through equity awards. These investors plan to file about 12 proposals and have submitted them at Citigroup and Dow Chemical. These resolutions seek to address the risk alignment between executives and shareholders, and notably, AFSCME's proposal asks for the holding period to extend two years beyond the executive's employment termination or retirement.

Activist investors have filed a new proposal that seek a shareholder vote on "golden coffin" agreements that provide generous death benefits to family members of CEOs and other top executives. The Teamsters, UNITE HERE, AFSCME, and the Amalgamated Bank's LongView fund plan to file 15 to 20 proposals. That resolution already has been submitted at Comcast, XTO Energy, Plains Exploration, the Shaw Group, Johnson Controls, and Nabors Industries.

In addition to these compensation proposals, investors are filing a significant number of "say on pay" proposals that seek an annual shareholder advisory vote on executive pay. The proponents, which include labor funds, individuals, ESG funds, and religious investors, plan to file about 90 proposals for 2009; more than 20 have been submitted so far. Proponents, including Tim Smith of Walden Asset Management, say they hope that high levels of support will prod Congress to pass legislation to mandate pay votes at public companies. Twelve U.S. issuers so far have voluntarily agreed to hold pay votes.

Individual investors have filed "say on pay" proposals at General Motors and Ford Motor, whose executives were on Capitol Hill last week to plead again for government assistance. The chief executives at the two automakers, who were criticized for using corporate jets for an earlier visit to Washington to lobby for aid, have pledged to cut their base salaries to $1 per year. Along with privately held Chrysler, the companies are seeking $34 billion in assistance.

Other prominent compensation-related proposals (according to RiskMetrics data as of Dec. 4) include:

* Eliminate excise tax gross-ups for senior executives: AFSCME plans to file this resolution at six companies, including Nabors and Northrop Grumman. In 2008, the proposal won more than 42 percent support at Nabors and Textron.

* Compensation consultant independence: Connecticut is filing proposals at Citigroup, Merck, and Avon Products that seek more disclosure, while the AFL-CIO is submitting resolutions that call for greater independence.

* Pay for superior performance: The Carpenters plan to refrain from filing "pay for superior performance" proposals this year, and instead will actively engage with companies, including those in the defense and aerospace industries. Those firms that fail to sufficiently engage with the union will be targeted with proposals in 2010.

* Internal executive pay equity: Connecticut filed internal pay equity proposals at Goodyear Tire & Rubber and Lockheed Martin.

RiskMetrics Group has just published a new piece of research this week titled, Brazilian Corporate Governance Trends. The report findings found that corporate governance practices in Brazil have improved significantly in recent years, but great strides must still be made to bring the country in line with international best practices. To access the research piece, please visit here.

Some legal experts expect the new Congress--with expanded Democratic majorities in both chambers and a new Democratic president--will take legislative action in 2009 to reverse U.S. Supreme Court rulings that sought to limit securities litigation.

Speaking at a Nov. 5 conference in San Francisco hosted by the Professional Liability Underwriting Society (PLUS), Stanford University Law Professor Joseph Grundfest said Christmas had come "early" for investor lawyers, and the only question is "what's in the boxes and what's under the tree," according to The D&O Diary, a weblog written by insurance lawyer Kevin LaCroix. Grundfest, a former commissioner with the Securities and Exchange Commission (SEC), said that Congress may act legislatively to reverse the Stoneridge (2008) and Central Bank of Denver (1993) rulings, where the Supreme Court limited the liability of investment bankers, vendors, lawyers, and other "secondary" actors.

However, Keith Johnson, who heads the institutional investor services practice group at the Reinhart Boerner Van Deuren law firm in Wisconsin, cautions that Congress and the new president likely will address other pressing issues related to the global credit crisis before securities litigation. "I don't see securities litigation reform at the top of Obama's legislative agenda," he told the SCAS Alert, noting that Congress may move first to enact reforms like "say on pay" advisory votes and proxy access, which "could have more impact" for investors.

Likewise, James Cox, a securities law professor at Duke University, told the SCAS Alert that he expects that Congress would address securities litigation reform after grappling with "the 800-pound gorilla in the room--the issue of regulatory reform." He said he had heard that prominent plaintiffs' firms and Senate offices have been working on draft legislation to address Stoneridge.

The Stoneridge and Central Bank rulings address the scope of SEC Rule 10b-5, which was promulgated under Section 10(b) of the Securities Exchange Act of 1934. The rule, which is the legal basis for most securities class-action cases, makes it unlawful: "a) to employ any device, scheme, or artifice to defraud; b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading; or c) to engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person."

Though the law doesn't explicitly authorize private shareholder suits, the Supreme Court held in 1971 that there was an implied right of action in Section 10(b) and its implementing regulations. However, in Central Bank, the justices ruled that this liability did not extend to "aiders and abettors." In 1995, Congress passed the Private Securities Litigation Reform Act, which explicitly authorized the SEC to pursue "aiders and abettors," while imposing new limits on private lawsuits. In response to Central Bank, plaintiffs' lawyers argued that investors could still sue secondary actors if they directly participated in a scheme to defraud investors.

In Stoneridge, the Supreme Court upheld an appellate court ruling that barred Charter Communications shareholders from suing two vendors who allegedly helped the company mislead its auditor and investors but did not make any statements to Charter investors. "The determination of who can seek a remedy has significant consequences for the reach of federal power. . . . Concerns with the judicial creation of a private cause of action caution against its expansion," Justice Anthony Kennedy wrote in the majority decision last January. "The decision to extend the cause of action is for Congress, not for us. Though it remains the law, the §10(b) private right should not be extended beyond its present boundaries."

The Stoneridge decision was denounced by prominent Democratic lawmakers and investor advocates, while receiving praise from corporate groups. (For more details, please see the February 2008 edition of the SCAS Alert.) The case was decided by a 5-3 majority (with one justice not taking part). Johnson said one or two Obama-appointed justices might prompt the Supreme Court to revisit Stoneridge in a few years, but he said it would be simpler and quicker if Congress were to address the issue.

Adam Savett, head of RiskMetrics' Securities Class Action Services unit, said he could see lawmakers acting to address the Stoneridge and Central Bank decisions. "If you read Rule 10b-5(a) and (c), it clearly anticipates liability for non-speaking defendants, as those two subsections do not even mention statements, like subsection b does," he noted. "Thus, we have a disjunction between the actual rule and judicial interpretations of that rule. Congress may choose to resolve that and offer strengthened protections for shareholders."

Cox said the accounting profession should support legislation to address Stoneridge. As the Duke professor explains, that decision provides little protection to audit firms, which certify financial statements and thus are deemed to make public statements to the investors of their corporate clients, while shielding other deep-pocket defendants (such as investment banks) that could contribute to securities settlements.

A new RiskMetrics Group study, "Gilding Golden Parachutes: the Impact of Excise Tax Gross-Ups," by analyst Kosmas Papadopoulos, sheds light on a long obscured aspect of executive pay.

The Securities and Exchange Commission's 2006 compensation disclosure rules lifted the veil on such benefits by requiring companies to estimate potential severance payments, including any tax gross-ups, in their annual proxy statements. These gross-ups are designed to eliminate the impact of a 20 percent penalty (excise) tax that is levied on change-in-control related severance payouts to executives that are deemed to be "excessive."

Congress enacted the tax in 1984 in an attempt to put the brakes on what were then considered unjustifiably large payouts (though paltry by today's standards) being made to top executives who lost their jobs after takeovers. But RiskMetrics' study of S&P 500 companies found that, in fact, the regulation has likely spurred the growth of severance packages, as more and more companies have agreed to pay the penalty tax--and pass that expense onto shareholders. Key findings from the study include:

* A substantial two-thirds of the S&P 500 disclosed they would provide excise tax gross-ups to one or more top executives. That's in spite of the fact that excise tax gross-ups are a costly benefit, since it generally takes at least $2.50 and as much as $4 to cover each $1 of excise tax that must be "grossed-up."

*At 80 percent of these companies, the tax would have been triggered if the executives had received change-in-control severance at the end of the prior fiscal year--in other words, the company disclosed its estimates of the tax hit. The aggregate potential gross-up payments for all named executive officers at those companies averaged $13.9 million. And their total estimated severance, including tax gross-ups, averaged a staggering $78.4 million.

* The story was different for the one-third of companies not providing excise tax gross-ups--average total potential severance payouts to the "top five" executives at these firms was $43.9 million.

The huge gap ($34.5 million) between the average value of top executive severance packages at companies that do provide tax gross-ups, versus those that don't, cannot be explained by the average value of the gross-ups alone ($13.9 million). This finding suggests that companies providing such gross-ups tend to pay higher change-in-control-related severance generally, likely not what Congress intended back in 1984.

Shareholders have been pretty tolerant of these arrangements, but that might change now that more details are available on a regular basis. And, although the government may appreciate the revenue stream from the penalty tax, Congress may also take note of the unintended consequences of that attempt to control executive pay.

As You Sow, a San Francisco-based advocacy group that urges companies to act responsibly toward the environment, has filed the first of several 2009 sustainability reporting proposals at Apple.

The group is expanding its focus from e-waste recycling to ask information technology (IT) companies for sustainability reports that specifically address climate change, targeting companies that did not respond to the Carbon Disclosure Project. As You Sow plans to file resolutions at Broadcom, Jabil Circuit, Microchip Technology, Micron Technology, Novell, and SanDisk. None of these firms, like most companies in the electronics sector, has received similar proposals in the past.

In March, a resolution from investor John Harrington to establish a board-level sustainability committee received 7.8 percent support at Apple. In contrast, five more broadly worded sustainability reporting proposals--which are similar to As You Sow's new proposal--fared better, averaging just under 30 percent support.

Over the last several years, As You Sow has focused on electronic waste and recycling issues. One of its recent successes is an "electronics take-back" program run by Best Buy that is in place at the company's 900 stores nationwide, after an initial run at 130 test stores. A critical component of e-waste recycling is chain-of-custody monitoring for recovered toxics–an issue that could spawn shareholder proposals in the future.

Building on its e-waste recycling in a new effort for 2009 makes sense, says Conrad MacKerron, director of As You Sow's corporate social responsibility program, because the IT industry contributes significantly to climate change. MacKerron told RiskMetrics that greenhouse gas emissions from IT firms are estimated to make up 2 percent of all carbon emissions globally, "on par with the aviation industry," and that electronics firms need to take action. "We will seek to link the impact of e-waste to climate change," MacKerron explained, because "increased recovery of e-waste can reduce the need for the carbon-intensive process to mine and process new metals for electronics."

For example, he pointed to an Environmental Protection Agency estimate that the gold in 100 million cell phones yields 3.4 metric tons of recovered gold, which avoids the need to mine and process 5.5 million tons of soil and rock. The related energy and fuel use savings could "dramatically reduce GHG emissions" in the electronics industry supply chain, MacKerron concluded.

As You Sow is continuing its dialogue on emissions reporting and reduction with industry leaders Dell and Hewlett-Packard, MacKerron said, examining how the companies calculate their emissions and obtain data from global supply chains.