At their upcoming annual meetings, DaimlerChrysler and Volkswagen will face a tough balancing act, trying to reconcile the demands of shareholders with labor union pressures, as senior executives at both companies face possible criminal charges.

ISS' SEC Comment Letter on Compensation Disclosure

March 28, 2006

Ms. Nancy M. Morris
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington DC 20549-9303

Re: File Number S7-03-06


Dear Ms. Morris:

Thank you for the opportunity to provide feedback on the proposed amendments to the SEC's disclosure rules for executive and director compensation. The comments and suggestions in this letter reflect the views of ISS and do not necessarily reflect the views of our clients.

ISS Supports the SEC's Efforts to Improve Compensation Disclosure

ISS supports improvements in executive compensation disclosure. Current requirements, which have been static during the past decade, are out of step with the growing complexities in executive pay packages. Shareholders' frustrations with the lack of disclosure on retirement plans, change-in-control arrangements, and many forms of stealth compensation have led to a growing compensation lexicon, such as "tally sheets" and "holy cow" meetings. The proliferation of multiple pay vehicles and the increase in shareholder concerns over compensation arrangements necessitate change to the current disclosure system. Overall, the SEC's proposed rules are a positive step to mandate improved disclosure, create clarity for shareholders, and underscore the accountability of directors to ensure that shareholders' assets are used wisely.

More U.S. companies are trying to head off shareholder proposals seeking majority board elections by changing their bylaws to require a majority of votes cast to elect a director.

The latest firms to embrace a full majority vote standard include Alaska Air Group, Altera, and Safeway. These changes bring to at least 18 the number of companies that have adopted a majority vote bylaw plus a resignation policy for incumbents who fail to gain the requisite vote, an approach commonly referred to as the "Intel model." Another seven companies have confirmed that they are in the process of doing so.

As Japan's proxy season gets underway, "poison pill" plans and other takeover defenses are shaping up to be one of the major issues of 2006. Three companies have placed such measures on the ballot at their annual meetings next week, but a host of others have announced defenses that do not require a shareholder vote.

The three companies that are submitting their takeover defenses to a shareholder vote later this month are Lion, a manufacturer of home and pharmaceutical products; Torigoe, a flour milling company; and CAC, a computer systems developer.

Update on French Poison Pills

The French parliament today adopted the much-anticipated legislation that allows companies to adopt poison pills to thwart hostile takeovers. Going forward, French companies, upon receiving shareholder approval at their annual general meetings, will be allowed to issue warrants to existing shareholders at deeply discounted prices to block hostile takeovers. Some have commented on the "timeliness" of this legislation, in light of the ongoing debate over the GDF-Suez takeover deal, as well as the Arcelor deal. The Associated Press in Paris is covering the story.

We invite your comments on this legislation.

Issues in 2006

In 2006, it appears that poison pills will continue to be an issue of focus for shareholder proponents although to a lesser extent than in the past two years.

ISS' Governance Research Services (GRS) is currently tracking 24 poison pill shareholder proposals submitted to companies. This number of proposals is considerably lower than the 101 proposals submitted to companies in 2004.

As in 2005, most of the proposals for the 2006 proxy season were submitted by individual shareholders (including the Chevedden and Rossi families) rather than by institutional investors or large funds. In at least one case, a proposal was submitted by a labor union pension fund. Unlike in 2005, it does not appear that any of the 2006 proposals were submitted by investment funds.

The Securities and Exchange Commission and the Public Company Accounting Oversight Board plan to hold a May 10 roundtable to seek comments on the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act.

The forum will be held at the SEC's headquarters in Washington. The agencies held a similar forum in April 2005 on Section 404, which requires companies to disclose and fix internal control deficiencies, including "material weaknesses" that could lead to a restatement of financial results.

Company officials have complained about higher-than-expected compliance costs and the distraction of management from other strategic concerns. Institutional investors have praised the increased focus on internal controls prompted by Section 404 and cautioned against easing or delaying its requirements.

"We look forward to an update on compliance efforts after year two," SEC Chairman Christopher Cox said in an agency press release. "We will carefully consider the facts presented to help develop policies to effectively and efficiently improve the reliability of financial statements for the benefit of investors."

To offer comments on Section 404, one may use a submission form available here or send an e-mail to rule-comments@sec.gov. One may also send a letter (in triplicate) to: Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090. The deadline for comments is May 1, and all comments should refer to File Number 4-511.

We also invite your comments.

Swiss Firms in Shareholders' Crosshairs As Proxy Season Commences

Swiss governance watchers are focusing this proxy season on developments at consumer goods giant Nestle and packaging materials manufacturer SIG Holding, albeit for different reasons.

Yesterday, the University of California became the latest--and, as measured by the number of students in its system, the largest--educational institution to divest from companies doing business in Sudan. The university system's regents voted unanimously to divest of nine companies in various portfolios held by the university. These nine companies, all of which have equity invested in Sudan and two-thirds of which are involved in Sudan's oil industry, were "clearly shown to be providing monetary or military support to the government, while showing little or no interest in the situation in Darfur or in helping to improve the welfare of the Sudanese people," a statement by the Regents said.

Full divestment of these nine companies will take place over an 18-month period, beginning only after California's legislature has passed a bill that would free individual Regents and the university system as a whole for any liability resulting from divestment.

The Regents declined to divest of all companies in the system's portfolio with Sudan ties. Instead, they pledged to engage in continued dialogue with some companies whose presence in Sudan the Regents believe can benefit the Sudanese people as well as or instead of benefiting Sudan's government. A policy of limited divestment appears to be a trend in university divestments from Sudan: Harvard, Stanford and Yale have also adopted limited divestment strategies.

A new bill, mandating divestment by CalPERS and CalSTRS from Sudan, has been introduced in California's legislature. A similar bill was introduced last year, but was edited before passage, changing a divestment requirement to a recommendation.

Majority election proposals remain popular among investors, but the first vote results of the season suggest that those resolutions may not fare as well this year at U.S. companies that have adopted director resignation policies.

A proposal by the United Brotherhood of Carpenters and Joiners received 35 percent of votes cast at Analog Devices on March 14 and 31 percent at Ciena the next day. At Hewlett-Packard's March 15 meeting, the resolution received 45 percent support, close to the 44 percent averaged by 62 such proposals last year.

Filing Claims in Securities Class Action Cases can Help Investors Also Get a Share of SEC Settlements

On Feb. 24, the Securities and Exchange Commission filed a motion with the court handling its case against Qwest Communications International requesting approval of a plan to distribute a $250 million settlement in a way that reflects an important and growing practice at the SEC.

The plan calls for the money to be distributed through the claims administration process that is underway in a completely separate securities class action settlement involving Qwest. Under this proposal, by filing a single proof of claim in the $400 million Qwest securities class action settlement (deadline: May 2, 2006), an institutional investor will also be able to recover its share of the $250 million SEC settlement. No part of the $250 million will be used to pay fees or expenses of counsel in the securities class action.

In response to recent high profile foreign hostile tender offers in France, the French National Assembly last week began debating the new takeover law that would give French companies the prerogative to use poison pills to thwart hostile tender offers.

Pending Legislation
The Sudan divestment campaign, which included the consideration of divestment bills in one-fifth of U.S. state legislatures in 2005, shows no signs of tiring in 2006. Bills introduced in 2005 in New York, North Carolina and Vermont are still pending, and new bills could be introduced in Maryland (where a bill died in committee in 2005) and Massachusetts. In 2005, Illinois and New Jersey enacted laws mandating divestment of state funds from companies doing business in Sudan, while Arizona, Louisiana and Oregon passed laws encouraging divestment, and the California legislature passed a resolution encouraging the state's public pension systems to encourage companies doing business in Sudan to work to safeguard human rights. California's Public Employee Retirement System (CalPERS) has been studying the issue, meeting this winter with representatives from several companies with major investments in Sudan.

University Update
In the past four weeks alone, Yale and Brown have agreed to divest of some of their assets in Sudan, with Brown pledging total divestment and Yale divesting from seven oil companies and Sudanese government bonds (but retaining the possibility of holding stock in other companies with business in Sudan). Later this month, the University of California regents will meet to discuss Sudan divestment. Schools including Harvard, Stanford, Amherst and Dartmouth have already enacted divestment policies (in many cases choosing to divest of only a handful of companies that are major players in Sudan's oil industry), and students are pressuring the administrations of many other schools to consider divestment.

Securities and Exchange Commission staff and commissioners gathered on March 3 and 4 for the Practicing Law Institute's annual "SEC Speaks" conference to detail a host of ongoing commission initiatives.

Speakers focused on topics including the commission's efforts to tackle accounting fraud, fairness opinions, enforcement actions, and its proposed Internet proxy rule. Staff members also provided some 2005 shareholder proposal statistics. Division of Corporation Finance Chief Counsel David Lynn noted that companies sought no-action on 337 companies, which is fewer than in past years, while the commission averaged roughly 42 days to respond to no-action requests.

An interesting article by Phyllis Plitch of Dow Jones Newswires caught my eye. The piece, which ran a few days ago, talks about Whole Foods Market's recent annual meeting. We invite comments...

An interesting article appeared today on the Dow Jones Newswires by Judith Burns. It references a study completed by law firm Foley & Lardner measuring "The Impact of Sarbanes-Oxley on Private Companies." Judith Burns cites some compelling statistics. We invite comments.

Should dissidents get reimbursed for running proxy contests even if they lose? That's the premise of a new proposal filed by the American Federation of State, County and Municipal Employees (AFSCME) now expected to go to a vote at three companies. The proposal calls on American Express, Citigroup and Bank of New York, to amend their bylaws to allow "for reimbursement of expenses in proxy contests where a dissident shareholder seeks to elect less than a majority of the board." Under the proposal dissidents who actually succeed would be fully reimbursed, but even some losers could receive partial reimbursement under a complex sliding scale, though only if the vote exceeds a certain threshold. AFSCME argues that proxy contests have been rare because the costs for drafting and mailing proxies, and for hiring advisors, are high.

Both American Express and the Bank of New York attempted to exclude the proposals on several grounds including that it was in contrast to commission rules requiring security holders to bear the mailing costs associated with proxy solicitations. The companies also sought to exclude the proposal by citing SEC Rule 14a-8, which allows for omission if a shareholder resolution relates to director elections, or deals with matters related to the company's ordinary business. The SEC rejected the companies' assertions, so the proposals will now appear on proxy statements beginning next month.

Rich Ferlauto, director of pension and benefit policy at AFSCME, says that, "In lieu of proxy access, reimbursement for solicitation expenses will give shareholders a needed leg up in the board room when it comes to confronting unresponsive and unaccountable boards."

If the proposal passes--a long shot at best given it's a first-year proposal, analysts say--will the number of such contests increase?

Faced with record warmth, unprecedented hurricane activity and rapid shrinking of polar ice caps, investor and industry attitudes about confronting climate change are shifting. Skeptics no longer question whether human activity is warming the globe, but how fast. Companies at the vanguard no longer question how costly it will be reduce greenhouse gas emissions, but how much money they can make doing it. Financial markets are starting to identify companies that are moving ahead on climate change, while those lagging behind are being assigned more risk.

In line with these changing attitudes, more shareholder resolutions on climate change are resulting in withdrawal agreements, whereby companies agree to disclose information on the financial risks and opportunities they face from climate change. Last year, 16 of the record 33 climate change resolutions filed ended in withdrawals. Already in 2006, eight companies have agreed to issue reports or expand dislosure on ways to reduce their greenhouse gas emissions and increase energy efficiency. Another dozen or so resolutions remain pending for the 2006 proxy season. (The eight companies with 2006 withdrawal agreements are Alliant Energy, Anadarko Petroleum, Great Plains Energy, Home Depot, Lowes, MGE Energy, Simpon Property Group and WPS Resources.)

The launch of the Kyoto Protocol in 2005 has made managing greenhouse gas emissions a fact of life for American companies doing business in key markets abroad, like Europe, Canada and Japan. As the United States moves to join this international effort in the years ahead, climate governance practices will assume an increasingly central role in corporate and investment planning. How effective companies are in managing these new risks and opportunities will also have a growing impact on shareholder value and the bottom line -- two things that matter to all investors.

While there have been few significant securities class-action settlements outside the United States, a growing number of countries have enacted legislation in the past few years to allow shareholders to join together to bring claims over investment losses.

Among those nations are South Korea, Israel, Sweden, Germany, Italy, and the Netherlands. While there have been no billion-dollar settlements, investors have obtained settlements reaching $100 million in Canada and Australia.

When GE's Jeff Immelt delivered his keynote speech at ISS' 2005 corporate governance conference, he talked about his strong belief in tying a CEO's pay to company performance. As Chairman and CEO, he was talking about tying his own pay to his company's performance.

In GE's recent proxy filing, we learned that Mr. Immelt put his money where his mouth is by requesting that his bonus be paid in performance shares tied to GE's financial and stock-market results. His ensuing share grant of 180,000 shares is valued at $6 million, but GE's cash flow from operations must increase by 10% annually the next two years for Mr. Immelt to keep half the shares, and must outperform the Standard & Poor's 500-stock index over the same period to retain the other half. Of course, this is nothing new to Mr. Immelt as his pay has been directly tied to performance since he took the helm of General Electric in 2001.

In GE's recently released annual report, Mr. Immelt said that he asked for the performance shares in lieu of cash to be "totally aligned" with shareholders. How refreshing.

Many of us at ISS sit across the table from America's CEOs on a regular basis. In representing over 1600 institutional investors, we understand that the level of a CEO's integrity has a direct and tangible impact on the way in which investors interact and support a company through good performance and bad.

As chairman and CEO, Jeff Immelt runs GE externally, the same way he runs it internally and that's why shareholders trust him and investors believe in him. He doesn't say one thing in speeches and annual shareholder meetings and another thing behind boardroom doors. We applaud you, Mr.Immelt, for embracing not just the letter of good corporate governance, but the spirit.

Shareholders concerned about social and environmental issues have filed more than 300 proposals so far for U.S. companies' annual meetings in 2006---down slightly from the 330 social issues proposals tracked at this point last year.

In mid-March, majority election proposals will come to a vote for the first time at three companies that have adopted director resignation policies.

Shareholders at Analog Devices on March 14, and at Hewlett-Packard and Ciena the next day, will have the first chance in the 2006 U.S. proxy season to vote on majority election proposals by the United Brotherhood of Carpenters and Joiners. More significantly, these investors will also be first to decide whether a director resignation policy obviates the need for a full majority standard.

Shareholder focus on severance packages continues to grow, and companies are listening. In 2000, only seven such proposals came to a vote and received average support of 30.8 percent; 2005 saw 22 such proposals and average support grew to 54.9 percent. (Support levels reached a high in 2003 when an average of 57 percent of votes cast were cast in favor of the proposals.) ISS' Governance Research Services (GRS) is currently tracking 30 proposals filed for 2006, but don't expect to see them all on proxy statements: four have already been withdrawn and proponents report that they are in negotiations with a number of other companies.

Interesting AP article out today, in which investment bankers predict a banner year for M&A in 2006, with one of the main catalysts being the efforts of activist investors.

On Tuesday, February 28, ISS' Pat McGurn appeared in a MarketWatch segment titled "Proxy Season: In the Hedge Fund CrossHairs." The discussed centered around what's on the horizon for hedge fund activism and executive compensation in the 2006 proxy season. To watch the interview, please click here.

Vonage IPO to raise $250 million

In tandem with this month's review of governance practices in the Telecommunications industry, CGQ View studies the corporate governance characteristics of Vonage Holdings Corp. (Vonage). Vonage, a leading provider of Voice over Internet Protocol (VoIP) phone services, recently filed an IPO registration statement with the Securities and Exchange Commission (SEC). The IPO is expected to raise $250 million.