An interesting post ran last week on Broc Romanek's Corporate Counsel Blog. If one agrees, as mentioned in the piece, that cumulative voting helps protect shareholder rights--which ISS policy does--then majority vote standard and cumulative voting compliment each other. Without majority vote standard, cumulative voting in an uncontested election has no teeth because then a director could still be elected if he/she receives one single vote.
July 2006 Archives
Seeking to woo institutional investors, H.J. Heinz Co. has embraced majority voting in board elections and other corporate governance reforms. The company unveiled these policy changes on July 20 as it sought support from state and union pension funds in a proxy contest with billionaire shareholder Nelson Peltz.
Heinz announced these commitments after CEO William Johnson met with representatives from the California Public Employees' Retirement System (CalPERS), the largest U.S. state pension fund. The Pittsburgh-based ketchup maker also detailed these steps during a presentation to the Change to Win labor federation.
Heinz officials have told ISS that the company will adopt a full majority vote standard with a director resignation policy, as Intel, Dell, and more than 30 other firms have done. In addition, Heinz said will ask shareholders to vote to change supermajority voting rules to require only 60 percent approval, rather than 80 percent, to make certain charter and bylaw changes. The company also promised to put any "poison pill" plan to a shareholder vote within a year of adoption.
"We welcome and are encouraged by the corporate governance reform commitments that the Heinz board has made to improve long-term value for shareowners," CalPERS CEO Fred Buenrostro told Bloomberg News. As of July 27, the pension fund had not announced which side it will back at Heinz's Aug. 16 annual meeting.
The meeting with CalPERS also produced a commitment from Heinz to add up to two independent directors to the company's 12-member board via current nominating processes. Director independence is a major issue in Heinz's proxy fight with Peltz, who seeks to replace five incumbent directors--that he deems "too connected" to the company--with his own nominees. In response, Heinz argues that Peltz's nominees, who include his son-in-law and a long-time business partner, would be a "self-interested voting bloc."
Peltz and his hedge fund, Trian Group, have urged the company to cut more than $500 million in costs and sell assets. Heinz has taken steps to reduce spending by $355 million, and is striving to buy back $1 billion in shares over two years, Bloomberg News reported.
ADP Proxy Services, which will mail ballots to 85 percent of Heinz shareholders, will allow retail investors to cast votes through the Internet, Heinz said. Management had accused Trian of obstructing Internet voting by these investors; Trian said that claim was "absurd" and said it welcomed such voting, according to Bloomberg News. About 22 percent of Heinz shares are held by retail shareholders through brokers and dealers, Bloomberg reported.
ISS is holding a Governance Forum on Monday, July 31, where Heinz management and the dissidents will present their arguments. The forum will start at noon Eastern (U.S.) time. To register, please click here.
Investors calls for increased disclosure on executive compensation were answered today as the Securities and Exchange Commission (SEC) adopted an extensive and wide-reaching executive compensation disclosure package. The new rules are intended to advance the interests of shareholders through better disclosure.
The Commission's new rules require new tally sheet disclosure that will provide the first in focus snapshots of the total annual compensation packages paid to senior executives at U.S. companies. Clear and meaningful disclosure in "plain English" is now going to be required in the areas of pensions, deferred compensation, severance and perquisites. The staff also corrected many of the problems that investors had raised concerning the original proposal.
Shareholders called upon the Commission to keep compensation committee members on the hook for their decisions related to pay. The staff neatly accomplished this difficult task by creating a new slimmed-down Compensation Committee Report that will accompany the new beefed-up Compensation Discussion and Analysis (CD&A) section prepared by management. The staff also fixed the most glaring problems with the so-called Katie Couric rules by proposing to limit its application to highly-paid, senior-decision makers. The extended comment period on this provision should provide some additional fine-tuning.
The Commission's new rules are also asking for greater transparency on option grant programs and plans. Essentially, the new rules relating to option grant practices will look at 1) timing practices and, 2) practices involved in establishing exercise practices.
What do these new rules mean for investors? Since companies will be required to present an accurate picture as to why and how compensation decisions are made, investors can now better evaluate the actions of board members and will have access to more sophisticated tools to oversee their investments.
We welcome your thoughts to today's approved SEC's Executive Compensation and Disclosure Package.
Rockville, Maryland; July 26, 2006: We applaud the Commission's substantive work and its unanimous decision to upgrade the disclosure of executive and director compensation. Shareholders and board members should receive immediate benefits next proxy season from the new tally sheets providing information on the total annual compensation packages paid to senior executives at U.S. companies. Additionally, we would expect abuses in the pensions, deferred compensation, severance and perquisites areas to dry up now that light will finally reach those previously dark recesses of the compensation landscape. The Commission also demonstrated its willingness to respond to public comment by making important adjustments to its original proposal. As a bonus, the staff also included enhanced disclosure provisions for stock option grant practices that should boost transparency regarding backdating and spring loading practices. Congratulations to Chairman Cox and his staff. Now, its up to shareholders and board members to put this information to good use.
Below is an article I submitted to BusinessWeek, which talks about why hedge funds can sometimes be a force for good. Please let us know whether you believe hedge fund activism in the current M&A environment has positive or negative consequences.
JULY 31, 2006
IDEAS -- OUTSIDE SHOT
By Chris Young
Hedge Funds to the Rescue
Thanks to Hedge Fund Activists, dealmakers can't rely on shareholder passivity
Back in the day, mergers and acquisitions advisers routinely viewed transactions as "in the bank" immediately upon the announcement of a deal. Indeed, deal conference calls were usually filled with congratulatory back-slapping from stock analysts as junior investment banking staffers planned elaborate closing dinners at tony steakhouses. True, regulatory concerns could occasionally scuttle a deal, but the shareholder vote (yawn) was usually a foregone conclusion.
But today, thanks to leadership provided by hedge fund activists, a shareholder vote can be very much in doubt. Consider the multibillion-dollar Novartis (NVS ) buyout of Chiron (NVS ) earlier this year. Chiron stockholder opposition to the buyer's "best and final" price resulted in hundreds of millions of dollars in incremental value received by target shareholders. Despite the common perception of hedgies as fast-money operators bent on corporate destruction, examples such as Chiron indicate ordinary investors can benefit from activists' "selfish" efforts.
With less than a month before Heinz's annual meeting, management and dissident shareholder Nelson Peltz are trading insults while trying to court institutional investors.
On July 20, both sides presented their arguments at a forum hosted by Change to Win, a labor federation that includes the Service Employees International Union, UNITE HERE, the International Brotherhood of Teamsters, and other unions.
The emerging markets of Brazil, Russia, India, and China have seen a flurry of corporate governance reforms in the last five years as economies develop and competition for foreign investors increases.
These four countries, given the acronym "BRICs" by global banking firm Goldman Sachs, have some of the building blocks of solid corporate governance in place. But progress is erratic and sometimes hindered by government control and ineffective legal systems.
Still, as outside investors continue to press for reform at home and abroad, Brazilian, Russian, Indian, and Chinese companies and regulators are taking a greater interest in improving transparency in meeting practices, voting, board processes, ownership, and shareholder rights.
Shareholders are filing a growing number of resolutions at continental European companies, according to an analysis of ISS proxy data.
ISS has tracked a total of 299 shareholder proposals filed at continental European firms through June 30, which traditionally marks the end of the European proxy season. The figure represents a 25 percent increase over the number of proposals tracked during the same period last year. For the entire year, ISS is projecting that the total number of shareholder resolutions will significantly exceed the 384 investor resolutions filed in calendar year 2005.
Of the shareholder proposals filed thus far, a majority--57 percent--were board related, such as proposing shareholder nominees to the board (46 percent of all shareholder resolutions), attempting to remove an existing director (3 percent), requiring a majority of independent directors on the board (1 percent) or introducing an age limit for board members (1 percent).
Non-board related shareholder resolutions covered miscellaneous topics, such as environmental and social considerations (3 percent of resolutions). Proposals related to these issues--addressing environmental, human rights, or labor concerns, for example--were added primarily to the agendas of Scandinavian companies, reflecting an interest in environmental, social, and governance matters on the part of some investors in Sweden, Finland, Norway and Denmark.
By market, the most significant increases were in the Netherlands, where ISS tracked 10 shareholder resolutions, compared with none last year. The majority of those proposals were put forward by foreign investors, thus illustrating the growing internationalization of the market's corporate shareholder base, as well as the introduction of U.S.-style shareholder engagement.
Significant increases in the volume of proposals also occurred at Nordic countries, with 32 shareholder proposals so far in Sweden (versus 21 over the same six-month period last year); 16 shareholder proposals in Denmark (compared with one during the first half of last year); and 15 in Norway (compared with seven during the same period last year).
In all other continental European markets, the number of shareholder resolutions remained similar to last year.
Over 400 callers tuned in last Thursday for a webcast on this year's hottest compensation topic - options backdating and spring loading. The hour-long webcast included a robust discussion by the panel of experts: Dr. Erik Lie from the University of Iowa, CFA's Kurt Schacht, and ISS' Pat McGurn.
According to the panel, backdating was most prevalent during the 1990's through 2002. Since then it has fallen by about 50 percent. Reasons for the decrease included Sarbanes-Oxley and accelerated Form 4 requirements. However, these don't safeguard against spring loading, which is more likely to be viewed as insider trading.
Dr. Lie provided a summary of his current work on the prevalence of options backdating practices. In his findings, Dr. Lie studied 8,000 companies from 1996-2005. His empirical work suggests that as many as 1,000 companies appear to have manipulated stock option grant dates. While over 50 firms are currently under investigation by the SEC, it appears that shareholders are seeing the tip of the iceberg of companies who have come forward to "confess and correct."
CFA's Kurt Schacht echoed that there are lots of facts still to be revealed, and he cautioned that shareholders should not jump the gun. In a comment letter submitted to the SEC, the CFA Centre for Financial Market Integrity cites loss of investor confidence as one of the largest implications for shareholders. A volatile stock market suffers from the uncertainty involved with these scandals and their associated legal, accounting, and tax costs.
The market is already seeing the issue being taken up in court, with more than 70 lawsuits filed. ISS' Pat McGurn weighed in on the success of these lawsuits. Future reaction to backdating scandals will depend on the findings and outcomes of current investigations. Questions still remain, such as how to deal with boards of directors, audit committees, and compensation consultants that were "in the know," or worse, involved in the cover-up. There seems to be a lack of communication and cooperation between audit and compensation committees, which will need to improve.
The panel members also discussed better compensation disclosure, in light of the SEC's proposal and suggestion that some guidance in this area is forthcoming. It was generally felt that the SEC should augment their reform proposal concerning executive compensation. Companies that don't use "plain English" in compensation disclosure as proposed by the SEC will be seen as less forthcoming. More troublesome is that companies and boards may try to defend their actions rather than disclose them. (Consider SEC Commissioner Atkins' remarks defending spring loading.) The larger implication goes to the investor confidence issue. While discounted stock options are nothing new and not illegal per se, it's the cover-up that is most problematic for shareholders.
What do you think? Please let us know your thoughts and comments from last week's webcast.
To learn more about the practice of options backdating and spring loading, please click here.
This article, the second in a two-part series looking at diversity in the boardroom, is drawn from ISS' 2006 Board Practices/Board Pay study.
Minority representation on boards appears to have remained essentially stable over the past year, but there has been a gradual, though slow, trend over recent years to diversify boards in terms of ethnicity, according to a recent ISS study.
Among the 6,979 directorships in the 2005 director group for which definitive information on racial or ethnic status is available, 706 are members of minority groups--representing a little over 10 percent of the total, about the same as in 2004. This percentage is up from 7 percent in 1999. The current group of minority directors includes:
--452 African-Americans (6.4 percent);
--146 Hispanics (2.1 percent); and
--107 Asian or Pacific Islanders (1.5 percent).
Larger companies are more likely to have minority directors on their boards than smaller firms. The correlation between company size and the likelihood that the board will have some minority representation is even more pronounced than with respect to female representation.
Lawmakers in Delaware, where most U.S. companies are incorporated, have amended the state's General Corporation Law (DCGL) to facilitate majority voting in director elections, but they stopped short of switching the law's default standard from plurality to majority.
The legislation, which goes into effect Aug. 1, makes clear that director resignation policies--which have been adopted by pharmaceutical giant Pfizer and more than 100 other firms--are enforceable under Delaware law. The new law also mandates that directors cannot overturn or alter shareholder-approved bylaw amendments that spell out vote requirements in director elections.
More than 500 people representing the institutional investment community attended the 2006 annual conference of the International Corporate Governance Network (ICGN) last week in Washington DC. Of course, a DC conference wouldn't be complete without a speaker from a regulatory body and SEC Commissioners draw a crowd at just about any investor conference.
In fact, the crowd that assembled to hear SEC Commissioner Paul Atkins speak turned a bit less courteous when the Commissioner suggested that the practice of springloading stock options (timing option grants prior to releasing positive company news) represented a legitimate tool for boards to use as incentives for CEOs and executives.
Immediately following his presentation, a vote was taken and 62% of the investor audience said that springloading should be considered a form of insider trading, while 16% seemed to agree with the Commissioner's viewpoint. 21% were undecided.
In other audience polls:
--82% of the conference-goers said that hiring and firing directors was the most important right a shareholder should have
--72% of the conference-goers said that corporate governance adds value but its difficult to measure, while 26% said that the value can in fact be measured
--70% of the conference-goers said that board practices have improved while only 8% said they had declined. 22% were on the fence.
While the practice of backdating options is clearly getting a close look by regulators, the newer approach of springloading option grants is just beginning to emerge. Is it insider trading? Tell us what you think.
There were two very interesting articles this weekend on options backdating. The first story is from The Wall Street Journal, which talks about the practice of 'spring loading' and, the second is a Guardian Unlimited story on how Dr. Erik Lie, associate professor of finance at the University of Iowa, is rocking corporate America by revealing boardroom reward ploys.
To read the Guardian Unlimited story, please click here.
To read the Wall Street Journal article, please Download file
Do you think 'spring loading' is insider trading? We welcome your comments.
Japanese firms once again overwhelmingly concentrated their annual shareholder meetings on a frenzied single day this year--June 29--as shareholders, together with their voting agents and proxy advisers, struggled to execute votes during the world's most challenging proxy voting marathon.
But while voting Japanese equities remains a daunting task, institutional activism, once almost exclusively associated with foreign pension giants like CalPERS and TIAA-CREF--both of which were instrumental in enabling international proxy voting in Japan in the early 1990s--is finally spreading to the long sleeping giant of Japanese institutional money.
In the past year, the Japanese business community has become increasingly sensitive to the growing clout of domestic institutional activism. Corporate managements, many of which are sitting on sizeable cash reserves, are facing hostile takeover threats for the first time in recent years. Moreover, the web of management-friendly cross-shareholding has steadily eroded, stemming primarily from the collapse of the economic bubble that peaked 16 years ago, forcing many banks and old-guard firms to sell off paper assets. Abysmal stock performance simultaneously drove many pension funds that were just starting to dabble in equity into under-funded positions, making them increasingly desperate for higher investment returns.
On June 27, U.K. regulators announced amendments to the Combined Code on Corporate Governance, a set of best practice requirements that govern all London Stock Exchange-listed companies. The code, dubbed Britain's governance "bible," was last revised in 2003.
Britain's Financial Reporting Council said the changes would:
--amend the existing restriction on the company chairman serving on the remuneration committee to enable him or her to do so where considered independent on appointment as chairman (although it is recommended that he or she should not also chair the committee);
--provide a 'vote withheld' option on proxy appointment forms to enable shareholders to indicate if they have reservations on a resolution but do not wish to vote against. Many listed companies already provide this option. A 'withheld' vote is not a vote in law and would not count in the calculation of the proportion of the votes for and against the resolution, however;
--recommend that companies publish on their Web site the details of proxies lodged at a general meeting where votes are taken on a show of hands. The Company Law Reform Bill currently with Parliament includes clauses that would require companies to publish details of votes taken on a poll. This amendment to the Combined Code means that details of all votes would be made available; and
--enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web site.
"When the FRC reviewed the implementation of the 2003 Code in the second half of 2005, we found that it was generally felt to be bedding down well," FRC chairman Sir Christopher Hogg said in a press release. "But the review did identify a small number of modifications that have now been endorsed by both listed companies and their investors, and these have been incorporated into the updated version of the Code."
According to the FRC, listing rules will not formally apply to the revised Combined Code until the Financial Services Authority has carried out a separate consultation, which is expected to start in September. The FRC will encourage listed companies and their investors to adopt the updated code on a voluntary basis for reporting years beginning on or after Nov. 1 2006, however, "in view of the limited nature of the changes and the strong support that they have received."
There is an interesting article in the Harvard Business School publication Working Knowledge titled "Corporate Governance Activists are Headed in the Wrong Direction." Author Joseph Hinsley offers his perspective on majority voting for directors and states that its a flawed concept that neither enhances shareholder democracy nor improves corporate governance.
To read the article click here. We welcome your comments on majority voting for directors.
Each year the president of the United States provides the nation with a "State of the Union" address that provides an update on the status of our country. Given the many recent developments, industry reports, and high-profile cases that have resulted in a flurry of discussion concerning the health, status, and future of securities class action litigation, we offer this State of the Union for securities litigation:
It's about the same as it's been for the last 10 years.
At least that's how we see it, despite some curious media pronouncements this year about the supposed demise (or at least the supposed decline) of securities litigation.
Already in 2006, Stanford University/Cornerstone Research, NERA Economic Consulting, and PricewaterhouseCoopers have published interesting studies presenting securities litigation statistics and analysis of possible trends. These studies, combined with notable events such as the high-profile settlements in the Enron case, as well as the criminal indictment of powerhouse plaintiffs' law firm Milberg Weiss Bershad & Schulman, have provided the press and pundits with numerous opportunities to opine on where securities litigation is headed.