Who should provide oversight of the U.S. capital markets? Should U.S.-based shareowners adopt a UK style principles-based model and form a Code of Best Practice, in cooperation with a broad array of market industry bodies, to measure the practices of U.S. listed companies? Should shareowners actively engage with companies to encourage them to adhere to the agreed upon best practices over time?

While corporate governance experts debated these issues leading up to the corporate scandals of 2001 and 2002, the U.S. regulators stepped in and took action on behalf of shareowners. Now we are all asking, have the regulators gone too far?

According to the WSJ, the Committee on Capital Markets Regulation report released today cites that excessive regulation is adding to corporate costs, stifling the public securities markets and causing the U.S. markets to lose business to foreign competitors.

Already the Council of Institutional Investors has issued a release stating that they disagree strongly with the Committee on Capital Markets Regulation's assertion that overzealous regulation is stifling U.S. competitiveness. They also believe that many of the panel's recommendations, if adopted, would undermine the effectiveness of market watchdogs and weaken critical investor protections.

Today's WSJ article adds the report encourages securities firms to step forward when they find problems, and it suggests the SEC should act more like federal banking regulators, such as the Federal Reserve. Yet, if the current political climate, feeding off of a growing body of data shows the U.S. capital markets are less competitive now than they were before 2002, results in a decrease in regulation, should securities firms fill the oversight void or should public pension funds or investment managers?

We welcome your comments.

The Committee on Capital Markets Regulation Report has been released this morning. The 152-page report makes 32 recommendations but places an emphasis on principles-based rules. It also recommends modifying the private litigation system. The committee is recommending certain regulations be cut back to improve competition in U.S. capital markets.

We welcome your thoughts on the report.

CFO.com is reporting today that the New York Stock Exchange and the National Association of Securities Dealers will merge, possibly in the first half of 2007. According to the article, the merger would create a single regulator that would oversee member regulation, examinations, arbitration, and mediation.

A new study by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer titled "Lucky CEOs," investigates the opportunistic timing of option grants during the period 1996-2005 by focusing on the relation between grant manipulation and corporate governance. Investigating the incidence of "lucky grants"--defined as grants given at the lowest pirce of the month--they estimate that about 1,150 lucky grants were manipulated and that 12% of firms provided one or more lucky grants due to manipulation during the examined period.

To read the study, please Download file.

The Organization for Economic Cooperation and Development (OECD) issued its first report on corporate governance in Turkey, praising progress made and itemizing a long list of necessary improvements.

"Although the overall corporate governance outlook is positive, the assessment reveals some key areas for improvement by companies and the authorities," the OECD concluded in a 150-page report issued last month.

The report notes that corporate ownership in Turkey tends to be concentrated in family-controlled, financial-industrial company groups. Free floats are often low, pyramidal structures are common, and there is a high degree of cross-ownership within some company groups. Controlling shareholders often play a leading role in the daily management and strategic direction of publicly held companies.

These challenges notwithstanding, the country's securities regulator, the Capital Markets Board (CMB), receives high marks from the OECD for "playing a leading role in setting corporate governance standards for publicly held companies, enforcing the applicable standards, and fostering market integrity." In recent years, Turkey has adopted a corporate governance code (CMB Principles) and implemented a wide range of fundamental regulatory reforms.

The report calls for further improvements in the disclosure of related-party transactions and self-dealing, the protection of minority shareholders, and the role of the board in overseeing not only management but also controlling shareholders.

"Some of the existing shortcomings can be addressed only by the private sector, including controlling shareholders, board members, senior management, company advisers, auditors, and investors," the report notes. "In particular, board members and controlling shareholders need to show they are adhering to the spirit, and not just the letter, of the relevant standards."

Proposed amendments to the company law provisions in the Turkish Commercial Code (TCC) would call for more disclosure about company groups and would require controlling companies to compensate controlled companies for losses incurred as a result of their exercise of control. This should strengthen the protection of minority rights, according to the OECD report.

The revised code proposal has been submitted to the Grand National Assembly and is now under consideration in the appropriate subcommittees.

The proposed amendment designating Turkish Accounting Standards (TAS) as the sole source of general financial reporting standards for all companies (including financial firms), represents a major step forward, as does the proposal requiring all companies to make investor-related information available on company Web sites, according to the report.

The OECD report also recommends that the CMB place more emphasis on comprehensive risk-based approaches to standard-setting, supervision, and enforcement, and that the agency include corporate governance factors in its risk assessment criteria. The report also encourages formalizing and enhancing the transparency of the CMB's consultation practices, including the publication of regulatory impact analyses.

"Turkey has gone a long way to achieving many of the outcomes advocated by the OECD principles," the report concludes. 'In several key areas, however, more needs to be done to ensure satisfactory outcomes."

Investors and regulators are taking a closer look at companies that miss deadlines for reporting executive stock option grants, in what may be a new phase in the U.S. option-timing scandal.

On Nov. 1, shareholder Erik Henne filed a derivative lawsuit against directors and executives of Digital River, a Minnesota-based Internet-commerce firm. The suit, which accuses the company of backdating options to maximize executive pay, claims that CEO Joel Ronning and two other executives have never filed Form 4 reports with the Securities and Exchange Commission on grants made in 2003, according to the Minneapolis Star Tribune. Two other executives waited until this year to report their 2003 option grants, the lawsuit contends.

Bob Kleiber, Digital River's vice president of investor relations, told Dow Jones last month that the late filings were an "oversight," but he said the company had accurately reported grant dates.

Since the passage of the Sarbanes-Oxley Act in August 2002, companies have been required to report option grants within two business days. While this rule change has made it more difficult for companies to manipulate grant dates, a significant number of firms have missed these deadlines, raising concerns among some investors that option-timing is still occurring.

Erik Lie, a finance professor at the University of Iowa who has written several papers on option grants, estimates that 13 percent of option reports last year were filed late. "Among those grants, the prevalence of backdating and other manipulation appears to be just as big as it was before 2002," Lie said at an ISS forum in July.

The Digital River investor's lawsuit also questioned the company's schedule for grants; the firm awarded grants in six different months between 1999 and 2004, according to the Star Tribune. Investors, including the AFL-CIO, have called on firms to set a fixed grant date each year to reduce the possibility for manipulation.

More than a half-dozen firms are facing investor scrutiny over their Form 4 filings for option grants. Among those are Hansen Natural, Children's Place Retail Stores, and Silicon Image, which have announced internal and SEC investigations of their option grant practices.

Overall, more than 175 companies have disclosed internal or regulatory probes into past grants, Bloomberg News reported. More than 95 issuers now face derivative lawsuits, according to The D&O Diary, a Web log maintained by Kevin LaCroix, an attorney with OakBridge Insurance Services. Twenty of those firms are defendants in securities class-action lawsuits, according to ISS Securities Class Action Services data.

John Nester, a spokesman for the SEC, told the San Jose Mercury News that the agency "will continue to monitor whether backdating appears to be occurring in conjunction with delinquent Form 4 filings. Where appropriate, enforcement actions will follow."

Edward Bright, a partner with the law firm of Thacher Proffitt & Wood, notes that some firms will miss deadlines because of a high volume of Form 4 filings. "A fair argument can be made in the case of occasional late filings that they are the result of inadvertence or something falling through the cracks," Bright told Compliance Week. "But if a company is chronically late with respect to options and not other transactions, it raises a legitimate question."

The six biggest international audit firms have called for a complete overhaul of corporate financial reporting as the U.S. and Europe move toward convergence of international audit standards.

In a Nov. 8 report, the accounting firms propose to replace static quarterly financial statements with real-time, Internet-based reporting that encompasses a wider range of performance measures, including non-financial ones. The report was signed by the chiefs of PricewaterhouseCoopers International, Grant Thornton International, Deloitte, KPMG International, BDO International, and Ernst & Young. The report can be downloaded here.

"We all believe the current model is broken," Mike D. Rake, KPMG's chairman, told the Financial Times. "There are significant shortcomings to U.S. GAAP [Generally Accepted Accounting Principles] and issues of concern with International Financial Reporting Standards. We're not in a very happy situation."

Rake noted that quarterly reporting and the short-term focus on companies' ability to meet Wall Street earnings expectations helped foster accounting scandals. The firms have been working on their proposals for more than a year.

The large discrepancy between the "book" and "market" values of many listed companies is clear evidence that the content of traditional financial statements is of limited use, the report said. The audit firms recommend using non-financial measures that would provide more valuable indications of a company's future prospects, such as customer satisfaction, product or service defects, employee turnover, and patent awards.

The report said the following developments need to occur to ensure capital market stability, efficiency, and growth:

--Investor needs for information are well defined and met;
--The roles of the various stakeholders in these markets--financial statement preparers, regulators, investors, standards setters, and auditors--are aligned and supported by effective forums for continuous dialogue;
--The auditing profession is vibrant, sustainable, and provides sufficient choice for all stakeholders in these markets;
--A new business-reporting model is developed to deliver relevant and reliable information in a timely way;
--Large, collusive frauds are more and more rare; and
--Information is reported and audited pursuant to globally consistent standards.

ISS today released its 2007 U.S., Canadian and international proxy voting policy updates. ISS analysts will begin applying the new policies for all companies with shareholder meeting dates on or after February 1, 2007. As apart of its comprehensive policy formulation process, ISS took on numerous policy outreach activities worldwide throughout the year to collect feedback across clients, a variety of industry constituencies and key regional markets.

To read the entire release, please visit here.

Some of the most sweeping changes for U.K. companies since passage of the Companies Act of 1985 took effect when the Companies Bill became law on Nov. 8.

The 696-page bill, considered Britain's longest piece of legislation, is intended to enhance shareholder engagement and promote a long-term investment culture, among other objectives.

The new law would implement several key changes such as requiring more detailed reports on environmental and social impacts, and calling for shareholders to ratify directors' acts. The latter is standard practice in several European countries, including Germany, the Netherlands, Austria, and Switzerland.

Other changes include requiring shareholder approval of director severance contracts that allow for awards of more than two-times a director's annual salary, as well as provisions allowing for auditor indemnification with shareholder approval.

Investors also have focused on measures that ostensibly place greater liability on directors, though some experts believe that the new rules allowing shareholders to sue directors who "don't promote the success of the company," will not lead to an up-tick in lawsuits against directors.

"I don't think this act will make a blind bit of difference to my practice," Edward Sparrow, a partner at London-based Ashurst, told Bloomberg News. Sparrow noted it is more difficult to prove fraud in England than it is in the U.S., and that lawyers had little incentive to take on such cases because the law barred them from receiving a percentage of winnings when working on a contingency basis.

Other experts warn that rules empowering investors to go after directors could be far-reaching but that it is too early to determine their precise impact.

The new law also affects rules on mergers and acquisitions. The new Companies Bill codifies European Union rules on takeovers, replacing the City Code on Takeovers. Britain's Takeover Panel will remain the regulatory authority overseeing such transactions and will receive greater statutory powers.

The new law will include squeeze-out and sell-out rights under which a bidder has the right to buy out minority shareholders, and minority shareholders have the right to require a successful bidder to acquire their shares, respectively. Both provisions would come into effect once a bidder has acquired 90 percent of the target firm's shares.

Meanwhile, companies whose reporting years begin after Nov. 1 must disclose compliance with new provisions of Britain's 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 earlier in the year.

The changes will:

*Amend the existing restriction on the company chairman serving on the remuneration committee. The changes would allow the chairman to do so (but recommends against serving as chair of the committee) if the chairman is deemed independent on appointment.
*Provide a "withheld" vote 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.
*Enable companies to meet the requirement to make the terms of reference of board committees available by placing them on their Web sites.

The code was last revised in 2003.

At a November 7, 2006 AGM, the shareholders of French Pernod Ricard, the second largest spirits and wine operator worldwide, voted against Resolution 13 with the board's blessing. How did such a turn in management recommendations come about?

Resolution 13 concerned an amendment of the company's voting right ceiling. In the present version of the company's bylaws, no shareholder could vote for more than 30 percent of the company's total share capital. This means that a shareholder with a 30-percent stake, voting at an AGM with an attendance rate of 60 percent (standard attendance rate according to a Pernod Ricard spokesman) could still represent 50 percent of the number of votes cast at the meeting (30 votes out of 60 cast; excluding possible double-voting rights).The new version of the company bylaws proposed to calculate the 30 percent ceiling based on the votes actually cast at the general meeting. This could have significantly reduced the number of votes a single shareholder could cast.

As a result, a shareholder with a 30-percent stake, participating in an AGM with an attendance rate of 60 percent would vote for only 18 percent of the total share capital (18 percent = 30-percent ceiling multiplied by 60-percent cast; excluding possible double-voting rights). In this example, the shareholder would be able to vote only 60 percent of his total voting rights (18 votes out of the 30 held). Furthermore, Pernod Ricard's resolution proposed to add a new paragraph to article 32.3. This new paragraph would have made the voting right ceiling stricter because the 30% limit would apply to shareholder groups as well. All shareholders linked by a concert action would only be allowed to vote a total of 30% of votes cast at a meeting. In its report, ISS recommended voting against resolution 13.

After discussion, the board of Pernod Ricard decided to take the concerns of its shareholders into account. As it was too late to modify the agenda, the board told shareholders present at the general meeting that it would vote against its own resolution and asked shareholders to do the same. This last minute turn of the situation is a victory for all champions of good corporate governance, achieved through a constructive dialogue between interested parties.

The CtW Investment Group has asked Rite Aid's board to delay a shareholder vote on the company's $2.54 billion acquisition of the Brooks and Eckerd drugstore chains until after regulators review the transaction.

Rite Aid, the third-largest U.S. drugstore chain with 3,315 stores, is seeking to acquire more than 1,800 Eckerd and Brooks stores from the Jean Coutu Group of Canada. Under the transaction, Rite Aid also would assume $850 million in long-term debt. CtW has requested that Rite Aid's board postpone the planned December meeting and instead schedule the shareholder vote after final regulatory reviews have been completed.

CtW, which is affiliated with the Change to Win labor coalition, first voiced its concerns in a Sept. 28 letter to Rite Aid Chairman Robert Miller. Change to Win represents more than six million U.S. workers who participate in public and union-sponsored pension funds with about $1.5 trillion in assets, including $180 billion in plans sponsored by affiliates.

Mike Garland, director of value strategies at the CtW Investment Group, is now in the process of meeting with the company's institutional investors to discuss the transaction. The labor investment group also has outlined its concerns in an Oct. 13 letter to shareholders.

"We believe forcing shareholders to make an up or down determination on this proposed acquisition is premature and potentially disenfranchising for shareholders," Garland tells Governance Weekly. "We are encouraging investors to take an active stance on this matter now, before the company files its definitive proxy statement. This is the time to weigh in."

Will Regulators Require Substantial Divestitures?
At the heart of CtW's critique is that a substantial divestment of stores may be required to gain antitrust approval from federal and state regulators. Such a requirement could materially impact the company's future cash flow and increase the per store acquisition cost for current Rite Aid shareholders, thereby undermining the financial logic behind the deal. CtW points out that the risk is particularly acute for shareholders since Rite Aid has committed to go forward with the purchase even if significant divestitures are required.

The Brooks and Eckerd chains consist of more than 1,800 stores, and CtW's analysis suggests the purchase price is already toward the high-end of comparable transactions. The labor investment group points out that the risk of significant divestitures could increase the company's per store acquisition cost from $1.8 million to as high as $2.2 million before taking into account proceeds from the divested stores.

These divestitures would drive the deal's implied EBITDA multiple upward, perhaps outside the reference ranges of comparable transactions used by Citigroup and Rothschild to form their respective fairness opinions on the acquisition. Depending on how regulators choose to define the relevant market, the number of required divestitures could substantially exceed even the 300 contemplated by Rite Aid, putting as many as "500 stores under the authorities' antitrust microscope," CtW notes.

Rite Aid anticipates the possibility of large-scale divestitures, but the company stands behind the proposed timeline and asserts that shareholder interests are adequately protected. In response to CtW's initial inquiry, Rite Aid General Counsel Robert Sari confirmed in an Oct. 10 letter that the company's plan to seek shareholder approval is moving forward on the fast track.

According to the company, "the EBITDA threshold in the agreement should adequately protect" investor concerns. Under the transaction agreement, if antitrust authorities require divestitures generating store-level adjusted EBITDA of more than $60 million, Rite Aid could walk away from the deal. The company claims this threshold is "not materially adverse" to Rite Aid shareholders. CtW believes this threshold is high and estimates this amount equals approximately 300 stores, far from insignificant.

CtW is continuing to evaluate the benefits and risks and has not made a determination on the deal's merits. "Our view as to whether the Brooks and Eckerd acquisition will be beneficial to Rite Aid shareholders could depend on the number of stores to be divested and the resulting implications for Rite Aid," Garland says. "We don't believe shareholders should be asked to make this decision before we know what we are actually getting."

It's unclear when regulators will complete their review. On Oct. 19, Camp Hill, Pennsylvania-based Rite Aid announced that it had received a second request from the Federal Trade Commission for information on the transaction. The company has said that it hopes to complete the acquisition before early March.

An offer by steel giant Arcelor Mittal to purchase the 33 percent stake in Arcelor Brasil it does not now own may be scuttled by some minority shareholder who are rejecting the deal as inadequate.

Arcelor Mittal's $3.3 billion offer, made last week, comes nearly five months after steel magnate Lakshmi Mittal ended his battle for control of the Brazilian unit's parent, Luxembourg-based Arcelor. The offer follows a decision by Brazilian securities regulator Comissao De Valores Mobiliaros (CVM) requiring the parent company to make a bid for the free float, in keeping with local rules. The rules, dubbed "tag-along rights," effectively call for Arcelor Brasil shareholders to receive the same treatment as that of the parent company's shareholders.

Last week's bid valuing each Arcelor Brasil share at approximately $15.45 is being criticized by some shareholders. Chris Hohn, managing director of The Children's Investment Fund, termed the offer "abusive" in comments to the Financial Times and argued the offer should be doubled to reflect a premium similar to that paid by Mittal for Arcelor. Hohn is well known to governance observers for his key role in ousting Deutsche Boerse CEO Werner Seifert last year.

Such an offer, however, would represent an expense of more than $6 billion on top of the $31.9 billion that Mittal paid for Arcelor. Consequently, Arcelor officials argued this summer that the tag-along rights did not apply because the acquisition of Arcelor included the company's 67 percent stake in the Brazilian unit and hence no change in control took place.

With the CVM's decision requiring a bid, Arcelor Mittal officials say they are offering a fair price though analysts believe the offer will be rejected. "I think [Arcelor Brasil] shareholders are going to reject it [the offer]," Pedro Galadi, an ABN Amro steel analyst, told the Financial Times.

Arcelor Brasil was formed in 2005 as a result of the consolidation of Arcelor's controlling stakes in the Brazilian companies Belgo, CST, and Vega do Sul. The unit likely will account for approximately 9 percent of Arcelor Mittal's steel output in 2007.

Goldcorp's former CEO Robert McEwen has broadened his battle for a shareholder vote on the company's purchase of Glamis Gold into a campaign to revise Canada's securities regulations.

In an Oct. 30 open letter, McEwen called on "all shareholders of all Canadian public companies" to take action to "correct a fundamental flaw in the Canadian securities regulations that allows management to circumvent your essential shareholder rights."

RiskMetrics Group, the leading financial risk management firm announced it will acquire Institutional Shareholder Services, Inc. ISS is the world's leading provider of proxy voting and corporate governance solutions to the institutional marketplace. The merger reflects the broader vision of both companies to expand beyond their core businesses of financial risk management and corporate governance to offer a broad range of data, analytics and advice to investors.

Combined, RiskMetrics Group and ISS will generate over $200 million in revenue per year with approximately 900 employees across 23 offices serving over 2400 clients worldwide. Spun-out of JP Morgan in September of 1998, RiskMetrics Group is the leading provider of financial risk analytics to banks, central banks, hedge funds, asset managers, pension funds and corporations. To read the entire release, please visit here.