Last Friday, the Securities and Exchange Commission reversed a decision it had made in July and adopted a rule that would allow many companies to report lower total compensation for top executives. Yesterday's New York Times business section discusses the change to the way grants of stock options are to be explained.

What are your views on this SEC change?

A federal judge has dismissed claims by Enron investors against Alliance Capital Management that arose from the service of Alliance executive Frank Savage on the energy company's board.

The investors argued that Alliance should be held liable because Savage signed a registration statement for a $1 billion Enron bond offering that incorporated the company's false financial statements for 1998 to 2000. Alliance, a New York-based money manager, is now known as AllianceBernstein.

U.S. District Judge Melinda Harmon in Houston rejected that argument after concluding that there was "no evidence that Alliance had any authority to influence, supervise, or determine Savage's actions at Enron," The Wall Street Journal reported. She also said there was no evidence that Savage knew or should have known that he had signed a false registration statement.

Jim Hamilton, an analyst at Wolters Kluwer Law & Business, noted the significance of the ruling in a posting on his Web log. Had the judge held Alliance liable based on Savage's service on Enron's board, "the effect would be to chill the willingness of qualified individuals to serve on boards of public companies as independent directors," Hamilton wrote.

In an unusual move, the judge ordered Lerach Coughlin Stoia Geller Rudman & Robbins, the lead counsel for the investors, to pay part of Alliance's legal fees and expenses. In her Nov. 30 ruling, the judge said investors' lawyers should have realized that their claims had no merit before Alliance had to ask the court to dismiss those claims, Bloomberg News reported. The fees will be limited to those incurred by Alliance during the summary judgment phase of the litigation, attorney Lyle Roberts noted in his 10b-5 Daily Web log.

Harmon's order was noteworthy because defendants in U.S. securities lawsuits typically pay their own legal fees even when they persuade a court to dismiss a case. Investors, who generally have contingency fee arrangements with their attorneys, generally have their legal fees paid through a percentage of the settlements that they obtain.

William Lerach said his firm would pay the fees if it does not prevail on appeal or fails to persuade the judge to change her mind, the Journal reported. Savage, along with other former Enron directors, previously reached a settlement with investors, without admitting wrongdoing.

Lerach Coughlin so far has obtained $7.1 billion in settlements on behalf of the University of California and other investors who lost money during Enron's collapse into bankruptcy in 2001. Investors have reached accords with Citigroup, JP Morgan Chase, and three other investment banks and are still pursuing claims against Merrill Lynch, Credit Suisse, Toronto-Dominion Bank, Royal Bank of Scotland Group, Royal Bank of Canada, Goldman Sachs Group, and the law firm of Vinson & Elkins, according to Bloomberg News. Judge Harmon previously dismissed investors' claims against Deutsche Bank and Barclays.

A trial is scheduled for April, but a federal appeals court is reviewing a challenge by Merrill Lynch and other defendants to Judge Harmon's class certification order, Bloomberg News reported.

Reuters ran an article today titled "MergerTalk: Hedge Funds Find New Ways to Sway Votes," which looks at the practice of empty voting. The practice of "empty voting" entails borrowing shares prior to a record date, which then gives the borrower the voting rights. Once the record date has passed, the borrower returns the shares and effectively controls a large number of votes without a continuing economic interest. Some critics say this creative share borrowing is being done to manipulate voting outcomes and seriously undermines corporate governance transparency for large shareholdings.

The story specifically cited hedge fund's ability to purchase over-the-counter (OTC) equity swaps, obtaining large blocks of shares for voting without any true ownership. Holders are also not required to disclose their current assets in OTC swaps, nor are the banks that structure the swaps. Henry Hu, a University of Texas Law Professor, recently came out with a study on the practice of share lending and empty voting and is advocating fixing the disclosure system to make this practice more transparent.

Industry and academic focus is growing on instances where manipulating the vote is the objective, but similar problems can exist through normal sharelending, even if the motivation is benign. What are your thoughts on the practice of share lending and its impact on voting as well as the practice of "empty voting"...widespread problem or an anomaly to be watched? We welcome your comments.

Interesting opinion piece in the Australian Financial Review by Geof Stapledon, Managing Director of ISS Australia, and Martin Lawrence, Lead Analyst of ISS Australia, titled "Equity Grants to Directors Should Require Consent."

The piece highlights the need to reinstate the shareholder approval requirement to issue equity grants to directors. Currently, the ASX is seeking comment on this rule.

Please Download file to read the entire article. We welcome your thoughts on restoring this rule in Australia.

According to a Dow Jones article from last week, the M&A landscape in Japan looks like it will be busy in 2007, likely driven by corporate Japan's need to restructure, its hunger for foreign acquisitions and a push by foreign firms to take advantage of opportunities in the world's second biggest economy.

Corporate Japan, with stronger balance sheets, flush with cash and in need of larger markets, is showing a renewed desire to venture overseas for acquisitions. Foreign private equity firms, which have cut few major deals in Japan despite blockbuster acquisitions in almost every other major market in the world, are also building up their presence in Japan.

Faced with such threats, many companies have been buying back shares, hiking dividends or trying to communicate more effectively with their shareholders in an effort to increase their market capitalization. According to ISS, others have been putting in place defense schemes, such as poison pills. 15 Japanese firms adopted poison pills in 2005, and the tally for 2006 is likely to top 140.

To read the entire article, please Download file
.

A majority of S&P 500 firms now allow for the annual election of directors, according to a forthcoming ISS study examining boards at S&P "Super 1,500" companies.

That key finding, along with others concerning the structure and composition of corporate boards, suggests that companies are moving steadily to shore up their governance practices in response to growing pressure from shareholders and regulators.

The developments are "part of a broader trend to ensure boards are more accountable to shareholders," noted University of Delaware professor Charles Elson in comments to Governance Weekly. "Companies are heeding the will of investors by moving in this direction."

The study, which examined proxy data for 1,433 companies holding annual meetings between Aug. 1, 2005, and Nov. 3, 2006, finds that only 45 percent of S&P 500 companies now maintain staggered boards, compared with 53 percent last year, and 56 percent in 2004. This year's figure represents the first time in the study's 10-year history that a majority of large capital firms allow for the annual election of directors.

The use of classified board structures among S&P MidCap and SmallCap firms also is on the decline, albeit at a more modest pace than that evidenced with larger companies. Firms in those indices maintained the same percentage of classified boards in 2003 and 2004 (66 and 62 percent, respectively), but each has dropped an aggregate 3 percentage points over the last two years.

Overall, the number of S&P 1,500 companies with staggered boards continued to decline in 2006, to 55 percent overall, down from 59 percent last year and 61 percent in 2004.

The steady decline in the prevalence of classified boards among all S&P 1,500 companies can be attributed to the significant decline among S&P 500 firms, which is the result of shareholder scrutiny of larger, high-profile companies deploying the anti-takeover device. From 1999 to 2006, S&P 500 companies faced 258 shareholder proposals to declassify, according to ISS records. Over the same period, MidCap companies faced just 48 such proposals, and SmallCap companies just 22.

This trend may change, however, as activist investors turn their attention to smaller firms where proposals in recent years have fared well. In past years, support for shareholder proposals to declassify tended to be stronger among S&P 500 companies. But that was not the case in 2006 and 2005, the study finds. Average support for shareholder proposals to declassify among S&P 500 companies in 2006 was 65 percent, compared with an average of 71 percent among MidCaps and 82 percent among SmallCaps.

The broader trend to declassify will pick up pace in light of a recently released report by the Committee on Capital Markets Regulation, analysts say. The report recommends that companies with classified boards seek shareholder approval when adopting poison pill defenses and, barring such approval, that companies redeem the pill. That, notes Elson, will sharpen the focus on companies maintaining classified boards and accelerate the trend toward declassification.

Majority vote and executive compensation proposals will be the most frequently filed shareholder proposals for the 2007 proxy season, based on early indications. ISS' Governance Research Service is currently tracking over 400 governance-related resolutions already filed for the 2007 annual meeting season, including 107 majority vote proposals and 135 proposals related to executive compensation practices. Labor funds have filed 91 of the compensation proposals, including 40 "pay for superior performance proposals." This proposal - first filed by the Carpenters' funds in 2006 - calls for a closer link between compensation and performance, and includes stipulations that bonuses not be paid if a company does not perform as well as its peers.

Another popular compensation proposal was also initiated by a labor fund last year: AFSCME's request for a non-binding advisory vote on compensation issues, dubbed by some proponents as the "say on pay" proposal has been filed by a number of different proponents for 2007. GRS is tracking 30 of those resolutions so far, including 10 filed by labor funds and others by individuals, public pension funds and social responsibility funds.

A more in-depth look at proposals for the 2007 season will appear in the forth-coming edition of ISS' Corporate Governance Bulletin. Stay Tuned.

A new French decree law was published this week, on December 12, in the "Journal Officiel" and will be fully effective as of Jan 1, 2007. The decree takes into account the recommendations issued by the Autorite Des Marches Financiers (AMF) workgroup --which ISS' French office contributed to.

In spirit, many of these changes are a step in the right direction for improving shareholder rights. However, there may be unintended consequences due to practical implementation and due to the short deadlines of this decree. This decree was expected and brings significant changes to the following areas:

- It introduces a record-date system. The record date must be three days before the general meeting and replaces the blocking shares requirements. As a result, we could see a rise in proxy voting volume and more participation by foreign shareholders who disliked blocking requirements.

However, a record date set so close to the date of the general meeting is an operational challenge that will have to be resolved by the intermediaries. Investors can only hope that, faced with a short two weeks to implement this law, the intermediaries' answer will not be to impose earlier instruction deadlines or blocking of shares at intermediary stages.

- Meeting agendas will be notified 35 days before a meeting instead of the current 30 days before the AGM. This measure will allow ISS to announce meetings and agendas earlier. Time will tell whether this will be accompanied in practice with better and earlier disclosure of data needed to make informed voting decisions.

-Shareholder proposals must be sent at the latest 25 days before the general meeting if the notice is published up to 45 days before the meeting, instead of the current 20 days before the meeting. If the notice is published more than 45 days before the meeting, shareholders need to send their resolutions at the latest 20 days after the publication of the notice. This should give other investors more time to consider shareholder resolutions.

-Shareholders must send written questions to management at least four days before the AGM. This imposes a stricter deadline than before as shareholders could previously send questions within a "reasonable" deadline. This change places the burden back on the shareholders instead of on the representatives.

-Finally, during a takeover period, an EGM can be called with a 15 day notice. In that case, shareholder resolutions must be received 5 days after the publication of the meeting notice. This is a significant change as shareholder meetings could previously not be called during a takeover because an offer period is limited to 25 days, while the minimum notice period for an EGM was 30 days. This caused inconsistencies with the national Breton law on hostile takeovers of French companies, since shareholders could not be consulted on issuance of warrants during a takeover.

The Securities and Exchange Commission today proposed guidance to make it easier and less costly for companies to comply with internal-controls rules set forth by the Sarbanes-Oxley Act. The Commission voted 5-0 to publish the proposal and circulate it for public comment.

According to MarketWatch, SEC Chairman Christopher Cox said the accounting rules have posed "the biggest challenge" under the law and "without question, it has imposed the greatest cost." The proposed SEC rules would offer management much more flexibility in carrying out audits.

We welcome your thoughts on the proposed rules.

The Canadian Securities Administrators (CSA), a forum for the 13 securities regulators of Canada's provinces and territories, is considering new executive compensation disclosure rules, similar to those instituted by the U.S. Securities and Exchange Commission earlier this year.

"The desired outcome is to develop new compensation rules for Canada that are not 400 pages long, recognize we are principles-based not rules-based, and provide complete and useful disclosure of the value of executive compensation," Bill Mackenzie, a member of the Ontario Securities Commission's (OSC) Continuous Disclosure Advisory Committee (CDAC), told Governance Weekly. Mackenzie also is president of ISS Canada.

Among the CSA proposals will be a new requirement for companies to tally the total value of all compensation--including the cash value of all stock options and share units granted to executives in the prior year, as well as the value of their pension gains--in a chart. Pay for directors would also have to be tallied in a similar chart.

The CDAC committee convinced the CSA to drop plans to include requirements for compensation disclosure in the management section of the annual report. The CDAC argued to include such narrative compensation information in the proxy circular.

Other changes under consideration by the CSA are a new requirement to disclose executive perks and a stock-option valuation methodology that is the same as that used in financial reporting. The vast majority of Canadian issuers have used the Black-Scholes valuation method when reporting options.

"The priority is quite high for this initiative, and many issuers have already bitten the bullet, giving it a high chance of becoming law," Mackenzie said. "That said, it will likely be effective no sooner than the 2008 proxy season."

Canada has no national securities commission, so regulators in the 13 provinces and territories would oversee the new disclosure standards once they are finalized by the CSA and approved by provincial lawmakers, Mackenzie said. The CSA plans to publish a draft of the proposed rules and a request for comment in early 2007, according to OSC legal counsel Elizabeth Topp.

OSC Chairman David Wilson said it has been 12 years since compensation disclosure has been reformed, and that it is time to modernize practices. "The disclosure regime is kind of long in the tooth ...The world has evolved," he noted in comments to The Globe and Mail.

Some major firms, such as Canadian National Railway, Canadian Imperial Bank of Commerce, and Sun Life Financial, have voluntarily adopted many of the proposed standards. The Canadian Coalition for Good Governance (CCGG), an association of 50 institutional investors with more than $1 trillion under management, has actively lobbied for disclosure reforms.

On Nov. 7, the CCGG released a study by the Clarkson Centre for Business Ethics and Board Effectiveness at the Rotman School of Management that looked at compensation disclosure by the 208 companies in the Toronto Stock Exchange index (excluding income trusts and funds).

The study concluded that just 23 companies had thorough and complete disclosure. Thirty-eight firms had disclosure that was within an "acceptable" range. Conversely, there were 147 companies that had work to do, the study said.

"This scorecard is not about levels of compensation, but about disclosing the process of how compensation is determined. Transparency is essential when it comes to communicating the compensation of senior executives to investors," Doug Pearce, CCGG's board chairman, said in a recent statement.

The Securities and Exchange Commission, which had planned to discuss proxy access on Dec. 13, postponed consideration of the issue again as the agency's commissioners struggle to reach a consensus.

"It's a very divisive item, and we don''t have a consensus on the issue yet," Commissioner Roel Campos told Bloomberg News this week.

The SEC, without providing an explanation, omitted proxy access from the agenda for its Dec. 13 open meeting, according to a notice on the agency's Web site. The five commissioners originally were to consider the topic on Oct. 18, but that discussion was postponed until December.

With this latest delay, it is less likely that the SEC's staff will grant requests by Hewlett-Packard and other firms to exclude shareholder proposals for the 2007 season that seek to establish procedures to allow shareholders to nominate directors, access proponents and governance observers say.

"Cox is clearly looking to get a consensus or at least a 4-1 vote on proxy access, and he hasn't got it now," ISS Executive Vice President Patrick McGurn noted. "This means that the shareholder proposal at H-P and maybe a dozen other companies that are likely to get such resolutions have a better chance of making it into the proxy."

The SEC has grappled with the controversial issue of proxy access for years. In October 2003, the agency issued a draft rule to establish procedures to allow investors to propose board candidates to appear on the same proxy ballots as management nominees. While investor advocates welcomed the measure, business groups opposed the rule and argued that the process would be too complicated. In early 2005, the SEC dropped the proposal and allowed American International Group (AIG) and several other companies to exclude shareholder resolutions that were based on the draft rule.

The SEC was forced to revisit the topic again after the U.S. Court of Appeals for the Second Circuit ruled in September that the agency should not have allowed AIG to omit the 2005 access proposal filed by the American Federation of State, County, and Municipal Employees Pension Plan (AFSCME). The appeals court took issue with the SEC's evolving interpretations of Rule 14a-8(i)(8), which allows companies to omit proposals that "relate to an election of directors." Since 1990, the SEC has applied that language more broadly to exclude proposals that deal with election procedures generally, including proxy access resolutions from AFSCME and other investors. The court asked the SEC to spell out the rationale for its change of approach.

Since the court ruling, investor advocates have urged the SEC to allow shareholders to bring access proposals at individual firms and create a mechanism for shareholders to nominate directors. In a Sept. 28 letter, the Council of Institutional Investors (CII) argued: "The shareholder proposal rule is particularly important to long-term investors such as council members who--due to their sizable ownership stake of portfolio companies and their commitment to passive investment strategies--are unable to exercise the 'Wall Street walk' and simply sell their holdings when they are dissatisfied."

"We are prepared to be very flexible. We want shareholders to have a limited ability to bring proposals for shareholder access," Amy Borrus, CII's deputy director, told Governance Weekly. "We are prepared to work with the SEC on a solution that addresses shareholder needs and the business community's concerns."

"I think the commission wants to give [proxy access] careful thought," Cornish Hitchcock, an attorney who represents labor and public pension funds, told Governance Weekly. "[Former] Chairman [William] Donaldson was not able to reach a consensus. I imagine they are still looking at the proposal."

Corporate advocates, including the Business Roundtable, have urged the SEC to reaffirm the agency's position since 1990 that companies should be able to exclude proxy access proposals. That group and the U.S. Chamber of Commerce have warned that the SEC may not have the legal authority to require companies to allow investors to nominate directors.

The American Bar Association's Committee on Federal Regulation of Securities expressed similar views in a Nov. 27 letter to the SEC. "We strongly support the well-founded interpretation of the director election exclusion that the commission has now applied for more than a decade," the lawyers' group wrote. The committee castigated "institutional investors, hedge funds, and activist groups, some of whom have goals that differ from those of shareholders generally."

More European investors are realizing that it makes sense to participate in U.S. securities class-action cases by serving as lead plaintiffs, or by filing claims for their share of billions of dollars in settlements.

"There has been a sea change in interest among European investors filing claims and claiming money that is rightfully theirs," Mark S. Willis, a partner with Cohen, Milstein, Hausfeld & Toll, a law firm that represents investors, said during a SCAS Web cast in September. "And there's also been an interesting change in the attitude toward institutional investors here in Europe about taking an activist role in U.S. class actions."

One prominent example of a U.S. case where European institutional investors are serving as lead plaintiffs is the Parmalat Finanziara class action. The lead plaintiffs include Hermes Focus Asset Management Europe, Cattolica Partecipazioni, Societe Moderne des Terrassements Parisiens, and Capital & Finance Asset Management. (A Hermes affiliate is a part owner of ISS.)

Earlier this year, a group of 26 Dutch pension funds led by Stichting Pensioenfonds filed a securities lawsuit against Royal Dutch Shell. The lawsuit, which is pending in federal court in New Jersey, was filed separately from the consolidated class action that was brought earlier by two Pennsylvania pension funds and other investors. A Canadian institution, the Ontario Teachers' Pension Plan Board, served as a lead plaintiff in the Nortel Networks litigation that resulted in a $2.47 billion settlement in February.

European and other international investors also have joined in derivative lawsuits that seek corporate governance changes. In October 2005, U.K. and Dutch pension funds were part of an international coalition of institutions that sued News Corp. in Delaware court over the company's decision to extend its "poison pill" defense without seeking shareholder approval. After surviving a motion to dismiss, the investors reached a settlement with the media company in April.

In addition, AP7, a Swedish pension fund, is serving as a lead plaintiff in a derivative lawsuit by Viacom investors that seeks to recover compensation paid to top executives, according to Keith Johnson, a Wisconsin-based lawyer who advises foreign pension funds.

International investors have also joined together to lobby for U.S. governance changes, such as majority voting in board elections. In October, pension funds from the Netherlands, Sweden, the United Kingdom, Canada, and Australia urged U.S. regulators to allow shareholders to put proxy access proposals on corporate ballots in 2007.

As Johnson noted, many European investors traditionally have been reluctant to sue companies, because they come from cultures that rely far less on litigation than in the United States. "I don't see a mad rush to doing this, but I do see a slow trend, which will gradually increase in the next few years," he told the SCAS Alert.

Johnson said European investors have become more interested in litigation as several European nations have taken limited steps to enhance the rights of shareholders to sue. Last year, Germany passed legislation to allow investors or companies to seek model case proceedings to resolve common factual or legal questions in shareholder lawsuits. In November, a new British law took effect that allows shareholders to sue directors who "don't promote the success of the company." However, American legal rules remain far more favorable to investors, so European institutions will continue to bring securities claims in U.S. courts when possible.