Legislation aimed at giving shareholders a greater voice in how executives at U.S. public companies are paid was endorsed by a House of Representatives panel this week.

By a 37-29 vote, members of the House Committee on Financial Services approved the "Shareholder Vote on Executive Compensation Act." The bill will likely be considered by the full House of Representatives when lawmakers return from their Easter recess in mid-April. To become law, the measure also must pass the Senate and be signed by the president.

The bill would not set any limits on pay but would allow shareholders to cast an annual advisory vote on senior executives' compensation packages. The legislation also would provide for a separate vote on severance payments for outgoing executives in the case of a merger or takeover.

"Excessive executive pay has been proven to have a significant impact on companies' profits and shareholder returns, and now the owners of the company will be given a voice on executive compensation plans." Rep. Barney Frank, the bill's primary sponsor and chairman of the financial services committee, said in a statement after the March 28 vote.

Frank, a Massachusetts Democrat, proposed similar legislation in 2005 but it stalled in the House, which was then controlled by Republicans. This week, most of the Republicans on the committee voted against sending Frank's bill to the full House. Rep. Patrick McHenry, a Republican from North Carolina who opposed the measure, said Congress should not legislate corporate salaries, Bloomberg News reported.

Shareholder advocates who have been pressing for advisory votes lauded the committee's vote.

"We're pleased and it shows that there is continued momentum behind advisory votes," said Richard Ferlauto, director of pension and benefits management for the American Federation of State, County, and Municipal Employees (AFSCME), who testified in favor of the bill at a March 8 hearing.

Ferlauto said he hopes that committee approval will embolden shareholders to support advisory vote proposals this proxy season. "I think this means we're going to have very strong votes," he told Governance Weekly.

AFSCME has submitted 12 of the more than 60 "say on pay" proposals at U.S. companies this season. At least 40 resolutions are likely to appear on company ballots, starting with proposals at Morgan Stanley (April 10), United Technologies (April 11), Wachovia (April 17), and Citigroup (April 17).

The Council of Institutional Investors has endorsed shareholder votes on executive pay, while the California State Teachers' Retirement System--the nation's second-largest state pension fund--sent a March 6 letter to Frank endorsing the bill.

However, some business groups argue that investors and lawmakers should wait and see how companies respond to the new executive pay disclosure rules issued by the Securities and Exchange Commission last year.

One company, Georgia-based insurer Aflac, has agreed to hold an advisory vote on compensation beginning in 2009. More than a dozen other companies, such as Tyco, Pfizer, JP Morgan Chase, and Intel, have joined AFSCME, TIAA-CREF, F&C Asset Management, Hermes, and other institutional investors in a working group to discuss the issue.

The United Kingdom has had a "say on pay" law on the books since 2002. So far, there has been just one instance of a negative investor vote. In May 2003, shareholders at pharmaceutical giant GlaxoSmithKline narrowly rejected a remuneration report that included a large potential severance package for chief executive Jean-Pierre Garnier.

Australia and Sweden also have advisory votes on compensation, and, in the Netherlands, the shareholder vote on pay is binding.

ISS is planning to hold a governance forum on the impact of advisory pay votes in these foreign markets on Wednesday, April 4 at 11 a.m. Eastern Daylight Time. To register for the webcast, please visit here.

*This article originally appeared in this week's edition of Governance Weekly.

When it comes to climate change, as Texas goes, so goes the nation.

That's why it was a big deal when Irving-based ExxonMobil announced last fall that it was cutting off funding of groups casting doubt on climate change--and pledged to step up its support of federal policy discussions.

It was an even bigger deal when Texan George W. Bush acknowledged in his State of the Union address in January the "serious challenge" posed by global climate change.

The biggest deal of all--at least in money terms--came last month, when Kohlberg, Kravis Roberts and Texas Pacific Group announced their $45-billion takeover bid of Dallas-based TXU Corp. As part of this largest-ever private equity offer, TXU has agreed to scale back its coal plant expansion plans from 11 plants to three, in favor of more investments in wind and solar power and conservation to save on CO2 emissions.

Another big deal lies ahead today, when shareholders will vote on the proposed $4.1 billion merger of Dynegy and LS Power. If approved, Houston-based Dynegy would become one of the nation's largest power companies--and among the top five U.S. carbon-emitting utilities.

The proposed terms of the TXU buyout leave Dynegy and LS Power with the nation's most ambitious coal-plant expansion plan.

Eight new coal plants proposed by LS Power would add nearly 7,000 megawatts of generating capacity and produce approximately 60 million tons of carbon dioxide emissions annually. That's equal to almost half of ExxonMobil's CO2 emissions from its far-flung global operations.

Assuming the merger goes through, and these power plants are built, the "new Dynegy" would nearly double its generating mix from coal to almost 40 percent. This may come as a jolt to "old Dynegy" shareholders who presently own a company with power coming mainly from cleaner-burning gas-fired power plants.

Given the volatility of natural gas prices, Dynegy's diversification into other energy sources may not be such a bad thing. But the question is whether diversification into more coal is the right move going forward.

When former Vice President Al Gore testified before Congress last week, he called for a moratorium on new coal plants that aren't designed to sequester carbon dioxide. LS Power's plants are based on older technology that can't do this efficiently.

Given that 50 percent of our nation's power comes from coal, Gore's proposal represents a radical departure from business as usual. Yet a new report from the Massachusetts Institute of Technology backs this conclusion. Even more companies are willing to take dramatic steps, acknowledging the "inconvenient truth" that business will have to pay for the right to produce greenhouse gases as we enter an era of carbon emission constraints.

Just last week, Kansas City Power & Light, in an agreement with the Sierra Club, pledged to offset all CO2 emissions from a new coal-fired power plant in Missouri by making additional investments in wind energy and conservation programs. This "carbon neutral" plan one-ups the deal that two other environmental groups, Environmental Defense and the Natural Resources Defense Council, helped.KKR worked out with TXU.

In January, on the eve of President Bush's State of the Union address, 10 major U.S. industrial companies announced their support for a federal mandatory program to cap and trade program CO2 emissions. These companies include industrial powerhouses General Electric, Caterpillar, Duke Energy and BP America. They want more certainty over their strategic planning decisions. TXU now is seeking to join this group.

Dynegy, in recent securities filings, acknowledges that greenhouse gas controls could have "far-reaching and significant impacts on the energy industry." But it hasn't yet stated how such controls might impact its merger with LS Power. It says only, it "cannot predict the potential impact of such laws or regulations on our future financial condition."

This may be a fair assessment of the current federal impasse on climate change regulations. But it isn't especially forward-looking. Given how minds are changing in Texas--and throughout the nation--on climate change, if shareholders can't get these answers before Dynegy's merger with LS Power, they likely will be asking for them shortly thereafter.

*The author's views do not necessarily reflect those of ISS or its clients.

Yesterday, the Supreme Court granted certiorari to consider whether secondary actors can be held liable to shareholders under a "scheme" liability theory. Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 549 U.S. ___ (U.S. 06-43 Mar. 26, 2007).

The Supreme Court's decision comes hard on the heels of the Fifth Circuit's decision in the Enron litigation last week, which highlighted the growing Circuit split on the issue. The Fifth and Eighth Circuit Courts of Appeal have rejected scheme liability, and the Ninth Circuit has indicated that liability may be found under the theory.

The Eighth Circuit had ruled that a party cannot be liable under Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5(a) and (c) for engaging in "schemes" to defraud. The Eighth Circuit held that liability under Section 10(b) is limited to those who (1) "make or affirmatively cause to be made a fraudulent misstatement or omission," or (2) "directly engage in manipulative securities trading practices." Stoneridge Investment Partners, LLC v. Scientific-Atlanta, Inc., 443 F. 3d 987 (8th Cir. 2006).

The Eighth Circuit affirmed dismissal of securities fraud claims asserted by shareholders of Charter Communications (NASDAQ: CHTR) against two of Charter's vendors, Scientific-Atlanta, Inc. and Motorola, Inc. (NYSE: MOT). Charter's shareholders alleged that the two vendors had entered into sham transactions while knowing that Charter intended to account for the transactions improperly. Neither Scientific-Atlanta nor Motorola made or affirmatively caused to be made any allegedly misleading statements directly to Charter's shareholders about those transactions. Charter's shareholders had alleged that the two vendors could be liable for participating with Charter in a "scheme" to defraud Charter's shareholders. The vendors allegedly deceived Charter's shareholders because the "sham" transactions artificially inflated Charter's cash flow by about $17 million in one quarter, which thereby inflated revenue forecasts and Charter's stock price.

In rejecting scheme liability, the Eighth Circuit relied on the Supreme Court's earlier decision in Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 191 (1994). In Central Bank, the Court held that there was no aiding and abetting liability for claims brought under Section 10(b) and Rule 10b-5. The Court in Central Bank did not foreclose all liability for secondary actors, noting that the absence of aiding and abetting liability "does not mean that secondary actors in the securities markets are always free from liability."

A dozen years after Central Bank, the federal courts are increasingly divided on whether "scheme" claims against secondary actors are different from claims for aiding and abetting against those same actors. Although the Eighth Circuit ruled that "scheme" liability cannot be squared with Central Bank's prohibition on aiding and abetting liability, the Ninth Circuit has ruled that it can under limited circumstances. Last year, the Ninth Circuit held that secondary actors can be liable for participating in a scheme to deceive investors if they engaged in conduct that had the "principal purpose and effect of [creating] a false appearance of revenues" even if they did not make misleading statements. Simpson v. AOL Time Warner, Inc., 452 F.3d 1040, 1048 (9th Cir. 2006). And last week, the Fifth Circuit expressly rejected the Ninth Circuit's standard and joined the Eighth Circuit in rejecting "scheme" liability for secondary actors. Regents of The University of California v. Credit Suisse First Boston (USA), Inc., et al., No. 06-20856 (5th Cir. Mar. 19, 2007).

The actual question presented for review:

Whether this Court's decision in Central Bank, N.A. v. First Interstate Bank, N.A., 511 U.S. 164 (1994), forecloses claims for deceptive conduct under § 10(b) of the Securities Exchange Act of 1934, 15 U.S.C. § 78j(b), and Rule 10b-5(a) and (c), 17 C.F.R. 240.l0b-5(a) and (c), where Respondents engaged in transactions with a public corporation with no legitimate business or economic purpose except to inflate artificially the public corporation's financial statements, but where Respondents themselves made no public statements concerning those transactions.

The shareholder campaign for advisory votes on executive pay received another boost last week when the Council of Institutional Investors (CII) endorsed the idea.

The council, which represents 130 institutional investors with $3 trillion under management, approved the policy change at its spring meeting in Washington on March 20. The policy calls for annual advisory votes on compensation but leaves the details up to companies and investors to work out.

"The issue has a head of steam behind it, which will only increase during proxy season," Amy Borrus, deputy director of CII, told Governance Weekly.

Also last week, the House Committee on Financial Services held two days of hearings on H.R. 1257, a bill sponsored by Rep. Barney Frank (D-Mass.) that would provide for annual advisory votes on compensation and a separate vote on change-in-control payments. The committee was scheduled to vote on the bill on March 22, but the panel postponed the vote to March 28. Committee approval is expected as Frank's fellow Democrats hold a narrow majority on the panel. Frank said he expects the full House will approve the bill after Congress returns from its Easter recess in April, Congressional Quarterly reported.

Likewise, Richard Ferlauto, director of pension benefit policy at the American Federation of State, County, and Municipal Employees, which supports the legislation, told Reuters that he expects the House will approve the measure with some bipartisan support. However, "[the bill's] prospects in the Senate are uncertain. Then you have the prospect of a possible Bush administration veto," Ferlauto said.

Meanwhile, shareholders have filed more than 60 so-called "say on pay" resolutions this season that seek an annual advisory vote on the compensation received by senior executives. Investors in the United Kingdom, Sweden, Australia, and the Netherlands already have the right to vote each year on executive pay reports. The issue, which averaged 40 percent support at seven U.S. firms in 2006, will first appear on the ballot this season at Morgan Stanley on April 10 and at United Technologies on the 11th. One firm, Aflac, has agreed to hold an advisory vote starting in 2009.

The issue appears to be gaining support from large investors. In early March, the California State Teachers' Retirement System, one of the largest state pension funds, sent a letter to Frank that endorses his bill. The pension fund notes that the legislation would negate the need for investors to "[submit] resolutions to one company at a time" and would provide the same rights to all shareholders.

Frank also spoke about his bill at CII's meeting, where he said the measure "won't cost anyone a nickel" and questioned why anyone would oppose it. "Essentially, the argument against this is that shareholders aren't smart enough," Frank said on March 19, noting that the bill's critics generally have faith in the ability of the market to value companies.

This article is the first in a two-part look at environmental and social issue proposals filed by shareholders for the 2007 proxy season. This preview focuses on environmental issues, while next week's article will address political contributions and other social issues.

Shareholders concerned with how U.S. companies manage environmental and social issues have already filed more than 340 proposals this season. The number of resolutions point to a busy proxy year that could beat the all-time high of 367 resolutions offered in 2006.

As a barometer of the times, one out of every 10 of these proposals deals with how companies should best respond to challenges posed by global warming. Climate change-related proposals, along with proposals on reducing the use of toxic chemicals or seeking action on other environmental issues, account for more than 70 of the proposals filed for this year's meetings. In addition, 39 proposals have been filed so far asking companies to issue sustainability reports, nearly double the 20 submitted last year.

Climate change continues to be a major concern of proponents of environmental resolutions, as evidenced by the submission of 45 proposals focused directly on greenhouse emissions or indirectly on renewable energy.

Proponents have submitted a new proposal to Chevron, ExxonMobil, Ford Motor, General Motors, and TXU asking the companies to adopt quantitative goals for reducing their greenhouse gas emissions. Other shareholders have filed four more climate change proposals at ExxonMobil, all of which are awaiting decisions on the company's no-action challenges at the U.S. Securities and Exchange Commission (SEC). ExxonMobil acknowledges the need to improve energy efficiency and decrease emissions but argues the pursuit of specific projects--such as establishing quantitative goals--is not something that shareholders should decide at the annual meeting.

New York City's pension funds withdrew the quantitative goals proposal at TXU. Still, two other greenhouse emission proposals are pending at the company, according to the proponents, but none may come to votes if a proposed $44 billion buyout goes through. Two private buyout firms seeking to acquire TXU have told environmental groups that they would scale back the utility company's plans to build 11 new coal-fired plants to three such plants.

Calvert Asset Management filed resolutions at Bemis, Hartford Financial, Prudential, and Teradyne asking for company reports on the effects of climate change on their operations. The investment firm reports that it withdrew all four proposals after reaching agreements with the companies. The American Federation of State, County, and Municipal Employees said it withdrew a similar resolution at another insurance company, Chubb, in return for a promise of future discussions before the SEC agreed to the company's no-action request. Insurance companies have always been able to get SEC permission to omit greenhouse-emissions-related shareholder resolutions by arguing that assessing greenhouse risks is an ordinary business issue for that industry.

In addition, the Service Employees International Union has filed a new resolution with Wells Fargo asking for emissions reduction goals for the company's own operations and the activities of its corporate borrowers, advisory, and project finance clients. A new church-sponsored resolution at Starwood Hotel & Resorts Worldwide asks for a report on the feasibility of developing policies that will minimize the company's impacts on climate change.

On the related issue of renewables, Trillium Asset Management reports it has filed a proposal at ConocoPhillips that seeks a report on how the company will respond to rising pressure to develop renewable energy sources. The Nathan Cummings Foundation is continuing to file this proposal with property development companies and retailers. The foundation re-filed at Standard Pacific, where the resolution got 39.3 percent support in 2006, a record for proposals related to climate change.

This year, Standard challenged the resolution successfully at the SEC, pointing to a June 2005 staff bulletin that sanctioned the omission of environmental and health resolutions if they would entail an evaluation of business risk (the supporting statement asserted that ignoring the issue of renewables could expose the company as an industry laggard and open it to competitive and industry risk). Pulte Homes was allowed to omit the proposal for the same reason.

Nevertheless, renewable energy proposals are being looked at by other companies. The issue has already been voted on at Whole Foods for a second year, and a mix of proponents have filed it for the first time at Boston Properties and CVS. The resolution has been withdrawn after agreements at D.R. Horton and Toll Brothers, proponents say.

A handful of the resolutions filed this year on climate issues come from individuals and organizations that question the scientific consensus on climate change. Carl Olson has re-filed resolutions with Ford and Occidental Petroleum asking for a detailed scientific report on how the companies measure "global warming/cooling." The SEC staff had allowed companies to omit the resolution in 2004 and 2005, but did an about-face, without explanation, last year.

Climate change skeptic Action Fund Management is re-filing a resolution to General Electric asking for a report on, among other things, whether climate-related change is necessarily undesirable and whether a cost-effective strategy for mitigating any undesirable change is practical. That proposal survived a challenge at the SEC, but a second Action Fund proposal was omitted at Hewlett-Packard. The resolved clause was similar, but the supporting statement raised the question of business risk by asserting that the company risked being sued in California for reporting its greenhouse emissions to the Carbon Disclosure Project.

The dilutive impact of employee stock option plans drew less investor opposition in 2006 than in 2005, according to findings from ISS' recently released Stock Plan Dilution study. Average voting opposition for 2006 stood at 22.1 percent, compared with 25.5 percent in 2005 and 24.6 percent in 2004.

The decline matches a marked drop in total dilution levels at study companies--S&P 1,500 firms--from 2005 to 2006. Average total dilution stood at 14.5 in 2006, compared with 17.2 in 2005 and 17.3 in 2004.

As in previous periods, voting results from the 2006 proxy season confirmed that potential dilution of 10 percent or more is a red flag for many shareholders voting on stock incentive plan proposals. Stock plan proposals that create less than 10 percent dilution elicited average voting opposition no higher than 24 percent; however, opposition rises to more than 29 percent when proposals that reserve new shares add potential dilution of 10 percent or more. Dilution analysis over the past three years confirms equity overhang of 10 percent as an approval threshold for many shareholders.

The data on actual voting results for stock-based plan proposals in the 2006 season also indicates that shareholders are sensitive to companies' overall dilution levels, or "overhang," when voting on stock plans. Since 2000, voting trends indicate that shareholders view an overall company dilution level of more than 20 percent as a cut-off point in terms of voting practices for stock-based plan proposals.

Companies with a total overhang under 10 percent, for example, saw average voting opposition of 14 percent when they proposed new stock incentive plans or additional funding for existing plans. That opposition increases to almost 22 percent for companies with overall dilution levels between 15 and 20 percent. Company overhang in excess of 20 percent appears to be highly significant in stimulating votes against a stock plan proposal. Average voting opposition rose to 30 percent for companies with dilution levels between 20 percent and 30 percent. Companies with dilution levels over 30 percent also experienced a jump in opposition of 4.1 percentage points over last year, when average opposition was 18 percent.

Among the 1,438 S&P 1,500 companies covered, the study tracked a total of 357 proposals seeking to reserve shares under a new or existing stock-based incentive plan--down from 383 such proposals last year, albeit among a slightly larger universe of 1,454 companies studied during the previous period.

The California Public Employees' Retirement System (CalPERS) will this year target 11 companies due to "dismal stock performance" and "poor governance practices," fund officials announced March 15.

Firms on CalPERS' 2007 "focus list" include Sara Lee, Eli Lilly, Tribune Company, Marsh & McLennan, International Paper, Tenet Healthcare, EMC, Dollar Tree Stores, Corinthian Colleges, Kellwood, and Sanmina-SCI. The fund targeted just six companies last year, and five in 2005.

"The longer-term performance of all 11 companies is at least 20 percent behind their peers, and they have resisted appeals to change corporate practices that make their boards unresponsive to shareowner interests," Rob Feckner, CalPERS' board president, said in a statement on this year's targets. "In several cases, their entrenched boards refuse to discuss our grievances."

The pension fund giant's perennial "focus list" is culled from its investments in its largest equity portfolio--the CalPERS 2500 Index Fund, and is based on the companies' long-term stock performance, corporate governance practices, and an economic value-added evaluation, which measures a company's net operating profit after tax, minus its cost of capital. Fund officials say they have pinpointed companies where poor market performance is due to underlying financial performance problems, as opposed to industry or extraneous factors.

CalPERS said it targeted Sara Lee and Eli Lilly because the companies require a supermajority vote to amend the bylaws. Fund officials say they will file a shareholder proposal at Lilly to reduce the threshold to a simple majority. Similarly, CalPERS will file proposals at Dollar Tree and insurer Marsh & McLennan to address supermajority-voting rules for bylaw changes as well as "excessive" severance pay agreements.

Kellwood, a St. Louis-based apparel marketer; Corinthian Colleges; International Paper; and media giant Tribune Company have classified boards and other "objectionable governance practices," CalPERS representatives say. Meanwhile, International Paper has failed to declassify its board after 79 percent of shareowners voted in favor of that change at last year's annual meeting,

The pension fund is targeting Tenet Healthcare over its failure to remove supermajority voting requirements for articles of incorporation, while electronics contract manufacturer Sanmina-SCI would not agree to adopt a "clawback" policy to recapture bonus and incentives payments in the event of officer fraud or misconduct. EMC, a Massachusetts-based data storage company, has resisted efforts to change "excessive" pay practices, fund officials say.

"Unless these companies make changes, we'll pursue shareowner proposals to address our concerns," Charles P. Valdes, CalPERS' investment committee chair, said in a statement. "The outcome depends on our dialogue with them as we try to improve their stock performance, shareowner rights, and executive compensation and severance policies."

At Hewlett-Packard this week, a proxy access proposal won 43 percent support from investors in the first vote on the issue this year.

Access supporters hailed the "landmark vote" and the "outstanding result" for the new bylaw proposal, which was opposed by the computer company's management. (Meanwhile, two other shareholder resolutions--calling for linking long-term equity incentives to corporate performance and requiring an investor vote on "poison pills" takeover defenses--won majority support.)

"HP should heed the voice of shareholders and sit down with us to discuss qualified candidates who can help rebuild the board," said Richard Ferlauto, director of pension investment policy at the American Federation of State, County, and Municipal Employees (AFSCME), which filed the access proposal with the state pension funds for New York, Connecticut, and North Carolina.

The proponents targeted HP after the California-based company was embroiled in a high-profile boardroom leak scandal that led to the resignation of two directors and board chair Patricia Dunn. Also this week, a California court dismissed criminal charges against Dunn over her role in the company's leak probe.

According to AFSCME, the proposal received support from 800.8 million shares, while 1.061 billion shares opposed the measure at HP's March 14 meeting. The proposed bylaw won 43 percent of the total votes cast "for" and "against." (This figure does not include abstentions, which the company and some news organizations included in their tallies when reporting that the proposal received 39 percent support.)

The 43 percent vote for proxy access surpassed the average support earned by other popular shareholder initiatives during their first year on the ballot. For instance, resolutions calling for an advisory vote on executive pay averaged 40 percent support in 2006, while proposals seeking majority voting in board elections averaged 12 percent in 2004, according to ISS data.

While the proxy access proposal failed to win the two-thirds of HP's outstanding shares necessary to take effect, the strong showing likely will encourage other investors to support the issue and file their own resolution at other companies. Ferlauto said AFSCME may submit proposals at companies that have disclosed that they improperly dated executive stock-option grants.

"We are looking at filing at other companies that may be deserving of proxy access, focusing on option backdaters and springloaders with meetings late in the year," Ferlauto told Governance Weekly.

The proposed bylaw would have required HP's proxy statement to include director nominations from shareholders who hold more than 3 percent of the company's outstanding stock for at least two years. The company argued in its proxy statement that the bylaw could lead to the election of "special interest directors" and "could turn every director election into a proxy contest."

After the vote, HP said it "is pleased that this proposal was not approved by the supermajority vote required." In the statement, the company reiterated the board's view that "this proposal was not in the best interests of HP stockholders."

ISS will hold a special Governance Forum webcast, Share Lending Practices and Share Recall Challenges, on Wednesday, March 21 at 1 p.m. Eastern Daylight Time.

Securities lending and its impact on proxy voting policies and practices are gaining significant attention in the corporate governance industry since potentially market participants can acquire voting rights in a company without an accompanying financial stake. This separation of economic from voting interest in a company bends one of the basic assumptions behind the one-share, one-vote principle, and places investors who retain the economic interest in a challenging position. Yet, share lending has become a lucrative practice for many institutions.

Panelists Chris Kunkle, Vice President of JP Morgan Chase, and Ed Blount, Founder and Executive Director of Astec Consulting Group, will share their views on the challenges share lending creates for investors. Diana Bourke, ISS' Executive Vice President of Global Voting and Transaction Services, will moderate the panel and also discuss the findings from ISS' recent Share Lending Survey. To register for the webcast, please visit here.

On March 14, investors will finally have a chance to vote on proxy access.

On the ballot at Hewlett-Packard's annual meeting is a proposed bylaw offered by the American Federation of State, County, and Municipal Employees (AFSCME) and the state pension funds from New York, Connecticut, and North Carolina.

The proposed bylaw would require the firm's proxy statement to include director nominations from shareholders who hold more than 3 percent of the company's outstanding stock for at least two years. The California-based computer maker opposes the measure, arguing in its proxy statement that the bylaw could lead to the election of "special interest directors" and "could turn every director election into a proxy contest."

CEO Mark Hurd reiterated the company's opposition to the access proposal in a letter to large shareholders. "While HP has faced a number of serious and very public challenges over the past year, the HP board already has acted decisively to address those challenges," Hurd wrote in the letter, which was released March 7.

Meanwhile, the two largest U.S. state pension funds, the California Public Employees' Retirement System (CalPERS) and the California State Teachers' Retirement System, sent letters to HP shareholders last month, urging them to support the proposal.

"This reform is needed so investors have a meaningful way to hold accountable dysfunctional, entrenched boards that harm a company's ability to generate long-term value," Russell Read, the chief investment officer of CalPERS, said in a March 2 statement.

The investors' proposal is not likely to pass, but a strong showing at HP could prod other investors and companies to support proxy access. HP asserts that the proposed bylaw would require approval by two-thirds of the firm's outstanding shares, a difficult hurdle for any measure that is not supported by management.

The investors targeted HP after the company disclosed a boardroom-leak probe that sought the phone records of journalists and board members. Patricia Dunn stepped down as HP's board chair in September and has pleaded not guilty to state conspiracy and fraud charges over her role in the leak probe. In December, the company agreed to a $14.5 million settlement with California's attorney general.

(In other news, a federal judge dismissed a shareholder lawsuit against HP directors over a severance package for former CEO Carly Fiorina.)

The vote at HP is the first on the issue since a federal appeals court ruling in September revived the ability of shareholders to pursue access resolutions. In that decision, the U.S. Court of Appeals for the Second Circuit ruled that the Securities and Exchange Commission failed to adequately support its decision to allow American International Group (AIG) to omit an AFSCME access proposal from its 2005 proxy. That proposal was modeled after a 2003 draft SEC rule that the agency later abandoned amid corporate opposition.

Since that court ruling, the agency's commissioners have failed to reach a consensus on whether to allow investors to propose access bylaws at individual firms or to propose a broader access rule.

Severance and golden parachute packages - which have been lightning rods for criticism over egregious executive pay - are likely to become even more high-profile this year. For the first time, new disclosure rules require companies to enumerate the estimated cash values of exit packages and other elements of executive pay. While the most egregious examples typically attract the most attention, the marketplace shows a range of practices - including some companies who have adopted best practices. ISS has just release a paper titled "Best Practices in Practice," which seeks to explain the issues involved, to describe the range and prevalence of practices, and to highlight specific examples of companies that engage in best practices. To read a copy of the paper, please visit here.

While lawmakers agreed that better disclosure and more dialogue on executive pay would help U.S. companies and investors, House panel members were sharply divided on whether to give shareholders a vote on CEO pay packages.

During a March 8 hearing, scholars, investors, and shareholder advocates testified largely in favor of "say on pay" legislation that would give investors a non-binding vote on the compensation packages of corporate executives.

The new bill, introduced by Rep. Barney Frank (D-Mass.), who chairs the House Committee on Financial Services, would modify the Securities and Exchange Act of 1934 to provide an annual advisory shareholder vote on executive pay.

"Collective wisdom is better than individual knowledge," said Frank, "so I am puzzled when people tell me ... that the collective wisdom that [shareholders] bring to the process somehow evaporates when it comes to paying the people who run their company."

The bill, if passed, would also require a separate vote on "golden parachute" payments to outgoing executives after a merger or acquisition.

The issue of executive pay has been in the spotlight recently due to federal investigations of stock option grants at numerous U.S. firms, as well as investor anger over large payments to outgoing CEOs at companies such as Home Depot, Exxon, Occidental Petroleum, and drug manufacturer Pfizer.

"For years we've been concerned about executive pay and the distortion that executive pay causes in the market," Rich Ferlauto, director of pension and benefit policy at the American Federation of State, County, and Municipal Employees (AFSCME), testified at the hearing in Washington.

Last year, AFSCME and other investors submitted "say on pay" proposals at seven companies. The first-time resolutions averaged 40 percent shareholder support, according to ISS data.

Rep. Frank introduced a similar executive pay bill in 2005, but it stalled, as the House was then under Republican control. At the March 8 hearing, Rep. Spencer Bachus (Ala.), the ranking Republican on Frank's panel, applauded the bill's intent and commended insurance company Aflac for agreeing to allow an advisory vote but stopped short of endorsing the bill itself.

"Even though this is a problem, there may not be a government solution that makes it any better," Bachus said.

Stephen M. Davis, a fellow at Yale University's Millstein Center for Corporate Governance and Performance, supported the bill but said he was frustrated with U.S. lawmakers' efforts to reform corporate governance.

"Our laws essentially tie the hands of public shareholders so they cannot act as owners," said Davis, who recently completed a study on "say on pay" votes in the United Kingdom.

The U.K. has had an advisory vote rule in effect since 2002, and a study by London-based New Bridge Street Consultants of the 100 largest British companies concluded that the rule has served to slow the rise of executive pay.

In the U.S., the Securities and Exchange Commission last year unveiled new rules that require companies to better disclose the total cash-and-stock compensation received by top executives.

"Of all the forms of tyranny, the least attractive and the most vulgar is the tyranny of wealth," Theodore Roosevelt famously said.

The decline in the number of securities class-action lawsuits filed in the federal courts is well documented. Similarly well documented is that investor losses in these cases, measured by the fall in the stock prices, have also declined since the boom market of the late 1990s.

A number of theories have been suggested by legal and economic observers for the decline in litigation activity. Some have suggested that the law should be changed so investors could no longer seek recovery of losses, even where fraud has occurred. Instead, these columnists suggest that the Securities and Exchange Commission alone be permitted to determine when, if at all, to challenge corporate misconduct. Wall Street would like nothing better.

Rising stock prices of the bull market can conceal many sins. When increasing price of securities is coupled with the U.S. Supreme Court's decision in Dura Pharmaceuticals, requiring plaintiffs to describe in their pleading the economic theory of loss, and the uniquely restrictive pleading requirement of the 1995 amendments to the securities laws (passed over the veto of President Bill Clinton, and being interpreted restrictively by a business friendly judiciary), one would expect to find fewer cases and lessened amounts recovered than immediately following the collapse of the "tech bubble years." Lawyers representing investors, impaired in their ability to collect for investor overpayments of securities caused by corporate malfeasance, would naturally seek other outlets for their time and talents.

Other hypotheses, including that there is "less fraud," seem highly problematic. According to this hypothesis, the government has supposedly been more aggressive in pursuing criminal and civil enforcement. Therefore, management has seen the light; natural human greed has been suppressed, and mankind has been improved. From this nearly theological statement of faith, there also arises the revealed command that the entire area of enforcement be left to the SEC, an agency nearly in thrall to Wall Street and corporate America. Neither of the hypotheses nor the perceived benefits of reserving to the SEC a monopoly of investor protection has real world justification.

Corporate malfeasance is based upon human nature: the acquisitive instinct and the desire for social status that accompanies riches regardless of how earned. Corporate greed exhibits the incentives of the free market without moral restraint. As water finds it own level and leaks out, so does money. No matter what reforms are then passed, the presence of large sums of money find a way of inducing some managers, directors, and Wall Street to take more than is properly theirs to take. Sooner or later, these managers and directors begin to think that corporate assets are their own, regardless of their lack of entrepreneurial risk in developing the business, and that the shareholders (and employees) are just in their way.

The lack of control by shareholders over the management of public corporations has been widely documented. Hiding troubling developments in a business and creating false pictures of success are natural. Self-congratulation is far preferable to embarrassing truth. Whether it is engaging in self enrichment through Wall Street manipulations, or the backdating of stock options, or otherwise enhancing already enormous compensation and benefit packages, or concealing their own embarrassment in making poor decisions that impact the business negatively, management will not be self-restrained. The money to be made is too big.

For the fourth year, my company (ISS' Securities Class Action Services) has issued its "SCAS 50" report. Based on data from the SCAS database, the SCAS 50 lists the top 50 plaintiffs' law firms ranked by the total dollar amount of final securities class action settlements occurring in 2006 in which the law firm served as lead or co-lead counsel.

The full report is available here.

At the March 6 annual meeting of Swiss pharmaceutical giant Novartis, chairman and CEO Daniel Vasella and Hans-Joerg Rudloff, chair of the compensation committee, are up for reelection.

Last week, the Ethos Foundation said it would vote against Rudloff, asserting that he presided over the approval of excessive "golden parachute" severance packages for five top executives, including Vasella. Ethos, which was created by Swiss pension funds, has been at the forefront of shareholder engagement in Switzerland.

Ethos estimates that Vasella received CHF 44 million ($36 million) in total compensation in fiscal 2006. Severance for Vasella and four other senior executives is three times annual pay, and five times annual pay in case of a change in control. However, the company has not disclosed what would constitute "annual pay" for purposes of applying the multiple. Yola Biedermann, head of corporate governance at Ethos, told Governance Weekly that "it is clearly not just base compensation. In a worse case scenario, the golden parachute would amount to five times CHF 44 million, i.e., CHF 220 million."

To help investors raise these concerns at other firms, Ethos has called for an annual investor vote on executive pay in Switzerland. Ethos made this request in November as part of a study on the compensation of executive and non-executive directors at the 100 largest Swiss companies. Investor votes on compensation are a common practice in the United Kingdom, Australia, Sweden, and the Netherlands. In the United States, shareholders have filed more than 50 proposals this proxy season that request an advisory vote on pay practices.

Ethos also plans to abstain from reelecting Vasella, because the foundation contends there is no justification for continuing to concentrate the roles of chairman and CEO in one person. In 2005, Ethos filed a resolution at Nestlé to separate the chairman and CEO roles, which received 36 percent support from shareholders.

At Novartis, Vasella became CEO in 1996 and has held the chairman position since 1999. At the time, the company justified the combination of the chairman and CEO roles as a temporary measure, following Novartis' creation by the 1996 merger of Sandoz and Ciba-Geigy.

While the combination of the chairman and CEO positions is losing favor in Europe, the practice is still common in the United States. In Switzerland, according to Ethos data, only 17 of the largest 100 companies combine the positions, and three of those have announced a planned separation. The Swiss Code of Best Practice for Corporate Governance allows a combination but calls for "adequate control mechanisms."

Novartis has structures in place to offset the combined roles, as many U.S. issuers do. Based on ISS classification criteria, Novartis' board is 75 percent independent. In addition, no executives serve on the audit and compensation committees, and all three key committees have independent chairs, as well as a majority of independent members.

When asked why he won't give up one of his dual roles, Vasella turned the question back to shareholders. "Since there is no conclusive evidence of any downside to a combination, critical investors should demonstrate that there would be a clear upside to a separation," Vasella told Governance Weekly.