U.S. companies will be allowed once again to exclude proxy access proposals from their corporate ballots, the Securities and Exchange Commission has decided.

The access-blocking rule, pushed through by the commission's Republican majority, was denounced by Commissioner Annette Nazareth, labor investors, state pension funds, and Democratic lawmakers.

"In a partisan 3-1 vote, the SEC today attacked the rights of investors to nominate corporate directors," the AFL-CIO labor federation said in a statement after the commission's Nov. 28 open meeting.

The SEC's vote effectively overturns a federal court decision that opened the door for investors to get proxy access on the ballot at three companies in 2007. The commission's action sets the stage for more litigation on the issue, as shareholders this week filed access proposals at financial firms Bear Stearns and JP Morgan Chase, and vowed to return to court if the companies seek to omit those resolutions.

The vote by the shorthanded SEC is a victory for General Motors, Bank of America, and other issuers that urged the commission to bar proposals to allow investors to nominate board candidates to appear on corporate proxy statements. Former SEC Chairman Arthur Levitt (who also is a RiskMetrics Group board member) told Bloomberg News that the SEC's action is "probably the most important vote the commission has taken in nearly 15 years."

The law firm of Watchtell, Lipton, Rosen & Katz, which represents companies and directors, applauded the SEC's decision. The New York-based firm noted that existing proxy contest mechanisms "are more than sufficient," given the potential "negative effects and risks" of contested elections. "Moreover, shareholders have never had as many other, less disruptive, avenues through which to express their views as they have today," the law firm said in a memo.

SEC Chairman Christopher Cox voted with Commissioners Kathleen Casey and Paul Atkins to reassert the agency's past position that companies may exclude proxy access resolutions. Nazareth, the SEC's only Democratic member after Commissioner Roel Campos departed in September, voted against the measure.

Cox said he voted to bar access because it was the only one of two draft rules released by the SEC that could muster a three-vote majority. In July, Cox joined Nazareth and Campos in supporting an alternative proposal that would have imposed a 5 percent ownership threshold and greater disclosure requirements on shareholders seeking to file access bylaw resolutions.

Cox said he hoped the SEC would revisit the issue in 2008 and work on crafting a rule to permit some access proposals. "Today is not the end, and I hope all stakeholders will continue to work with us," he said. "If we use the time between now and the next proxy season wisely, we can act on a new rule proposal next year that does more than just perpetuate the status quo."

At least one Republican commissioner appears unlikely to support a federal access rule in the future. Casey said governance reforms should be handled at the state level rather than nationally.

The SEC has repeatedly failed to reach a consensus on proxy access in the past. Nazareth expressed skepticism that the SEC would approve a pro-access rule next year. She said it appears the Republican commissioners voted for the non-access rule simply to put the matter behind them.

"I don't see a principled way to vote on the non-access release and be supportive of shareholder rights in the longer term," Nazareth said. "Indeed, if this amendment were truly intended to be a temporary stop-gap measure … it would then have a sunset provision. But it does not."

"Shareholder rights face a long uphill battle with this commission," Nazareth said. "I hope that we have not completely lost the opportunity to address these issues."

Ann Yerger, executive director of the Council of Institutional Investors, said the SEC vote is a step in the wrong direction. "It makes no sense for the commission to do the wrong thing now but promise to try to do the right thing next year," Yerger said in a press release. "This is a sad day for shareowners."

The SEC's decision to reverse its course on proxy access leaves investors' efforts to enhance boardroom accountability in limbo. Thousands of investors expressed their support for access via the SEC's comment process and our own 2007 Policy Survey revealed that two-thirds of institutional investor respondents support proxy access at all U.S. companies. Three access proposals came to a vote in 2007, with one being approved, demonstrating these resolutions can move forward without negative impact. We hope well-reasoned and practical rulemaking on the proxy access issue will prevail given the importance of directors' accountability to shareholders.

Who is advancing ESG onto corporate agendas, and who is putting on the brakes – CEOs, boards or investors?

If you believe that investors are demanding that companies take action on environmental, social and governance issues (ESG), while corporate executives are resisting it, you may be surprised by the findings of a McKinsey & Co. survey of CEOs at companies participating in the UN Global Compact. McKinsey describes its findings in Shaping the New Rules of Competition: UN Global Compact Participant Mirror as well as in an October article in McKinsey Quarterly online titled "CEOs on strategy and social issues."

"Chief executives around the world increasingly believe that they have a strategic rationale for taking on environmental, social, and governance issues," according to the MQ article. (That's not surprising, given that these execs lead companies that have already signed on to the UN Global Compact. ) CEOs feel pressure from increasing societal expectations – especially from employees and consumers.

But where do investors and corporate boards fit in this picture?

Turns out, investor short-termism ranks as a big-time barrier. Companies need a long-term horizon to invest in ESG, but shareholders demand short-term financial performance. And that leads to competing strategic priorities, which the CEOs ranked as the top barrier. CEOs on Strategy explains:

Shareholder demands for strong short-term performance, for example, compete with environmental, social, and governance investments that are longer term by nature. The absence of clear and consistent metrics that could relate such investments to (or correlate them with) investor returns exacerbates this conflict. In fact, fewer than one-fifth of the CEOs we surveyed believe that financial markets account for the way a company approaches environmental, social, and governance issues when they value it.

The survey also revealed gaps between what CEOs thought companies should do and what they actually do. Two gaps jumped out at me:

* 69% of surveyed CEOs believe that companies should "have the board, as part of its risk-management and fiduciary responsibilities, discuss and act on these issues." But only 45% say that boards actually do this.
* 51% of the CEOs believe that companies should "embed these issues into investor relations strategy by incorporating them into discussions with mainstream financial analysts." But only 31% say that companies do so.

Nonetheless, McKinsey sees promise in investment initiatives underway to encourage ESG activity. These include investment firms that support the UN Principles for Responsible Investing, pension funds that base investments on those principles, and Goldman Sachs' Global ESG Framework. Still, McKinsey observes:

These initiatives still have to gain further traction – sustainability reports rarely highlight the most financially relevant issues, and investment initiatives and frameworks have yet to become part of the capital market mainstream – but current activity is promising.

What do you think? What are your views on these three questions:

* By demanding short-term returns, are investors part of the problem? Or, by pressing companies to fulfill ESG responsibilities, are investors part of the solution?

*And what about boards? Are they doing their job to discuss and act on ESG as part of their oversight role? Are they a positive influence or a constraint on company actions on ESG?

* Last but not least, what can all parties do to enhance the role of both investors and boards in encouraging companies to address ESG issues?

Investor representatives from Sacramento to London joined forces this week to urge the U.S. Securities and Exchange Commission not to roll back investors' proxy access rights.

The California Public Employees' Retirement System (CalPERS), the California State Teachers' Retirement System (CalSTRS), the Connecticut Retirement Plans and Trust Funds, the Colorado Public Employees' Retirement Association, the Washington State Investment Board, five New York City pension funds, the Council of Institutional Investors (CII), and the United Kingdom-based Universities Superannuation Scheme and Hermes Equity Ownership Services all criticized SEC Chairman Christopher Cox's plan to move forward with a vote on proxy access this year.

The SEC plans to consider the issue, along with rule changes to promote electronic shareholder forums, during its next open meeting on Nov. 28.

The investors held a Nov. 19 telephonic press conference as part of a final campaign to head off an expected SEC vote to prohibit access proposals. Cox has warned that the lack of a clear rule on proxy access--or the right of investors to nominate candidates to appear on management proxy statements--would cause legal uncertainty and possible fraud during the 2008 proxy season.

"The argument that there is uncertainty in the market is not borne out by the messages of these institutional investors," said Jack Ehnes, CEO of CalSTRS. "We must not run backward out of fear of an illusionary uncertainty," said Ehnes, who also serves as board chairman for CII, which represents investors with more than $3 trillion in assets.

The SEC took "no view" on corporate requests to exclude access proposals this year after a U.S. appeals court ruled that the agency improperly allowed American International Group (AIG) to omit an access proposal by the American Federation of State, County, and Municipal Employees (AFSCME). Three proxy access proposals went to a vote in 2007, including a resolution that received 53.4 percent support at Cryo-Cell International in July.

A hedge fund also filed an access proposal at Reliant Energy, but the Texas-based company sought a court ruling that it was not bound by the AFSCME v. AIG decision. That proposal was withdrawn before the dispute was decided. At a Nov. 14 hearing, Cox told lawmakers that this case is an example of the legal ambiguity plaguing the market after the AFSCME decision.

At the press conference, the investor representatives rejected this argument. "Often critics do not like the unknown or a sense of uncertainty," said Fred Buenrostro Jr., CEO of CalPERS, which hosted the press conference. "What has happened over this year has been practical for investors, and that fear [of uncertainty] is unfounded."

"[O]nce the rights of shareholders are advanced, shareholders will quickly learn how to exercise them prudently and responsibly, which is the case in other jurisdictions," said Bess Joffe, a manager at London-based Hermes.

Shareholders in the U.K., Australia, and South Africa, are allowed by law to nominate directors to a management slate, provided they meet ownership thresholds, Joffe noted.

The SEC issued two competing rule proposals on proxy access in July. One draft rule would essentially bar access by allowing companies to resume excluding such resolutions. The second draft rule would impose new disclosure requirements and a 5 percent ownership threshold for filing access bylaw proposals.

Both were met with significant investor backlash; most of the comment letters from investors urged commissioners to scrap both proposed rules and let shareholders file access resolutions again in 2008. Cox has said repeatedly that he plans to have a firm rule on proxy access in place by December--either one of the two draft rules or a not-yet-disclosed third option. Cox has promised that the SEC will revisit the issue in early 2008.

RiskMetrics Group today announced its ISS Governance Services unit has released its 2008 U.S., Canadian, U.K. and International proxy voting policies updates, which will be applied to all companies with shareholder meeting dates on or after February 1, 2008. ISS Governance Services' global research team conducted extensive policy outreach activities worldwide throughout the year to collect feedback from clients, a variety of industry constituencies and key markets.

This year's policy updates reflect an increasing desire among investors for better disclosure on critical corporate governance issues. Our policy updates on shareholder resolutions calling for an independent chair, say on pay, stock option overhang cost, pay practices, accounting practices and product safety each derive from this trend towards improved transparency.

These updates, as well as more detailed information on our policy formulation process and this year's policy outreach efforts, are all available on our Policy Gateway. The Policy Gateway contains helpful FAQs, summaries of its surveys, roundtables and comment period and other informational materials to help investors and companies better understand how it views corporate governance matters. The full 2008 Proxy Voting Manual will be available in January 2008. RiskMetrics Group will also hold a 2008 Policy Webcast for clients on December 5 at 11:30 EST. To register, please visit: 2008 Corporate Governance Policy Updates Forum.

Investors are watching to see how companies respond to more than 100 shareholder resolutions that received majority support in 2007 – and companies that fail to respond will likely face the same proposals in 2008.

Proponents, including the American Federation of State, County, and Municipal Employees (AFSCME), the New York City Employees' Retirement System (NYCERS), and others, are lobbying companies to respond to majority-supported proposals. The investors say they plan to refile at many issuers if the boards do not take action.

"When there is a majority, we'll try to talk to [the companies] and say, 'The shareholders have spoken. What are you going to do about it?'" Cornish Hitchcock, an attorney for the Amalgamated Bank's LongView Funds, told Risk & Governance Weekly (RGW).

If a company doesn't act on a majority-supported proposal, LongView's policy usually dictates that a binding proposal on the same issue be filed the next year, Hitchcock said. This year, LongView filed board declassification proposals that won majority support at food processing company Arkansas' Best and online music service Napster. So far, the labor-affiliated fund has refiled a non-binding proposal on the same topic at Arkansas' Best.

While the vast majority of shareholder proposals are non-binding, it's getting more difficult for companies to disregard those that receive majority support, Hitchcock observed. As late as 2001, it often took a major corporate scandal to motivate companies to adopt shareholder-supported governance reforms--even after four to six years of repeat proposals, he said.

But the trend began to change in the aftermath of Enron and other corporate scandals. More than 40 companies have adopted reforms in response to shareholder proposals that received majority support in 2007, according to RiskMetrics Group data. Notably, on Nov. 1, Verizon Communications agreed to hold an annual advisory vote on executive pay after a 50.2 percent vote for a shareholder proposal and pressure from LongView, AFSCME, Walden Asset Management, the North Carolina and Connecticut state pension funds, and the city pension fund of Cincinnati, Ohio.

Earlier this year, Disney adopted a poison pill-limiting bylaw that was based on a majority-supported resolution submitted by Harvard Law School Professor Lucian Bebchuk. CSX instituted a majority vote standard for director elections after a proposal received majority support in May.

Another factor that may be driving more companies to heed shareholder proposals is concern that investors will withhold their votes from unresponsive boards in the future. Directors at 13 S&P 500 companies received more than 10 percent opposition in 2007 after failing to implement majority-backed shareholder proposals. (Under its benchmark policy, ISS Governance Services advises clients to vote against directors who fail to respond to proposals that receive more than 50 percent support from votes cast for two consecutive years.)

Five years after the Sarbanes-Oxley Act (SOX) was signed into law, U.S. corporate boards are far more independent and responsive to the governance concerns of shareholders, though observers may conclude more needs to be done in some key areas including diversity, according to an analysis of 1,245 S&P 1,500 companies in 2002, and 1,425 in 2007.

Boards have taken significant steps to rebuild investor confidence following the corporate scandals of 2001 and 2002 that gave rise to the watershed legislation. Indeed, insiders have far less influence on corporate boards today than they did five years ago, while audit committees–critical to ensuring good governance, and a primary focus of SOX–are near to being fully independent,.

Approaches to board leadership are another example of marked change for the better. For instance, far more companies today have separated the positions of chairman and CEO than was the case five years ago. In 2002, 73 percent of companies had combined the posts, leading many shareholders and stakeholders to view America's captains of industry as all-powerful figures insulated from shareholders and disconnected from directors. But that figure stands at just 55 percent today, while the number of non-employee chairmen who are independent has jumped 10 percentage points over the past five years to 17 percent in 2007.

The past five years also have seen an end to the age of the imperial CEO, which, in turn, has spurred further governance reforms. For example, the analysis finds that companies are now paying much closer attention to concerns surrounding executive leadership, with far more having succession-planning committees today than even one year ago, let alone in 2002.

Meanwhile, boards today are much more likely to engage with investors on concerns such as executive pay and takeover defenses, despite a five-year-long bull market that might otherwise have led many all-powerful corporate leaders to disregard shareholder entreaties in the pre-SOX era.

Investors, responding to the accounting scandals of 2001 and emboldened by SOX, have played no small role in prompting change. Classified boards, once the norm for S&P 1,500 companies, are far less prevalent today, for example. Fewer than half of all S&P 500 firms now have them, thanks primarily to investor pressure to dismantle the defense, but, also critically, to the growing presence of more independent and responsive boards willing to act on investors' demands.

While governance reforms since SOX have been far reaching in many areas, some observers will conclude that more remains to be done. Advocates of greater diversity in corporate boardrooms will be disappointed by findings that show little improvement in the number of minority and female directorships since the watershed legislation was signed. Governance observers believed both groups would benefit from post-Enron reforms that called for greater board independence, but findings show minimal growth in the proportion of female directorships, and no change in the percentage of directorships held by members of a racial or ethnic minority group.

To view the entire paper, Counting Progress: The State of Corporate Boards Five Years After SOX, please visit here.

The SEC is holding an open meeting today to discuss the possibility of eliminating a reconciliation to US accounting rules for those companies who report in international standards. This is an important step along the path of U.S. companies adopting international accounting standards and moving away from US GAAP. This could mean U.S. accounting rules are going to become less relevant and over time U.S. companies will migrate to international rules. It's a controversial issue, and RiskMetrics Group's Financial Research and Analysis unit issued a note on the topic yesterday.

To access the note, Tipping Point for US GAAP, please visit the Accounting Section of RiskMetrics Group's Knowledge Center. We welcome your thoughts on this topic.

RiskMetrics Group's Environmental, Social and Governance (ESG) team just released a new study today which identifies large differences in global sustainability governance. The extent to which large cap global companies are regulating themselves with regard to ethics, climate change, other environmental concerns, and labor and human rights varies significantly by nationality and industry sector. These findings emerge from RiskMetrics Group's year-long project assessing more than 1,700 global companies--including the S&P 500, the Toronto Stock Exchange 300 and the Morgan Stanley EAFE index excluding Japan--on more than 200 policy and performance indicators.

EAFE companies clearly outperform S&P 500 firms on both climate change and other environmental issues, but U.S. firms have the edge on ethics policies. For labor and human rights, overall performance between EAFE and S&P 500 did not differ substantially. Canadian firms (the TSX 300), overall, lagged companies in the other two indices, but did best on labor and human rights. In addition, while some individual companies stand out as clear leaders, overall average performance by sector and industry stood at less than 50 percent of the ideal defined in the research model.

To access the study, please visit here.

RiskMetrics Group just recently completed a report on Credit Card Master Performance Trusts. The report examines why credit quality measures deteriorated across several credit card issuers during September, ending a summer in which credit quality stablized for most issuers in the survey group. Prior to the summer, we had seen credit quality measures deteriorate since early 2006.

The September data from our survey of credit card master trusts may indicate developing credit pressures for the U.S. retail consumer. We found that credit card master trusts whose underlying credit cards had direct exposure to the retail sector experienced greater deterioration in their credit quality measures compared to other master trusts in our survey group. Those credit card master trusts with direct retail exposure included those with private-label and co-branded credit cards.

For our survey group as a whole, our adjusted credit quality measure (accounts that are 60 or more days delinquent + charge offs) deteriorated during September 2007 on a sequential and year-over-year basis. That is 41 basis points sequentially, and 93 basis points year-over-year. While we cannot draw a straight line between the deterioration in the housing market and the deterioration in credit quality at several credit card issuers, the timing suggests that there is, at the very least, some connection. Looking forward, we anticipate that credit card charge off rates will continue to rise through the holiday season and into 2008.

Democratic lawmakers have settled on Luis A. Aguilar and Elisse B. Walter to fill current and pending vacancies at the Securities and Exchange Commission, the Washington Post reported Nov. 14.

Citing unnamed sources, the paper reported that Senate Majority Leader Harry Reid, D-Nev., had submitted both names to the White House for approval. Under federal law, two of the SEC's five commissioner seats must be filled by members of the political party that doesn't control the White House. Accordingly, Democratic lawmakers are recommending replacements to President George W. Bush, who would then nominate the individual for congressional confirmation.

Aguilar, a securities lawyer at McKenna Long & Aldridge in Atlanta and a former SEC staff attorney, would replace Roel Campos, the SEC's first Hispanic commissioner. Aguilar has received strong backing from Sen. Robert Menendez, D-N.J., who is co-chair of the Senate Democratic Hispanic Task Force.

Walters previously served as Deputy Director of the SEC's Division of Corporation Finance and, before that, as staff member both in that division and in the Office of the General Counsel where her responsibilities ranged from litigation to legislation and advisory functions. She now serves as senior executive vice president, Regulatory Policy & Programs, at the Financial Industry Regulatory Authority.

Walters would replace Annette Nazareth, who announced last month that she plans to leave the agency, likely before the end of the year.

Aguilar was surprising choice given the view of him by some activist shareholders. In a 2004 interview, Aguilar branded the Sarbanes-Oxley Act a "political response … quickly and hastily done to address public confidence issues," according to a report on HispanicBusiness.com. That may serve to ensure his approval by President Bush who, in light of contentious issues now before the commission, will be under pressure from corporate interests to support nominees sympathetic to the views of business, not just those of investors.

Separately, SEC Chairman Christopher Cox told lawmakers this morning that he favored moving forward on approving a rule on "proxy access," or the ability of shareholders to nominate corporate directors.

Lawmakers and investors have lobbied against any decision on access in light of the departure of Campos and the pending departure of Nazareth, both of whom backed the right.

Testifying before the Senate Committee on Banking, Housing, and Urban Affairs, Cox said he "could not predict what the commission would do," but made clear the status quo had to change in order to avoid a state of uncertainty around access that would likely result in "every litigant for himself." The commission has taking no position on access following an appellate court ruling last year that held that the SEC had erred in barring shareholder proposals calling for the right.

Notably, Cox said the commission was not obligated to approve one of two opposing draft rules approved this summer that would either allow for or bar access, or to do nothing, as many have expected. According to Cox, the commission may also "adopt a rule that is different than either of those proposed."

In his prepared testimony, Cox told lawmakers that the only requirement is that the "proposed rule, and the questions the agency has asked, provide fair notice to the public of what the commission is contemplating and the issues involved … so long as the final rule or rules are a logical outgrowth of what was proposed, we are free to amend the proposals and to consider improvements that the public comment process has brought to our attention."

Lawmakers this morning will also hear from investor groups including the Council of Institutional Investors and International Corporate Governance Network, as well as issuer advocates such as the Business Roundtable.

A new book by Ron Orol of The Deal titled, Extreme Value Hedging: How Activist Hedge Fund Managers are Taking on the World, is fresh off the presses.

Orol examines how activist investors are impacting corporate boards through interviews with activist investors, money managers and corporate executives. He also predicts activist investors and corporate executives will soon be taking their battles online.

Chris Young, Head of M&A Research at RiskMetrics Group, provides commentary for the book on activist tactics. Overall, the book is an excellent read for anyone wishing to learn more about how the world of activist investing operates.

As a reminder, RiskMetrics Group is holding a webcast on Wednesday, November 14 at 1 p.m. EST on the current M&A and activism landscape. To register for the webcast, please visit here.

RiskMetrics Group will host a webcast on trends in mergers and acquisitions on Nov. 14. For more details on that webcast, click here.

This year has been a tale of two M&A markets.

Before the credit crunch of August, U.S. investors demonstrated a greater willingness this year to oppose going-private transactions and other deals.
During the first half of 2007, companies announced a record $2.5 trillion in transactions, including $616 billion in purchases by private equity firms, according to Bloomberg News. The availability of inexpensive and abundant credit allowed private equity firms to pursue bigger targets, including First Data, Equity Office Properties Trust, and TXU--the largest-ever U.S. leveraged buyout.

Facing pressure from hedge funds, boards at Acxiom, Applebee's, and other companies agreed to put their firms up for sale. After watching more boards approve private equity sales, investors became more skeptical of the fairness of initial offers and more willing to hold out for a better price.

Traditionally, target company shareholders have rarely turned down transactions. This year, however, investors rejected buyouts at Cornell Cos., Eddie Bauer, Lear, and Cablevision. The vote at Eddie Bauer in February was particularly noteworthy because no dissident investor had filed a Schedule 13D to publicly oppose the $9.25-per-share deal. In January, Cornell shareholders turned down an $18.25-per-share offer from Veritas Capital. The votes at Cornell and Eddie Bauer were among the first signs this year of an investor backlash against private equity buyouts.

In late October, ClearBridge, Gamco Investors, and other Cablevision investors rejected a $10.6 billion buyout by the firm's founding Dolan family, which owns a 20 percent stake and has tried unsuccessfully twice before to take the cable television firm private. While the tighter credit markets have reduced the likelihood of other offers, the Cablevision shareholders argued that the Dolan family's $36.26 per share bid undervalued the company.

In several cases this year, companies repeatedly delayed transaction votes while they tried to build sufficient support from shareholders. One prominent example is Clear Channel Communications, where the investor vote on a buyout by Thomas H. Lee Partners and Bain Capital Partners was delayed four times amid opposition from Fidelity Management and Highfields Capital Management. The buyout firms eventually raised their bid from $37.60 to $39.20 per share and won 98 percent support.

Other examples of delayed transaction votes include OSI Partners and Genesis Healthcare. In June, Inter-Tel postponed a vote on its sale to Mitel Networks amid fears that investors would reject the deal. Inter-Tel shareholders approved the sale in August after the company posted disappointing second-quarter results.

In the Clear Channel transaction, the private equity acquirers sought to win over skeptical investors by offering the opportunity to obtain up to a 30 percent "stub equity" stake, so they could share in the future profits of the privatized company. Similarly, the acquirers of Harman International Industries offered a 27 percent stake to Harman's investors. Investors became more interested in stub equity transactions after watching private equity firms take companies private and then reap substantial profits a few years later through a public offering. While these stub equity stakes generally have limited liquidity and governance rights, the Clear Channel investors have negotiated certain governance rights, including the right to elect two of the new company's 12 board seats.

In the Clear Channel, Lear, and Topps transactions, companies were ordered by Delaware judges to delay votes after shareholders filed lawsuits alleging that directors had breached their fiduciary duties. In the Lear case, a judge ordered the company to provide more information to investors on negotiations over the CEO's severance package. In the Topps case, the court delayed the vote on a buyout by Madison Dearborn Partners and Tornante after concluding that the board failed to act in good faith to consider a competing offer from rival UpperDeck. The Topps ruling also is notable because the court decided to keep jurisdiction over the case, even though investors sued earlier in New York state court. The case illustrates that Delaware judges want to maintain their important role in overseeing transaction disputes between companies and investors.

Several companies bypassed a shareholder vote by agreeing to a friendly tender offer. One example was Laureate Education, which agreed to a $62-per-share offer from a private equity consortium in June after shareholders--including T. Rowe Price and Select Equity Group--objected to a $60.50-per-share bid. Friendly tender offers had been all but extinct until 2006 when the Securities and Exchange Commission amended its "best price" rule to exclude employment agreement payments to insiders. Tender offers can be more advantageous to acquirers because the transactions can close more quickly and there are no record dates to contend with. Also in June, the private equity purchasers of Biomet replaced a $44-per-share buyout with a $46-per-share tender offer.

Among the most contentious deals of the year was CVS's acquisition of Caremark Rx, a Tennessee-based pharmacy benefits manager. Facing opposition from CtW Investment Group and other Caremark investors and a hostile bid from Express Scripts, CVS eventually increased its offer by $7.50 per share. Caremark investors, who received an additional $3.3 billion in value, approved the deal in March after a Delaware judge delayed the vote twice and ordered the company to provide more disclosure on investment bank fees and investors' appraisal rights.

Another development this year was the greater activism by large mutual fund companies, which historically have taken a passive role. For instance, OppenheimerFunds helped lead a successful investor revolt in March at video game maker Take-Two Interactive, where the company's former CEO had pleaded guilty to stock option backdating. Fidelity opposed the Clear Channel buyout, while T. Rowe Price made 13D filings to challenge Laureate Education's buyout and Diversa's going-private transaction.

The Securities and Exchange Commission appears poised to adopt a rule that would bar investors from filing proxy access proposals in 2008, a prospect that has alarmed some investors and Democratic lawmakers.

John Nester, the SEC's director of public affairs, said Chairman Christopher Cox intends to hold a vote on one of two competing draft access rules, though he has not specified which one. Cox then plans to put forward a "proposal to expand shareholder access after the beginning of the year," Nester told Risk & Governance Weekly.

One of the proposed rules, released for public comment in July, would require investors to hold at least a 5 percent stake to file proxy access bylaw proposals. Cox, a Republican, and the two Democratic commissioners, Roel Campos and Annette Nazareth, voted for that draft rule. However, it appears unlikely that Cox could persuade a majority on the commission to adopt this rule this year. Campos left the agency in September, and Nazareth has announced plans to leave, as well, though she has not specified a departure date.

The second draft rule would essentially block investor access to the proxy altogether, a measure that Cox also voted for along with the commission's two other Republicans, Paul Atkins and Kathleen Casey. It is this rule that Cox plans to hold a vote on, according to The Daily Deal newspaper, which would allow the SEC staff to resume granting corporate "no action" requests to exclude shareholder access proposals.

The issue of proxy access--the right of investors to nominate directors to appear on corporate proxy statements--has been debated for years by the SEC, companies, and investors. In comments on the draft rules, many investors complained that the 5 percent ownership threshold and new disclosure requirements for filing access proposals would be too onerous for most institutional investors. Corporate advocates warned that proxy access would be disruptive and called on the SEC to bar access proposals.

SEC observers have speculated that the poor reception to the draft rules, in addition to the resignation of Nazareth and Campos, would deter the SEC from trying to address proxy access this year. During a speech to the International Corporate Governance Network, Nazareth called on the SEC not to rush into adopting a new rule without a full complement of commissioners. (For more information on this topic, please see the Nov. 2, 2007, issue of Risk & Governance Weekly.)

Cox, however, insists that a nationwide rule governing access needs to be instituted. "Investors are not protected if we do absolutely nothing," Cox told Dow Jones Newswires on Nov. 1, adding that if there is no hard-and-fast rule in place, proxy access in 2008 will depend on court decisions, which can vary by jurisdiction.

In response to investor complaints that the 5 percent threshold for filing access proposals is too high, Cox is also considering dropping that requirement to 3 percent when he crafts a new access rule for the 2009 proxy season, The Daily Deal reported.

Proxy access advocates expressed concern, but not great surprise, when asked about the possibility that the SEC would disallow access proposals in 2008.

"I wouldn't be surprised if they say, 'We're going to bar the door for '08,' then take another look at [the issue] down the road," Cornish Hitchcock, an attorney for the Amalgamated Bank's LongView funds, told Risk & Governance Weekly.

If Cox again allows companies to exclude proxy access proposals, he will "go down in history as an anti-investor chairman," Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees (AFSCME), told Dow Jones.

And the envelope please

Earlier today we released our first-ever Securities Class Action Services (SCAS) 50 Power Rankings Report, which highlights the top 50 plaintiffs law firms by dollar value of securities class action settlements and number of securities class action settlements from 2003 to 2006 in which the law firms served as lead or co-lead counsel.

The report is based on SCAS 50 data from the past four years, since we began publishing the SCAS 50 reports on an annual basis, but introduces the SCAS 50 Power Rankings, which are based on the position of each firm for each SCAS 50 survey year. The top five firms in the SCAS 50 Power Rankings were:

1. Bernstein Litowitz Berger & Grossman
2. Milberg Weiss
3. Coughlin Stoia Geller Rudman & Robbins
4. Barrack, Rodos & Bacine
5. Grant & Eisenhofer

Bernstein Litowitz also has the distinction of having placed first or second in each of the previous four surveys.

We also looked at the cumulative dollar value of securities class action settlements from 2003 to 2006. The top five law firms by settlement value were:

1. Coughlin Stoia Geller Rudman & Robbins
2. Bernstein Litowitz Berger & Grossman
3. Barrack, Rodos & Bacine
4. Millberg Weiss
5. Heins Mills & Olson

Of interest, Heins Mills & Olson made the list largely on the strength of a single settlement - the $2.5 Billion AOL Time Warner settlement in 2006. That settlement is one of the five largest securities class action settlements since the PSLRA was enacted.

The top ten firms in terms of number of settlements accounted for more than sixty percent of the securities class action settlements during 2003 to 2006. The top five law firms in terms of number of securities class action settlements were:

1. Millberg Weiss
2. Coughlin Stoia Geller Rudman & Robbins.
3. Schiffrin, Barroway, Topaz & Kessler
4. Berger & Montague
5. Bernstein Litowitz Berger & Grossman

The full report is available here.

Thanks to the entire SCAS research team for the assistance and a special thanks to Brad Horgos for pulling the laboring oar on this report.

Companies with high percentages of female directors significantly outperform those companies with few or no women directors, according to a report by advisory and research firm Catalyst.

"The Bottom Line: Corporate Performance and Women's Representation on Boards," which examined average returns between 2001 and 2004, found that the Fortune 500 companies with the highest numbers of female directors on the board outperformed those with the lowest by about 53 percent in average return on equity. Firms with a significant number of women board members also outperformed those with few to none on average return on sales by 42 percent, and average return on capital by 66 percent.

Additionally, having three or more female directors correlated with higher-than-average financial performance, the study shows. Companies with three or more women directors outperformed the average return on sales and return on equity by over 5 additional percentage points.

"Clearly, more is better," Deborah M. Soon, Catalyst's vice president of executive leadership initiatives, told Risk & Governance Weekly. "The flipside of the coin is just about all the companies with no women on their boards performed in the bottom quartile."

This is the second "Bottom Line" report that Catalyst has released. The last study, published in 2004, focused on women in management positions. That study found that companies with the most women in top management teams performed, on average, 34 percent better than those with few to no women.

In response to shareholder pressure, Verizon Communications has agreed to hold an annual advisory vote on executive compensation in 2009.

The decision by Verizon's board comes after shareholders of the New York-based telecommunications and Internet service company gave 50.2 percent support to a resolution asking for a non-binding vote on executive pay policies at the firm's annual meeting in May.

Verizon is the second U.S. public company to adopt an annual pay vote, known as "say on pay," a right given to investors by law in markets such as the United Kingdom and Australia.

Insurance company Aflac received a similar resolution, but decided to adopt "say on pay" in February before the matter went to a shareholder vote. Aflac, like Verizon, will hold the first advisory vote on executive pay policies at its 2009 annual meeting.

According to a Nov. 1 press release, Verizon's presiding director, Sandra O. Moose, said that the board's decision will "further strengthen Verizon's corporate governance practices."

A number of Verizon shareholders, including the American Federation of State, County, and Municipal Employees (AFSCME), Walden Asset Management, and the North Carolina and Connecticut state pension fund officials, co-signed an Oct. 17 letter that urged the directors to consider adopting an advisory vote policy.

"Giving shareholders an opportunity to vote on executive pay is a simple and easy way to improve Verizon's corporate governance policies," the investors' letter read. "Since the vote is not binding, it will give us a voice in the process without allowing us to micromanage the [c]ompany."

The Amalgamated Bank, which invests for labor interests through its LongView funds, sent a letter on Oct. 31 that called for an annual advisory vote. The letter criticized past pay practices at Verizon, where five directors received between 7 and 11 percent opposition in May amid an AFL-CIO "vote no" campaign over CEO Ivan Seidenberg's compensation.

The company initially objected to the "say on pay" proposal, filed by C. William Jones, president of the Association of BellTel Retirees. Verizon argued in its proxy statement that an up-or-down vote on pay would be a blunter instrument than simply communicating grievances over pay directly to the board.

After the proposal received majority support, however, the board began a dialogue with shareholders--including Jones--according to the company's Nov. 1 press release. Aflac went through a similar process of consulting with large investors before deciding to adopt "say on pay."

"We believe that it is important to engage in an ongoing dialogue with shareholders and others," Verizon presiding director Moose said in the press release.

Richard Ferlauto, AFSCME's director of pension and benefit policy, lauds the Verizon decision as "a breakthrough." "It's the first time a company has moved to adopt 'say on pay'" after a vote on a shareholder proposal, Ferlauto told Risk & Governance Weekly.

The AFL-CIO (of which AFSCME is a part) is also optimistic about the possibility for an advisory vote, but the labor federation expressed some concern about the language used by the Verizon board to describe its new pay vote policy.

The company describes the new policy as providing a shareholder advisory vote "related to executive compensation," leaving some AFL-CIO officials nervous about whether all of the company's pay practices will really be put to a vote and whether pay disclosure will be made in a clear and meaningful way, said Heather Slavkin, the AFL-CIO's senior legal and policy advisor.

"As we all know, the devil is in the details," Slavkin told Risk & Governance Weekly. "We are eager to see how it actually looks when the management proposal is submitted to shareholders."

The Verizon board also modified its policies on compensation consultant independence and executive severance pay--both in response to high support for shareholder proposals on these issues at the annual meeting.

A new policy ensures that any firm consulting on executive pay for the board is not allowed to do any other contractual work for the company. A Communication Workers of America proposal asking the company to examine the independence of its compensation consultant won 46.9 percent support in May.

According to the press release, Verizon has also implemented a revised policy that more specifically defines the types of payments that can be used in calculating a severance payment to an executive, but regulatory filings including the exact details of the new policy have not yet been released. A shareholder proposal, which asked for severance payments to be limited to 2.99 times (or less) an executive's annual pay plus bonus, received 47 percent support at the meeting.

At least one other company where a "say on pay" resolution received majority support is considering adopting a yearly advisory vote, Ferlauto reported. AFSCME, Walden, and Connecticut and North Carolina fund officials sent a similar letter urging the board at industrial equipment manufacturer Ingersoll-Rand to hold an annual pay vote. A Unitarian Universalist Association proposal on "say on pay" received 56.7 percent support at the company's meeting in June.

According to Ferlauto, Ingersoll-Rand's board responded by indicating that it has begun to contact major shareholders to get their views on implementing an advisory vote on pay.

And more companies may face shareholder pressure to follow suit. "Say on pay" proposals received majority support at six other firms this year in addition to Verizon and Ingersoll Rand. The latest was a resolution at Par Pharmaceutical that received 56.8 percent support on Oct. 16, according to the proponents, the New York City Public Employees' Retirement System.