RiskMetrics Group is scheduled to hold a webcast on July 30 at 10 a.m. called, Proposed Accounting Changes on the Horizon--What Investors can Expect. As the fallout of the credit crisis continues to spill into the marketplace, pressure on companies to better disclose their risk of losses is mounting from investors and regulatory committees alike. Despite strong opposition from some financial institutions and other publicly-traded companies, the Financial Accounting Standards Board (FASB) has proposed changes in accounting rules that will have varying outcomes on companies' reporting standards. Marc Siegel, RiskMetrics Group's Head of Accounting Research and Analysis, will outline what investors can expect from such changes. Mr. Siegel will also discuss the implications as it relates to the future of off-balance sheet treatment for securitization structures and asset transfers; a controversial new Exposure Draft issued by the FASB that could change the playing field regarding the disclosures companies are required to make for all manner of loss contingencies; and what modifications may come of fair value accounting.

To sign-up for this webcast, please visit here.

Citigroup announced this week that it had appointed new chairs of three board committees: audit and risk, nomination and governance, and personnel and compensation.

The company is the latest financial firm to try to address shareholder anger over mortgage-related losses by changing its board leadership. In early June, Washington Mutual named new chairs to its finance and personnel committees after the two former panel leaders received more than 42 percent opposition. On June 30, Swiss firm UBS announced a new risk and strategy committee, appointed a new senior independent director, and said that four directors would leave the board in October.

The committee shakeup at Citigroup, one of the world's largest financial firms, had been expected by investors. Before its annual meeting in April, the New York-based company pledged to undertake periodic committee chair rotations. The AFL-CIO labor federation urged investors to vote against then-audit and risk committee chair C. Michael Armstrong, but dropped its campaign after Citigroup announced the rotation plan. Armstrong still serves on the board, but is no longer a member of the audit and risk committee.

Board member John Deutch, who previously held no chairmanships, has been named to lead the audit and risk committee, Citigroup said in a July 22 press release. Richard Parsons, former chair of the compensation committee, will head the nomination committee, while former nomination panel chair Alain Belda will lead the compensation committee. Both Belda and Parsons received significant withhold votes at Citigroup's annual meeting, with 30 and 31 percent opposition, respectively. The withhold votes appeared to stem from investor concerns over the company's compensation practices, including the retirement package for former CEO Charles Prince. Also this week, the company named Lawrence Ricciardi, a former IBM executive, to the board as a new independent director.

"We're pleased to see that Citigroup is fulfilling the commitment it made to investors earlier this year and look forward to working with the new board leadership," AFL-CIO Associate General Counsel Damon Silvers told Risk & Governance Weekly.

However, Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees, says the union sees little value in rearranging committee chairs. "What we really need is new blood on the board that will expand strategic vision for the future of the company that includes focus on the core business," Ferlauto told R&GW.

Richard Clayton III, research director at the Change to Win Investment Group lauds the move. "I think that it's valuable for members of the committees to get some sense of what the other committees are doing," Clayton told R&GW. "It contributes to an atmosphere of collective responsibility." Earlier this year, Change to Win threatened to oppose Citigroup directors if the company did not report on how it tried to mitigate credit losses, but the labor investment group ultimately did not wage an opposition campaign.

Also this week, AFSCME called on Citigroup to outline clearer strategies for share growth. In a July 21 letter to board chair Sir Winfried Bischoff, the labor union writes that much of Citi's financial underperformance is due to a lack of a coherent financial strategy. In the past year, the company's share price has fallen approximately 60 percent--from above $50 in July 2007 to about $20 this week. The letter also comes after the July 18 release of Citigroup's second quarter earnings statement, which documented a $2.5 billion profit loss.

Still, the $2.5 billion loss is less than the minimum of $3 billion that Wall Street analysts expected. The loss was half that of the first quarter, when mortgage-related investments resulted in a $5.1 billion loss. CEO Vikram Pandit wrote in the earnings release that writedowns in Citi's securities and banking businesses decreased by 46 percent last quarter.

In AFSCME's letter, Chairman Gerald McEntee claims that Citi is in continued financial danger from its multiple and diversified non-core businesses. "While the stock price has been dropping in large part because of the mounting subprime losses, we contend that much of the current depression of the stock price reflects investor confusion over Citigroup's sprawling makeup," McEntee wrote. He goes on to say that the "unwieldy jumble" of diverse businesses under the Citi name blinded it to subprime-related risk.

Pandit, who took over in December after Prince's resignation, is implementing a restructuring plan that will cut costs by $15 billion in the next three years, according to the earnings release. The company has shed a number of its subsidiaries--including the April sales of commercial finance division CitiCapital to General Electric, and the Diner's Club International credit division to Discover. AFSCME lauded the sale of non-core assets, but suggested that Citi might ultimately benefit from breaking into two separate entities--one for securities and investment banking, and one for retail banking.

Before the start of the U.S. proxy season, investors were expected to give significantly greater support for governance reform proposals while withholding votes from directors who presided over record losses. As the credit crisis worsened early in 2008, the attitudes of many investors appeared to shift from anger to anxiety.

Early on, it seemed that 2008 would be marked by frequent displays of shareholder discontent. Activist institutional investors, angered by the Securities and Exchange Commission's decision in November to bar proxy access proposals, appeared ready to rally behind shareholder proposals seeking independent board chairs and advisory votes on executive pay. The SEC also frustrated activists by allowing many firms affected by the credit crisis to exclude most of their new proposals that sought compliance committees, mortgage risk reports, and better CEO succession planning.

After the labor-affiliated Change to Win Investment Group (CW) threatened "vote no" campaigns against directors at six large financial companies in January and February, it appeared that many investors would vote against board members at other financial firms and homebuilders. Democratic lawmakers joined the fray, holding a hearing in early March to denounce the generous compensation received by outgoing executives at Countrywide Financial, Citigroup, and Merrill Lynch.

However, shareholder views appeared to shift after Bear Stearns, an 85-year-old Wall Street stalwart, suddenly collapsed in mid-March. The firm, which had traded at $170 per share a year earlier, initially agreed to be sold for $2 a share to JPMorgan Chase in a government-supported bailout (JPMorgan ultimately agreed to pay $10 per share).

"Simply put, the bear market mauled the 2008 proxy season," said Pat McGurn, special counsel for RiskMetrics Group's ISS Governance Services unit. "The collapse of Bear Stearns on the eve of the season let most of the air out of the shareholder activism balloon."

The fall of Bear--along with soaring oil prices and falling real estate values--helped drive consumer and retail investor confidence and optimism to new depths. The TIPP economic optimism index--conducted by TechnoMetrica Market Intelligence for Investor's Business Daily and the Christian Science Monitor--hit an all-time low in April and has continued to fall. The Yale School of Management's Stock Market Confidence Index (the one-year outlook) for individual investors also hit its low point for the decade in April.

The season's vote results suggest that many shareholders were more inclined to back management and refrain from supporting shareholder proposals or initiatives to unseat directors. With a few notable exceptions where compensation concerns were raised or a heavily staked hedge fund led the charge, most directors at U.S. companies were elected with wide support. While investors expressed slightly more support for "say on pay" advisory vote proposals and independent board chair resolutions, the increases were less than what some governance observers had expected at the start of the year. At six financial firms, support for "say on pay" actually declined from 2007 levels.

"People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues," James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. "Some institutions may believe--given the trauma of the marketplace--that management shouldn't be distracted by these concerns."

Activist investors also appeared to shift their tactics after Bear's collapse. The American Federation of State, County, and Municipal Employees (AFSCME) and two state pension funds dropped plans to sue Bear and JPMorgan over the exclusion of proxy access proposals. CtW decided to wage "vote no" campaigns at just two of its targeted six financial firms, while the AFL-CIO dropped a campaign against C. Michael Armstrong, Citigroup's audit and risk management committee chair, after the company announced that he would leave the panel. The California Public Employees' Retirement System, the largest U.S. public pension fund, focused its attention this year on firms outside the troubled financial and homebuilding sectors (with the exception of a "vote no" campaign at Standard Pacific).

This muted investor response was apparent at the April 8 meeting of Morgan Stanley, the first of the major Wall Street firms to hold its annual meeting. Despite a "vote no" campaign by CtW against two directors and Chairman/CEO John Mack, all the directors won at least 90 percent support, which is consistent with historic voting patterns at the firm. Several other factors may have contributed to the results. Mack is well liked on Wall Street, so many investment managers were reluctant to vote against him, CtW officials said. Most of Morgan Stanley's writedowns stemmed from a single failed trading strategy, rather than broad exposure to mortgage-backed securities; Mack responded by firing the head of trading and replacing the chief risk officer, which helped assuage investor concerns. Duke University's Cox also noted that Mack's decision not to accept a bonus in 2007 also dampened potential opposition.

At most financial firms, directors received overwhelming support this year. Wachovia's board members all received more than 92 percent support at the annual meeting, which occurred before the company reported more problems in its loan portfolio and fired its CEO in June. At Lehman Brothers, the directors all won at least 95 percent support. Bank of America also avoided an opposition campaign this year, but it may face greater scrutiny from investors in 2009 over its purchase of Countrywide. Countrywide, which was the largest U.S. mortgage lender, was targeted by labor funds late last year, but it didn't hold a regular 2008 meeting.

At some companies, there may have been a limited response because investors didn't learn of the full extent of their firm's problems until after the annual meeting. Lender IndyMac and mortgage financiers Freddie Mac and Fannie Mae--whose troubles made headlines in July--faced no organized investor opposition at their meetings in May and early June and received just one shareholder proposal.

On July 17, the Delaware Supreme Court rejected a proposed bylaw at CA Inc. that sought to require the computer software firm to reimburse dissidents for expenses incurred in successful short-slate proxy contests.

The bylaw proposal was filed by the American Federation of State, County, and Municipal Employees as an alternative to proxy access resolutions, which the Securities and Exchange Commission has allowed companies to omit. The AFSCME proposal would have required the board to reimburse successful dissidents for their "reasonable expenses" in future short-slate contests.

The case is the first time that the Supreme Court has granted a request by the SEC to rule on the legality of a shareholder proposal. Islandia, N.Y-based CA, which--like a majority of U.S. public companies--is incorporated in Delaware, asked the SEC for permission to exclude the AFSCME proposal from the proxy statement for its Sept. 9 annual meeting.

The CA v. AFSCME decision can be seen as a partial victory for investors because the Supreme Court ruled that an election-related bylaw is a proper matter for shareholder action. As Justice Jack Jacobs noted in the court's opinion, "the shareholders of a Delaware corporation have the right 'to participate in selecting the contestants' for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election."

However, the Supreme Court went on to conclude that AFSCME's bylaw would violate Delaware law because it would prevent CA's board from fully exercising its fiduciary duties. While the labor union's proposal specified that the board should award only "reasonable" expenses, Jacobs said that provision "does not go far enough because the bylaw contains no language or provision that would reserve to CA's directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all." The court noted that a board has a fiduciary duty to deny reimbursement in cases where a proxy contest is "motivated by personal or petty concerns" or would promote interests "adverse" to the corporation.

Following the CA decision, AFSCME said it would renew its efforts to pursue proxy access at the SEC. A short-staffed commission voted last November to allow companies to resume omitting access bylaw proposals, but SEC Chairman Christopher Cox has pledged that the agency would revisit the issue. With the U.S. presidential elections less than four months away, it's unclear whether the SEC will tackle this controversial issue as it confronts other regulatory concerns that stem from the credit crisis.

"This decision makes Delaware less relevant to future discussions about shareholder rights, and makes a federal solution the only alternative for shareholders seeking fair and open elections," said Richard Ferlauto, AFSCME's director of corporate governance and pension investment. "The ball is pushed back to the SEC for when the next chairman will finally have to resolve shareowner rights to proxy access."

J. Travis Laster, a partner with the Abrams & Laster law firm in Wilmington, Del., offered a more sanguine view of the CA decision in a posting on TheCorporateCounsel.net weblog. "Although many will likely view this as a loss for stockholders, I believe they should view the case as a significant win. Yes, the director-reimbursement bylaw was held invalid, but the court held that the election process was a proper subject for stockholder action. A bylaw mandating the inclusion of stockholder nominees on the company's proxy statement should fare much better under a CA analysis," he wrote.

However, Laster cautioned that the ruling would be "generally negative" for stockholder bylaws that don't relate to elections. The court's analysis "should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year," he wrote in his posting.

The New York law firm of Wachtell, Lipton, Rosen & Katz, which represents companies and boards, hailed the CA ruling and concluded that the Supreme Court's reasoning would preclude shareholder bylaws that would prevent boards from adopting poison pills. "The Delaware Supreme Court's unequivocal and welcome holding should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors. The opinion will hopefully signal that the courts will not permit directors to be undermined or constrained in the exercise of their fiduciary duty in the broad range of subjects traditionally within their ambit as stewards of the corporation," the firm wrote in a memo on the case.

With disappointing news continuing to dominate the headlines, it should not be surprising that overall company performance in the first six months of the year has been less than stellar. RiskMetrics Group's forensic financial accounting analysts, who uncover inherent risk in companies, track a list of companies that they see as being especially concerning. As U.S. markets retreated into bear market territory in the first half of 2008, the companies included in our "Biggest Concerns List" were hit much harder than their fair share.

For an excerpt of our Biggest Concerns list performance update, please access the report here.

With the majority of annual shareholder meetings past, the French proxy season this year was notable for a greater focus on executive pay, and more pressure from activist investors.

The Law for the Promotion of Employment, Labor, and Buying Power (TEPA), which went into effect this year, reflects the growing shareholder discontent with executive severance pay. The law was adopted partly in response to the 2006-2007 insider trading scandal at European Aeronautic Defence and Space. TEPA requires that all executive pay at listed companies--except that related to supplemental retirement benefits or non-competition agreements--must be performance-based. Performance targets must also be verified by the board of directors, according to the law, which specifically targets retirement and severance benefits.

The law expands on a 2005 measure that stipulated that the terms of any new employment agreements with company presidents, CEOs, managing directors, and deputy managing directors be subject to approval by the board and by shareholders, according to a release by Soulier, a Paris-based law firm.

According to RiskMetrics Group data, 11 of 17 companies in the CAC 40--a major French stock index--that have submitted employment agreements to a shareholder vote this year have limited total severance benefits to two times an executive's last total pay package. Though no pay measures failed to win majority shareholder support this year, a significant number of investors opposed severance packages with a salary multiple greater than two. For instance, 20 percent of shareholders voted against an employment agreement at Alcatel-Lucent's May 30 meeting that would provide CEO Pat Russo with a €6 million ($9.5 million) severance package. Shareholders may have disapproved of the performance targets, which allow the severance payout if the company achieves 90 percent of its target revenue and/or 75 percent of target operating profit if Russo retires in 2009. Despite this high-profile instance, such agreements are rare in France.

Despite the passage of TEPA, companies can still choose a broad range of performance criteria--ranging from easily measurable shareholder returns to such benchmarks as internal business unit performance or client satisfaction. As the law still exempts payments in the case of a change in control or provided by a non-compete agreement, French executives and directors may still walk away with large severance packages.

In a historic move, the Delaware Supreme Court has agreed to rule on the legality of a shareholder bylaw proposal at CA Inc. that would provide reimbursement for expenses incurred by successful dissidents in a short-slate proxy contest.

The court will hear arguments on the matter on July 9 in Dover. This is the first time that the Supreme Court has agreed to resolve a legal question presented by the Securities and Exchange Commission (SEC). Delaware lawmakers approved legislation in 2007 to allow the SEC to directly ask the Supreme Court to rule on disputes over shareholder proposals.

The bylaw proposal--filed by the American Federation of State, County, and Municipal Employees (AFSCME)--would require the Islandia, N.Y.-based software company to reimburse successful dissidents for their "reasonable expenses" in future short-slate contests. To qualify for reimbursement, the dissidents would have to seek less than 50 percent of the board seats, win at least one seat, and there not be cumulative voting in place. In addition, the reimbursed expenses could not exceed the sum spent by the company on that election.

Attorneys for CA asked the SEC's Corporation Finance Division in April for permission to exclude the proposal, arguing that it is barred by SEC Rule 14a-8(i)(8), is not a proper subject for shareholder action, and could violate Delaware law. Lawyers for AFSCME's pension plan responded by asserting that investors have broad authority under Delaware law to enact bylaws and may constrain actions by directors.

On June 27, the SEC asked the Supreme Court to rule on: 1) whether the resolution is a proper subject for shareholder action; and 2) whether the proposed bylaw would cause CA to violate any Delaware law. On July 1, the court agreed to hear the case, and directed the parties to submit briefs on the dispute by July 7.

Richard Ferlauto, director of pension and benefit policy at AFSCME, said he is encouraged that Delaware now allows disputes over shareholder proposals to go directly to the Supreme Court. In past disputes over Delaware law, investors have had to file a lawsuit in Chancery Court and then wait "months or years" for the case to reach the Supreme Court, he noted.

AFSCME has filed several short-slate reimbursement proposals as an alternative to proxy access resolutions, which the SEC allowed companies to omit this year. Reimbursement generally is not an issue in full-slate contests, as dissidents who win board control typically are able to recover proxy expenses. An AFSCME reimbursement proposal is on the ballot at computer maker Dell on July 18. A similar proposal went to a vote May 8 at Apache, which has not yet released official vote results. A reimbursement resolution received 13.9 percent support at the Houston-based oil firm in 2007.

Feraluto said he is "optimistic" about the labor fund's chances in the CA bylaw dispute. "While a corporation has wide latitude for the actions it takes, that's based on the premise that directors are agents of shareholders," he said. "The corollary is that shareholders should be able to structure the procedures for nominating and electing directors."

In a memo on the case, the law firm of Wachtell, Lipton, Rosen & Katz, which represents directors and companies, noted that Delaware law "has generally limited the ability of shareholders pursuing special interests to recover their solicitation expenses." The firm concluded that the Supreme Court would "have a strong basis to reaffirm the traditional prerogatives of the board under Delaware law to manage the business of the corporation and decide how to spend its funds."

The Supreme Court likely will rule on the dispute quickly. CA plans to file its definitive proxy statement by July 17 for its Sept. 9 annual meeting. This case may have broad significance for U.S. companies and shareholders, as 61 percent of New York Stock Exchange and Nasdaq-listed firms are incorporated in Delaware, according to Bloomberg News. "Whatever happens, it will be precedential," Ferlauto said.

A new shareholder proposal filed this week calls on The Hain Celestial Group to reincorporate to North Dakota in light of legislation there requiring companies to provide for an advisory vote on pay, majority voting in director elections, and other shareholder-friendly measures.

"The North Dakota law is far ahead of any other state corporation law in providing rights for stockholders," wrote proposal proponent Kenneth Steiner in the resolution's supporting statement. "It addresses each of the major issues in corporate governance."

The North Dakota statute, which took effect on July 1, 2007, is among the friendliest to shareholders, according to those familiar with the resolution. The law mandates the separation of the chairman and CEO positions, annual election of directors, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures widely seen as empowering shareholders.

"It's an intriguing idea and someone was bound to do it sooner or later," said Cornish Hitchcock, an attorney for the Amalgamated Bank's LongView fund. "It will be interesting to see how it plays out in terms of shareholder approval."

Advocates of the North Dakota statute believe the measure will generate measurable support among investors should it come to a vote. "I would think any shareholder who understands the benefits of the North Dakota law would support this proposal," said William H. Clark, Jr., a Philadelphia-based attorney with Drinker Biddle & Reath.

Clark, who served as president of the North Dakota Corporate Governance Council, which drafted the statute, also noted that the law required shareholders nominating director candidates not nominated by management to be reimbursed for their proxy expenses "to the extent they are successful." That automatic right of reimbursement for solicitation expenses has gained added import in light of the Securities and Exchange Commission's decision late last year to bar proxy access proposals and a pending decision by Delaware's judiciary as to whether or not a reimbursement proposal filed at Long Island-based CA would violate Delaware law.

The proposal also may fare well based on support given to other recent proposals to reincorporate to another jurisdiction. The United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies' 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the "for" and "against" votes, respectively.

But the view that the North Dakota reincorporation resolution will be well received by shareholders is not shared by all, with some observers arguing incorporation in Delaware is more beneficial to investors. "Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective," said Delaware University professor Charles Elson. "There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes."

That underlying premise is flawed, argues Clark, because the need to rely on the Delaware judiciary effectively concedes that the Delaware corporation law is fundamentally "not protective" of investor rights. "My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights," said Clark. "The Delaware judiciary is limited by the statute in the rights it can provide investors. There's no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has."

Hain officials did not immediately respond to requests for comment on receipt of the resolution and whether they would seek to challenge it at the SEC. Of 17 proposals relating to reincorporation over the past decade, just three were omitted at the SEC, according to RiskMetrics records. Hain held its 2007 annual meeting on April 1 of this year and will hold its 2008 annual meeting sometime this fall.

Shareholder activist John Chevedden, who worked with Steiner on drafting and filing the proposal, said he had so far not engaged in any dialogue with the company on governance concerns. Chevedden also said he will be looking into filing the proposal at other companies as deadlines approach for submissions for 2009 annual meetings.

To view the proposal, please Download file.