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all about corporate governance

  1. 3,097 Posts.

    We have entered into an age of widespread investor skepticism over nearly all aspects of corporate governance. Scandals are sapping investor confidence and sinking stock markets. With the financial shenanigans at Enron, WorldCom, Global Crossing, Tyco, Adelphia, Lucent, Xerox, Qwest, Ahold NV, Peregrine and other public companies permeating the news, many are seeking ways to improve corporate governance and, in particular, Director accountability to Shareholders. Solutions involving better disclosure and stiffer penalties miss the big picture. Additional disclosure has not caused Management and/or Directors to abandon acts of greed and conflicts of interests. Tweaking rules and regulations at the margins will only minimally improve the quality of corporate governance.

    "Instead of serving as watchdogs for shareholders who elect them, corporate directors too often act as lapdogs for the executives who handpick them. At a minimum, the breakdown of board accountability has resulted in stock losses for investors. At worst, it has contributed to corporate wrongdoing." (USA Today, 4/27/03, Editorial/Opinion - "Behind many errant CEOs hide weak corporate boards")

    The real problem with corporate governance is the lack of an effective procedure by which Directors can be held personally accountable for their actions, e.g., voted out of office and replaced by candidates nominated by Shareholders. Shareholders (the true owners of Corporate America) should have the legal right to nominate truly independent Director-candidates and cause the names of those candidates to appear on the Company's ballot. "[S]hareholders have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest." (1/9/03, The Conference Board - Commission on Public Trust and Private Enterprise - Findings and Recommendations) For the most part, incumbent Directors have no real concern about their personal accountability to Shareholders. "[I]t is especially difficult to remove a director for poor performance ... [N]on-performing directors ... were allowed to stay because the chairman felt it was not worth the effort or embarrassment to remove them. ... '[O]ne of the most difficult tasks confronting boards now is what to do with underperforming directors'..." (Globe and Mail, 3/15/03, "The boardroom and its cast of characters") "'The biggest obstacle to a good board is arrogance,' Raber [Roger Raber, president of the National Association of Corporate Directors] said. 'With some directors, there is a sense of entitlement. ... "I'm here as long as I want to be."'" (LA Times, 7/22/02, "Crisis In Corporate America")

    The present system to select/nominate corporate Directors is rife with conflicts of interests. "Ms. Teslik [Executive Director, Council of Institutional Investors] cites how difficult it is for shareholders to elect a director other than those handpicked by management --- even though the directors, in theory, represent the shareholders. ‘Our system allows executives to pick the boards who are supposed to police them,’ she says." (WSJ, 7/16/02, "Wall Street Rushes Toward Washington, Flees Responsibility") For all practical purposes, Management selects Director-candidates and causes them to be "elected." Management uses Shareholders' assets to conduct proxy solicitation efforts on behalf of the candidates that Management selects. There is little likelihood that Management will desire, select or support candidates who are inclined to ask "tough questions" on behalf of the Shareholders. Further, Directors, who do not cooperate with Management, will not be asked to serve an additional term. Those Directors know the score. Yet, while dependent on Management for their longevity, Directors still have a fiduciary duty to ALL Shareholders to monitor Management’s actions. The end result is that Directors are very much beholden to the CEO who brought them to the dance! Could there be a more obvious conflict of interests?

    Former Tyco International Director Wendy Lane discussed the Director selection process. "How did you get on Tyco's board? ... I went to a Wharton conference, and Dennis (Koziowski) was acting CEO in a case study.... We were role-playing a board meeting.... Apparently he like my answer. He asked me onto the Tyco board." (Corporate Board Member, Special Legal Issue 2003, "Tyco Director Says, 'I've fallen Off the Cliff")

    CEOs seek "consensual" Directors and shorten the longevity of Directors who are otherwise. "Too many boards are stuffed with yes men who question little that their chief executives suggest. ... Chief executives tended to dominate the choice ... of board members (where search committees are usually encouraged to look for 'consensual' candidates who will not rock the boat)...." (The Economist, 1/9/03, "Corporate boards: The way we govern now") “[D]eparting director Andrea Van de Kamp --- who emerged last year as one of (Disney Chairman and CEO Michael D.) Eisner’s harsher board critics --- vehemently objected and accused the chairman of orchestrating here removal … Directors said the names of the four leaving the board were submitted by the nominating committee, which was acting on the recommendation from Eisner.“ (LA Times, 1/31/03, “Eisner Critic Losing Seat on Board of Directors”) "She argued that Eisner's behavior undermines efforts to strengthen the board's independence and 'gives the appearance that rubber-stamping Michael's decisions is an unwritten prerequisite for continued board membership.'" (LA Times, 2/15/03, "Exiting Board Member Says Eisner Bullied Her") “Last week, the Securities and Exchange Commission charged HealthSouth and its chairman and chief executive, Richard M. Scrushy with ‘massive’ accounting fraud…. Mr. Scrushy confronted Mr. (Robert P.) May … and told the director he was going to ‘fire’ him …. unhappy with Mr. May's efforts to replace certain longtime board members....” (WSJ, 3/25/03, “HealthSouth Turns to Outside Help”) "[N]ewly appointed director Jon F. 'Jack' Hanson ... says Mr. Scrushy invited him to join its board because they casually knew each other from serving ... on the board of the National Football Foundation and College Football Hall of Fame. Several months before Mr. Hanson got his HealthSouth directorship, the company donated $425,000 to the football foundation...." (WSJ, 4/11/03, "Board Members Had Lucrative Links at HealthSouth")

    Additional conflicts of interest are caused by the existence of a Director clique. "[A]n inner sanctum of friends, colleagues and partners ... sit on corporate boards together. ... [T]hat creates the potential for serious conflicts of interest and negates what is supposed to be an independent watchdog in Corporate America.... [T]he degree to which America's boards are connected shows that a lot of power is concentrated in relatively few hands." (USA Today, 11/25/02, "Web of board members ties together Corporate America") Membership in the Director clique is by invitation only. "'Getting on a board is like being invited into a secret club,' notes James Kristie, editor of Directors & Boards magazine. 'There's a collegiality that's required, so you aren't going to be invited in unless you've demonstrated that you can work within the system and the club. No one wants a wild card.'" (USA Today, 11/1/02, "Good old boys' network still rules corporate boards") "[T]here has developed a cadre of 'professional directors' who serve on numerous boards in their 'retirement years.' ... For these individuals a board fee of $50,000 to $100,000 per board amounts to a considerable retirement stipend. It's not surprising that their objective is to get along." (WSJ, 2/18/03, "Manager's Journal --- Corporate Boards: A Director's Cut")

    "[B]oards of directors are notoriously social organizations, where the goal is not to maximize profits but to avoid embarrassment while maintaining social cohesion within the board and the larger corporate community. For directors, it is simply bad form to nitpick over a couple of million dollars with another member of the club, particularly one who helps set director fees or serves on the compensation committee of other corporations." (Washington Post, 4/30/03, "A Rigged Market For CEOs")

    Even legendary investor Warren E. Buffett was not immune to the collegiality. He recently wrote to the Shareholders of Berkshire Hathaway Inc. on the subject of Director passivity. "Warren Buffett ... confessed ... after sitting on 19 boards in the past 40 years: 'Too often I was silent when management made proposals that I judged to be counter to the interests of shareholders.' In those cases, 'collegiality trumped independence,' Buffett said. A certain social atmosphere presides in boardrooms where it becomes impolitic to challenge the chief executive, he wrote." (CBS MarketWatch, 3/8/03, "Buffett chides corporate boards") Was he admitting to passivity or breaches of fiduciary duty to Shareholders? "Berkshire's seven-member board includes Buffett's wife, Susan; his 48-year-old son, Howard; and three executives who have business ties to the company." (LA Times, 5/5/03, "Buffett Applauds Wall Street Settlement") Mr. Buffett is reputed to be the best of the best! Thus, Shareholders have no reason to expect better representation from any other Director.

    In March 2003, Arthur Levitt, Chairman of the SEC from 1993 to 2001, made some astonishing comments at the CFO Rising conference. He stated, in part, "I've sat on enough boards and audit committees to understand the kind of culture of seduction that characterizes many boards. It's a game that many CEOs played and played well by seducing their boards with perks and private attention and contributions to favorite philanthropies, and meetings that were short on substance and long on fluff. The boards became willing accomplices. And it's part of the American personality to go along and become more fraternal rather than more vigilant." (CFO Magazine, May 2003, "'You are the guardians'") So, Mr. Levitt, if you did all that board sitting before 1993, what did you do or attempt to do, from 1993 to 2001, to cure the specific problem? Also, Mr. Levitt, are you saying that it would be un-American to require Directors to be vigilant on behalf of Shareholders?

    Rich Koppes, coordinator of Stanford's Institutional Investors' Forum and Fiduciary College, member of the advisory board of the National Association of Corporate Directors and former General Counsel of the California Public Employees' Retirement System ("CalPERS"), stated, "As a director of three public companies.... To often, in my experience, boardrooms are full of directors that still don't understand that they have a fiduciary duty to shareholders at large. ... I think we have too much in boardrooms today a feeling that you have kind of a divine right to continue on the Board without anybody challenging that assumption." (Emphasis added.) (TheCorporateCounsel.Net, 5/21/03, Webcast Transcript "Shareholder Access to the Ballot")

    Ira Milstein, a 76 year old attorney who is well known within corporate governance circles, has criticized the ability and tendency of CEOs to control the flow of corporate information that reaches Boards of Directors. "'Think of how unreasonable it is that the CEO can decide today what goes to the board,' he said." (Reuters, 7/13/03, ""CEO Pay, Courts Now Hottest Button") The unspoken assumptions are: (1) members of Boards of Directors do not have the intelligence to recognize that they may be making decisions based upon insufficient and/or inaccurate information; or, (2) intimidated by CEOs, they are reckless in exercising their fiduciary duties.

    Some Directors resign or decline to stand for re-election due to disagreements with the Company's operations, policies or practices. Yet, they fail to inform the Shareholders of the problem(s) and sheepishly disappear into the night. "Mr. [Rueben] Mark had grown weary of his self-appointed role as conscience of the board, and so had some of his fellow directors. ... His colleagues ... deflected his input. ... Mr. Mark walked upstairs to Mr. [Sandy] Weill's office and said he wanted to leave the Citigroup board. Mr. Weill ... is always sensitive to market reaction to events, .... The Citigroup chief then made a suggestion: Why not, instead of resigning, simply not stand for re-election this spring?" (WSJ, 3/10/03, "After Sandy --- Slow Quest for a Weill Successor Is Ruffling Feathers at Citigroup") Departing Directors can require a Company to include a statement of their disagreement in the Company's next proxy statement. However, they know that a "noisy withdrawal" from one Company would prevent them from ever being "selected," "chosen" or "recruited" as a Director at any other Company.

    It is practically impossible for a Director-candidate, NOT selected by Management and/or incumbent Directors, to conduct an effective proxy fight to replace incompetent and/or corrupt Directors. Even though Company Articles of Incorporation or bylaws permit any Shareholder of record to nominate a Director-candidate, Companies will NOT place the names of Shareholder-nominated Director-candidates on the ballots that the Companies distribute to their respective Shareholders! Those outsider Director-candidates must go through the entire complex and expensive proxy solicitation procedure for themselves. See, e.g., "Shareholders Unite!" in Kiplinger’s Personal Finance Magazine (May 2002). The normal cost to conduct an effective proxy fight is at least $250,000. There could be additional legal costs of defending against frivolous legal actions filed by Management as Companies sometimes try to exhaust an outsider Director-candidate’s funds and energy. Further, even if a Shareholder-nominated Director-candidate is elected, present rules do NOT provide for reimbursement of his/her campaign expenses. (Note: Companies pay, without limit, from Shareholders' assets, all expenses of Director-candidates selected by Management.)

    Shareholders, who seek Director accountability, can NOT rely upon Institutional Investors or persons of wealth to act as watchdogs of Management. Recently, Ranger Governance, in substance, accepted $10 million from Computer Associates and then folded its corporate governance based proxy fight. Further, substantially all Institutional Investors are not pro-active. "The fact that fund managers were nowhere to be found isn't surprising to anyone. Because their primary concern is generating fees from managing corporate pension plans, few portfolio managers are willing to rock the boat by complaining about corporate governance issues." (, 10/15/02, "Mad as Hell --- What You Can Do About It: Institutions Asleep at the Wheel") "Mutual funds also generally refuse to defy management teams because gaining a reputation for siding with dissidents can harm their ability to get business managing the 401(k) plans of employees in companies whose stocks they own." (, 11/7/02, "Proxy Fights, Rarely Successful, Continue to Tempt Shareholders") On December 12, 2002, John J. Sweeny, President of the AFL-CIO, condemned the lack of business ethics in proxy voting by Mutual Funds by stating: “[A]nother conflict of interest in our financial markets—the conflict that encourages mutual fund companies to use our money to be ‘yes-men’ for corporate management in proxy votes. Using our money, mutual funds have bought up more than one-fifth of U.S. corporate stocks. Their sheer size makes mutual funds one of the most powerful forces in deciding who sits on corporate boards….. [W]e suspect that mutual funds vote with management at the expense of our jobs and savings to win profitable deals on retirement accounts and selling other services. … Take Fidelity Investments, for example, the world's largest mutual fund company and one of the most influential investors in the global capital markets. Fidelity earned $2 million in 401(k) management fees in 1999 from Tyco. … [W]ill Fidelity or any other mutual fund company, ever vote against management and risk a contract worth millions?” (Emphasis added.)

    Substantially all Institutional Investors, due to perceived legal exposure or trading restrictions, have not nominated Director-candidates. "Nell Minow used to think that large institutional investors, such as pension or mutual funds, would be most likely to take on corporate governance issues. But the founder of, an online clearinghouse of research and analysis of global corporations, says she realized that rarely works. 'They don't want to be out front. ...'" (edventure, 1/8/03, "Investors of the World, Unite!")

    Institutional Investors provide a false sense of security to the investing public when they only "withhold" their votes. They send a "message" of impotence. "An influential adviser to institutions (Institutional Shareholder Services) is urging its clients to oppose the re-election of the directors of Texas Instruments, including Thomas J. Engibous, the company's chairman and chief executive. The adviser ... is angered by the disclosure that the Texas Instruments board adopted a costly stock option plan without obtaining shareholders' approval. It is recommending that stockholders withhold their votes for the eight directors who can stand for re-election. ... Institutional shareholders own 68.7 percent of Texas Instruments' shares outstanding, while officers and directors own 0.83 percent. ... 'Companies need to get the message that reforms are out there....'" (NY Times, 3/29/03, "Texas Instruments Directors Come Under Fire") "Campaigns to withhold votes from directors cannot oust the directors...." (NY Times, 4/4/03, "Will S.E.C. Allow Shareholder Democracy?") Even if the entire 68.7 percent vote to "withhold," when the 0.83 percent vote to re-elect themselves, the BOD of Texas Instruments will continue "business as usual" at the golden trough.

    Shareholders cannot rely upon class action lawsuits to hold Directors personally accountable. First, there is the "business judgment rule" as a Director's first defense to his/her poor decisions. Next, most class action lawsuits are settled for a few cents on each dollar of losses, vouchers towards a future purchase and, possibly, nebulous injunctive relief. The few cents are paid through Directors' and Officers' insurance and/or from corporate (Shareholders') assets --- not from the Director's personal funds. Also, Directors cause their Companies to provide them with contractual indemnity for costs of defense and judgments. Much of the settlement fund goes to pay attorneys' fees. Lastly, "The Problem: Millions of dollars of class-action settlement money goes uncollected every year... Experts estimate that more than half of people who are eligible for compensation never follow-up." (WSJ, 2/18/03, "Quick Fix: Tracking Consumer Suits") Then, the culpable Director is still in a position to continue to exercise poor judgment.

    It appears that the Securities and Exchange Commission ("SEC") can NOT or will NOT discipline Directors selected by Management even in the most egregious of instances. "One SEC official says, 'There's the fear that rather than serving on boards, they'll just go off and play golf.' ... Lynn Turner, a former SEC chief accountant, contends Enron represents a perfect opportunity for the SEC to go after directors. 'If you don't go after this board, you're telling the public you ain't going after any board,' he says. Sarah A. B. Teslik [Executive Director, Council of Institutional Investors] ... adds that if the SEC doesn't pursue a case against Enron's ... directors, it will be sending the message that 'it is OK to be unaware that your company is a complete house of cards.' ... But the SEC confirms that ... to date it hasn't brought any cases [against Directors who were not also Company officers]." (WSJ, 9/25/02, "SEC Isn't Likely to Discipline Enron Board")

    Companies will develop innovative means by which to try to convince the investing public that they seek “independent” Directors while, in reality, maintaining the status quo. Nothing will change, except appearances. “HealthSouth Corp. … is naming four outside advisers to help field new candidates for the board. The appointments … are part of HealthSouth’s efforts to address concerns about the independence and effectiveness of its board…. The four will work with the board’s Nominating/Corporate Governance Committee, along with two outside search firms, to identify and evaluate two or three new director candidates.” (WSJ, 1/27/03, “HealthSouth Appoints Advisers To Find Candidates for Board”) We are not told whether the ultimate Director-candidate selection decision still rests with the CEO. We are not informed whether the advisers are obligated to publicly blow-the-whistle if the HealthSouth declines to accept the advisors’ advice. We are not told how and in what manner the HealthSouth will compensate the advisors for their efforts. Further, the advisers may be very interested in earning a positive reference from HealthSouth in order to bootstrap their role into a lucrative advisory assignment at another Company. If the Directors on HealthSouth's Nominating Committee are ineffective, would it not be more efficient and less costly to replace them? Where is the accountability?

    "T.K. Kerstetter, president of Board Member, Inc., which publishes Corporate Board Member magazine, said there's no way for outsiders to know how serious a board is about carrying out reforms. 'Is there any way to tell if this is window dressing or solid governance? I don't know how somebody would be able to tell the difference.'" (Dayton Daily News, 6/7/03, "DPL directors' ties raise red flags")

    Some individual Shareholders have attempted to influence corporate governance issues by bringing non-binding Shareholder Proposals. However, even when those non-binding Shareholder Proposals are approved by an overwhelming majority of Shareholders, Managements and Boards of Directors ignore them. "[T]riumphs often are only symbolic, because the resolutions they submit aren't binding. Activists agree that the most effective way of generating change is through a proxy battle that unseats directors. But running one of those is far more difficult, expensive and time-consuming than submitting a shareholder resolution, and is consequently largely off-limits to small shareholders. ... Professional investors rarely bother with nonbinding resolutions. ... [The Committee of Concerned Shareholders] is now asking the SEC for a rule change that would make it easier and cheaper for shareholders to run a dissident slate of director-candidates." (, 10/15/02, "Mad as Hell --- What Can You Do About It: Voices in the Corporate Wilderness") "Hewlett-Packard shareholders approved new poison pill guidelines ... in a move to to assert more influence over the company. ... CEO Carly Fiorina said the company's board would 'duly consider' the recommendation." (CBS MarketWatch, 4/2/03, "H-P shareholders OK poison pill plan") For all practical purposes, consider it "duly considered" and rejected. "If Hewlett-Packard's board has any spine, it'll do more than just give 'due consideration' to two shareholder measures adopted at last week's annual meeting. ... There shouldn't be any stalling on this. But so far, H-P has responded by noting that the board is not required to act." (CBS MarketWatch, 4/9/04, "H-P shareholders are 'due' respect")

    Since others cannot be relied upon to improve accountability of Directors to Shareholders, individual Shareholders should be allowed to function as their own watchdogs by use of the Shareholder Proposal procedure to nominate truly independent Director-candidates. (See, below, Shareholders Unite! - Petition for Rulemaking (SEC File No. 4-461).)


    A Simple/Effective Solution

    "'If directors felt they were vulnerable to competition for their seats, they wouldn't simply dance the dance of the chairman and CEO who brought them onto the board,' he [Ralph Whitworth, a principal and managing member of Relational Investors] believes." (WSJ, 9/17/02, "Investors Have to Lead The Charge to Keep Big Bosses in Line") "The solution would appear simple enough: Open the nominating process so shareholders have a right equal to that of the nominating committee to put candidates on the proxy." (The Star-Ledger, 3/27/03, "Iffy board nominees attract Mom's wrath")

    The Editors of the Wall Street Journal have obliquely opined that Shareholders should have real tools with which to function as their own corporate watchdogs, e.g., be able to replace incompetent/corrupt Directors. "A dissent shareholder is now requesting that the SEC investigate Tenet for disclosure violations. That's fine, but we think a better answer is to create a market for corporate control that makes it easier for such shareholders, the real owners, to challenge blundering management. Then investors, who are hurt most by corporate mistakes, will be the ones weeding out all the bad apples." (WSJ, 1/9/03, “Tenet's Shareholder Ills”)

    Pursuant to the provisions of Rule 14a-8 1/ of the Securities Exchange Act of 1934, Shareholders may submit and Companies are required to solicit proxies (votes) from all Shareholders (at the Company's expense) concerning Shareholder Proposals. However, when it comes to Shareholder Proposals that require the Company to solicit proxies related to the election of Directors, SEC Rule 14a-8(i), states, in part: "Question 9: If I have complied with the procedural requirements, on what other bases may a company rely to exclude my proposal? .... (8) [T]he proposal relates to an election for membership on the company’s board of directors or analogous governing body." (Emphasis added.)

    The Committee advocates a change to Rule 14a-8 whereby the solicitation of proxies for ALL nominees for Director positions are required to be included in the Company’s proxy materials, at no cost to any nominee. The proposed Rule change would make it easier for people willing to step forward and offer to serve as Directors. Shareholders would determine whether the Director-candidates have presented meritorious cases. Institutional Investors would have Director-candidates to endorse without fear of legal exposure or trading restrictions.

    "Get Rid of Pet-Rock Boards ... [T]oo many corporate boards of directors still serve as little more than puppets of management. ... Companies should be required to give shareholders election materials about rival candidates; as it stands, small investors who want to wage upstart campaigns don't stand a chance." (TIME Magazine, 7/22/02, "More Reform and Less Hot Air")

    "The SEC ... should fix these problems. All candidates should appear on the ballot that companies prepare. After all, they already print dissident shareholder proposals in proxy statements. ... Many of the corporate abuses emerging now happened under crony boards. It's in everyone's interest to make it easier for outsiders to get in." (BusinessWeek Magazine, 10/21/02, "Bring Democracy To Boardroom Elections")

    Supposedly, it is the Shareholders' Company. It should be the Shareholders' choice as to who can best represent their financial interests. The corporate aristocracy disagrees. Opponents to change argue that equal access to the Company ballot "might be abused by dissents to mount a no-premium corporate takeover disguised as a boardroom coup." The Director-candidates can set forth their respective positions and the Shareholders can vote. If the "dissents" prevail, it would be because the majority of Shareholders desired that result. The opponents to change further argue that SEC Rule 14a-8(i)(8) keeps "ill-qualified," "riffraff," "know-nothings," "crackpots" and/or "nobodies" from being elected as Directors. [Note: Anyone they oppose is, by definition, "ill-qualified," etc.] On the other hand, some of the current and/or recently former members of the corporate Director aristocracy, even those serving on multiple Boards of Directors, who were handpicked by Management and/or their fellow Directors based upon their supposedly prestigious pedigrees, have proved to be less than competent. The choice is clear: corporate democracy or continued paternalism by the corporate aristocracy

    "Corporate insiders will no doubt object to any move to open up the process.... But that's all you'd expect from any group with a vested interest in the status quo. ... Insiders also like to argue that making board elections more competitive will discourage people from running. Well, that's just what we need - to chase off people who like to operate in the dark and admit others who won't mind answering to the people who elected them." (, 4/6/03, "High time to bring democracy into boardroom")

    Companies may claim that democracy in corporate elections will cause them to incur burdensome additional costs. However, the true cost of NOT allowing democratic elections of Directors is that Shareholders have no real means of holding Directors and/or CEOs accountable. Without true accountability, there is no incentive to improve. A few centavos, kopecks or shekels in added printing costs is nothing in comparison. Specious claims of added burdens/costs have been raised by Institutional Investors (and rejected) in the context of disclosing how they vote the shares they hold. "The Office of Management and Budget said Friday that it won't object to a new rule requiring mutual funds to disclose how they vote shares of corporate stock they hold for investors. The new Securities and Exchange Commission rule has been applauded by investor advocates and attacked by mutual funds, which claim it would be too burdensome and costly." (Associated Press, 3/28/03, "Feds OK New SEC Mutual Fund Rule")

    Directors will only improve when they can be held personally accountable to Shareholders for their actions, e.g., voted out of office and replaced by candidates nominated by Shareholders. Until disgruntled Shareholders can seek personal accountability through an economically feasible procedure, Management and Directors will conduct "business as usual." Amending SEC Rule 14a-8(i) will provide that needed procedure. (See, below, Shareholders Unite! - Petition for Rulemaking (SEC File No. 4-461).)


    Other Plans (UNequal "Equal Access") Are Flawed

    The plan of big business is to keep the status quo. "The most powerful business lobby group (Business Roundtable) in the US plans to ask the Securities Exchange Commission to delay sweeping reforms that investors say will improve shareholder democracy." (Financial Times, 5/28/03, "SEC under proxy pressure") Yet, "in August 1977, Business Roundtable ... memo ... was supportive of the equal access concept, recommending that 'the SEC should adopt, if necessary, amendments to Rule 14a-8 that would permit shareholders to propose amendments to corporate bylaws which would provide for shareholder nominations of candidates for election to boards of directors.'" (See, “Equal Access – What is It?”)

    On August 2, 2002, Petition for Rulemaking (SEC File No. 4-461) was formally filed with the SEC. Other plans have been proposed or trial balloons have been released to the media. Other plans propose the concept of "equal access" to the corporate ballot, but only for a small number of wealthy Shareholders. In substance, they promote continued UNequal "equal access." None of those plans has been filed as a formal Petition for Rulemaking with the SEC.

    The other plans are fundamentally flawed in that they require such elevated Director-candidate nominator ownership requirements, e.g., 3%, 5% or 10% stock ownership, groups of 25 to 50 investors, that, in reality, they only promote the status quo. They try to impose arbitrary and impractical nominator eligibility criteria and paternalism by the wealthy. In effect, those proposed plans will maintain the status quo while attempting to cause the investing public to believe otherwise. The supposed purpose of Shareholder Proposals is to afford a more level playing field to those owning relative small amounts of a Company’s securities. We are adamantly against nominator requirements of 3% or 5% or 10% shareholder ownership or groups of 25 or more members.

    1. The idea behind the “equal access” concept is to encourage more persons to step forward to become Director-candidates. Persons or groups that own 3% or 5% or 10% of a Company’s shares ALREADY have the knowledge and financial means to conduct a full proxy contest without the need for any SEC Rule change. Historically, very few, if any, of those persons or entities have shown any inclination to hold Directors accountable by fielding their own Director-candidates. There is a big difference between having knowledge and financial ability and having the will to exercise them. There is absolutely no assurance a 3% or 5% or 10% nominator ownership requirement will have any positive impact on the current situation.

    2. Plans with 3% or 5% or 10% nominator requirements forget that there are 9,000+ Companies with shares, which are publicly traded. Where is the commitment from such potential nominators that they have the interest and personnel and will expend the necessary finances, time and effort to seek Director accountability on behalf of the Shareholders of those Companies?

    3. Opponents to change might argue that “equal access” to the Company ballot "might be abused by dissidents to mount a no-premium corporate takeover disguised as a boardroom coup." (Staff Report to Trustees of CalPERS.) One should not assume that Shareholders have little or no intelligence. The Director-candidates can set forth their respective positions and the Shareholders can vote. If the "dissidents" prevail, it would be because Shareholders, casting at least 50% of the votes, desired that result.

    "Though never popular with the Business Roundtable, the takeover threat was a remarkably effective way of enforcing corporate accountability in the 1980s." (WSJ, 6/19/03, Editorial: "A Welcome Brawl")

    Institutional Shareholder Services ("ISS") recently placed the “burden of proof” on the Companies to justify why a “takeover” should not occur. "The burden of proof used to be on the dissidents to prove their case for change when waging a proxy fight, Mr. (Patrick) McGurn (Senior Vice President of ISS) said, but his company and many others in the investment community have become increasingly skeptical of the ability of existing managements and boards to make significant changes. ‘You saw time and time again that incumbent boards weren’t taking care of shareholder interests,’ he said.” (New York Times, 6/4/03, “An Investment Adviser Urges That El Paso Board Be Ousted”)

    4. The numbers 3% or 5% or 10% or 25 are arbitrary when the Shareholder Proposal criteria (continuously owned at least $2,000 of the Company's stock for at least one year) have already been tested for many years and have proved to be effective.

    Elevated Director-candidate nominator criteria is not related to the level of Shareholder discontent. One cannot predict the extent of shareholder dissatisfaction until the final vote is counted. In our proxy contest at Luby's in 2000, even though the outsider Director-candidate nominators held about 1/4% of the outstanding stock, our candidates garnered 24% of the vote. A 3% or 5% or 10% criterion would have deprived 24% of the Shareholders of their rightful voice.

    A 3% or 5% or 10% shareholder ownership requirement may have been the result of a misplaced fear that hordes of "riffraff," "know-nothings," "crackpots" and/or "nobodies" would storm Companies' gates to seek Directorships. Such predictions of doom and gloom are not supportable. Even "riffraff," "know-nothings," "crackpots" and/or "nobodies" are aware of and would not cavalierly subject themselves to the legal exposure of serving as Directors. Further, there are many safeguards in SEC Rule 14a-8 to assure that Companies would not be harassed with frivolous Director candidacies. "Over the past several years, companies generally have sought to omit 40% to 50% of the proposals they have received, and the SEC has granted permission 50% to 60% of the time." (WSJ, 6/11/03, "Siebel Fights Proposal About Stock Options")

    Also, a 3% or 5% or 10% shareholder ownership requirement may have been based upon a misplaced political attempt to reduce anticipated protests from "Corporate America." Let "Corporate America" protest! After the wave of recent financial shenanigans, a protest against the rights of individual Shareholders by "Corporate America" would be absurd and met with public scorn.

    5. 3% or 5% or 10% nominator requirements would be impractical to implement. It would necessitate a substantial revision of current SEC Rules. It would not simplify the current process. Further, forming groups or at least 25 persons and holding them together for an extended period will prove to be a very onerous task.

    The recent example involving ten (10) major pension funds demonstrates the difficulty of forming an investor group to attain a 3% stock ownership threshold. They formed an investor group to sign a letter dealing with one policy issue, a much simpler than forming a group to nominate Director-candidates. "A group of major pension funds Monday called on Unocal to reconsider its role … in Myanmar… The group, led by New York State Comptroller Alan G. Hevesi and joined by California’s treasurer and the state’s two largest pension funds… In all, representatives from 10 investment funds owning more than 4.5 million Unocal shares, or 1.6% of the stock, signed the letter and requested a meeting on the matter…. The 10 funds include the California Public Employees’ Retirement System and the California State Teachers’ Retirement System." (5/20/03, Los Angeles Times, “Shareholders Press Unocal on Myanmar”) If a major investor group with ten (10) members, formed to pursue an issue that is much less complex than Director-candidate nominations, can, at best, muster 1.6% of the stock, it is unlikely that many investor groups could be formed with at least 3% stock ownership to pursue the complex issue of Director-candidate nominations.

    6. There is no suggestion that members of a Company’s Nominating Committee, also, need meet the 3% or 5% or 10% ownership or 25 members nominator criteria. Our studies have shown that members of Nominating Committees own (not counting recently granted unexecuted stock options) less than 2/100ths of 1% of the outstanding stock. Some members own no stock whatsoever. Some might argue that the negligible stock ownership of members of the Company’s Nominating Committee should be excused, as each owes a “fiduciary duty” to the Company and/or Shareholders that outsiders do not owe. However, members are NOT truly independent as they are beholden to their fellow Directors and/or the Chief Operating Officer for their positions and longevity and, thus, have a conflict of interest in the nominating process. Self-preservation will prevail. Nominating Committees will substantially always find outsider suggested potential Director-candidates to be “unqualified” and/or will decline to “consider” them.

    7. Pursuant to general corporate law, ALL Shareholders of record have the right to nominate Director-candidates. (However, pursuant to current SEC Rules, the names of those Director-candidates need not appear on a Company’s ballot.) ALL Shareholders should be able to vote on all Director-candidates, even those nominated by Shareholders with relatively small share holdings. Other plans try to impose paternalism by the wealthy. The real issue is whether a Director-candidate, if elected, is qualified to serve the collective best interests of ALL Shareholders. It is not an issue of his/her wealth or the wealth of the person(s) who nominated him/her. (Even if such were an issue, Shareholders should determine its importance.)

    8. Some highly paid representatives of the status quo have expressed vague concerns about alleged added costs and/or potential unforeseeable consequences. ("We have nothing to fear, but fear, itself.") Those persons do not adequately consider the known and continuing costs to Shareholders and the markets due to Enron, Worldcom and numerous less publicized situations, where Director unaccountability has created an atmosphere of bad judgment, impunity and greed. The cost of continuing to deny true "equal access," i.e., lack of Director accountability, is substantially more.

    Sponsors of the other plans should support Petition for Rulemaking (SEC File No. 4-461) and assist ALL Shareholders to become effective watchdogs of "Corporate America."


    Sarbanes-Oxley Act Is Not Effective

    "Two influential Delaware judges have thrown something of a legal hand grenade in the direction of federal lawmakers ... over recent efforts at corporate reform. ... [T]he judges take a decidedly shareholder-friendly approach on two issues. ... Described as a forgotten element ... for 2002 reforms, they say it is time to examine the 'management-biased corporate-election system.' Because incumbent directors can 'spend their companies' money in an almost unlimited way in order to get reelected,' the judges said the corporate-election process is an 'irrelevancy' ... '... [T]he rhetorical analogy of our system of corporate governance to republican democracy will ring hollow so long as the corporation election process is so tilted toward the self-perpetuation of incumbent directors.'" (Dow Jones Newswires, 2/7/03, "Two Delaware Judges Take Issue With Governance Reforms")

    "[I]t's hard to fathom how boards could be less accountable than they are right now. Even after ... implementation of the Sarbanes-Oxley reform law, corporate boards are still accountable to no one." (BusinessWeek, 7/2/03, Commentary: "Shareholder Democracy Is No Demon")

    "Congress passed a corporate accountability act last week. Was that enough? ... The election of corporate board members is a Kremlin type of election. It's a self-perpetuating system, with shareholders having no real power. That has not been touched." (TIME Magazine, 8/5/02, "Interview - 10 Questions for Ralph Nader")

    "Some critics, too, say the new rules aren't tough enough. 'So much of it is an effort by business and government to look like they are doing something to improve the situation,'.... The [Committee of Concerned Shareholders] ... wants the rules for corporate proxies changed so that 'truly independent' outsiders have a chance to be elected directors.... At present, he argues, directors are too beholden to management to do their jobs properly." (CSM, 8/2/02, "Big business races to reform itself")

    "[T]his simple reform would outweigh all the complex rule changes being considered by the SEC and others, in the wake of the corporate governance scandals hosing down Wall Street. 'Corporations do not need to be micro-managed by Washington, D.C.,' he [the Committee of Concerned Shareholders] said. 'Company officials only need to know shareholders can elect their own slates.'" (Los Angeles Business Journal, 8/19/02, Wall Street West)

    "It's been a year since the Enron scandal broke and, sadly, Corporate America remains in disgrace. ... [I]t's the lack of genuine reform that's now troublesome. ... [L]awmakers on Capitol Hill have pretty much forgotten about the issue." (BusinessWeek Online, 11/27/02, "Biting the Invisible Hand")

    "[S]ome companies are still up to the same old games. … ‘It’s just abominable,’ says Nell Minow, co-founder of the Corporate Library, a research house specializing in corporate governance. … Despite the shareholder backlash and new legislation pressuring companies to stem such abuses, many fear boards will continue to play games. … Clearly, the investor outcry over board shenanigans continues in some cases to fall on deaf ears." (BusinessWeek, 9/9/02, “Look Who’s Still At The Trough”) "The problem is that the CEOs still pretty much control the nomination process [for board members] ..." (CFO Magazine, March 2003, "The Prime of Ms. Nell Minow")

    "[C]ontrasts between executive pay and corporate performance are fueling much of the public anger with corporate America. Yet even with business under intense scrutiny in 2002, many executives and board members have continued to cash in the stock options they were awarded as part of their pay, making millions of dollars even while their companies lost much of their value. The sales suggested that the measures enacted this year by Congress and by the New York Stock Exchange will not end the entrenched disconnect between pay and performance...." (NY Times, 12/29/02, "Options Payday: Raking It In, Even as Stocks Sag") "[C]hief executives are still reaping huge severance deals, even when they are forced out. ... Yet corporate directors still haven't put the brakes on runaway executive pay and the practice of guaranteeing CEOs golden parachutes...." (WSJ, 4/8/03, "Directors Should End Extravagant Packages For Departing CEOs")

    "One of the problems ... is that everyone seemed to lose their heads, even the supposed watchdogs. ... The political class reacted by giving us Sarbanes-Oxley, one of those Washington specials that imposed new costs and burdens on their entire economy in the name of punishing the guilty few. We think that history shows that the better way to deter against future misbehavior is for individuals to be held accountable for their own actions." (WSJ, 8/14/03, Review & Outlook: "Piano Player Accounting")


    Problems With SEC Staff Report

    “The Securities and Exchange Commission staff made a valiant effort yesterday to find a way to allow shareholders to influence the companies they own. … The fact that this would be progress says a lot about the extent to which the term ‘shareholder democracy’ is an oxymoron. … The S.E.C. staff paper … reacts … by leaving large hurdles in the way of insurgent candidates. … The S.E.C. is still unwilling to take democracy to the limit, which would mean letting shareholders vote the incumbents out even if no one was willing to finance a full-scale proxy fight.” (NYT, 7/16/03, “A Small Move to Shareholder Democracy”)

    The central issue is the degree to which the SEC is committed to Shareholder democracy and Director accountability. Self-interested protestations of doom and gloom by entrenched Directors and the legal professionals who are paid to protect them should be ignored.

    The SEC Report leans toward a Director-nominator share ownership threshold of 3% to 10% and limiting the number of truly independent Director-candidates. SEC Chairman William Donaldson attempted to justify such a substantial threshold/hurdle by stating, "Well, I think that the practicality of doing that ... you know, having such a broad gauge vote, if you will, and, you know, hundreds of ideas and nominees being put forward, it just isn't practical. And I think the problem here is to base this sort of access on some sort of evidence that a substantial number of shares are not being listened to." (CNBC, 7/15/03, "Shareholders may get bigger say at companies") Upon what "evidence" does the good Chairman assume that there will be "hundreds of ideas and nominees," that any nominator who can meet the threshold would step forward to nominate Director-candidates or that the true extent of shareholder discontent is related to the holdings of a few shareholders? (In our proxy contest at Luby's, above, although the outsider Director-candidate nominators held about 1/4% of the outstanding stock, our candidates garnered 24% of the vote.) One cannot predict the extent of shareholder dissatisfaction until the final vote is counted.

    A recent study has demonstrated that permitting the nomination of only a few truly independent Directors would be ineffective in causing real reform. If elected, they will be isolated by their fellow board members. "[T]he corporate director who asks management the tough questions often gets a cold shoulder from the 'in' crowd or shunned by the ruling clique. ... 'These processes are to some extent under the radar screen of institutional investors.' ... The research and resulting 65-page paper, 'Social Distancing as a Control Mechanism is the Corporate Elite' by Westphal and Poonam Khanna, confirms what critics have long argued -- country-club cronyism bogs down efforts to rein in CEO power and advance shareholder rights. ... [T]he corporate board rocker's views will not be solicited, his advice will be shunned, and his contact with fellow directors will wane. ... '[Y]ou should be relatively pessimistic about the chances for voluntary board reform, unless there is a significant turnover in board membership...'"(Reuters, 8/3/03, "Reformist directors get the big chill, study finds") The publicly reported experience of Guy Adams, who unseated the Chairman of the Board of Directors of Lone Star Steakhouse & Saloon (STAR) in a bitterly fought proxy contest, vividly confirms the results of the study.

    By further conditioning access to the Company's proxy machinery to "triggering events," Shareholders, who have legitimate grievances, would be stalled for years. In the interim, corporations could be looted and businesses could be destroyed. “Triggering events” is another way of saying “dilatory tactic.” "[F]iguring out whether a company failed to act on a shareholder proposal is not always cut and dried." (, 7/24/03, "Creating Triggers For Board Proxy Access Has Challenges") When time is of the essence to Shareholders, a Company's well paid attorneys would attempt to deny proxy access by arguing before some federal court that the Company did "act" upon any such proposal and would cause Shareholders to incur the expense of proving otherwise. ("Let the games begin!")


    Problems With SEC Proposed Disclosure Requirements

    The SEC’s efforts with respect to this proposed Rule are seriously misplaced. As investor confidence in the securities markets is burning, the SEC is fiddling, by expending much valuable time and effort, with a proposed Rule that provides little or no useful benefit to Shareholders. Further, compliance with the proposed Rule would cause Shareholder assets to be needlessly expended.

    On August 6, 2003, the SEC proposed proxy rule changes that would augment disclosure requirements as "better information about the way board nominees are identified, evaluated and selected is crucial for shareholder understanding of the proxy process regarding nomination and election of directors" and "better information about the processes of shareholder communications with boards lies at the foundation of shareholder understanding of how they can interact with directors and director processes."

    The augmentation does not come anywhere near solving the fundamental problem --- Directors are substantially UNaccountable for their actions. The proposed Rule attacks symptoms of the problem, but not the cause. The new disclosures would not remove the fundamental conflict of interest --- Directors are beholden other Directors and/or the CEO, vis-à-vis Shareholders, for their position and their longevity. Further, all but the very largest Shareholders would still remain impotent to attempt to cure that problem. Their willingness to act in an effective manner on behalf of all Shareholders is questionable at best.

    Writing proxy material setting forth "a company's process for identifying and evaluating candidates," "minimum qualifications and standards that a company seeks for director nominees," "whether a company considers candidates ... put forth by shareholders and, if so, its process," and/or "whether a company has rejected candidates put forward by large long-term shareholders" would only result in more legalese and obfuscation. (Emphasis added.) Corporations can always hire the most eloquent "spinners." [Note: There is an assumption that UNlarge Shareholders are incapable of suggesting qualified candidates. All members of Nominating Committees are UNlarge Shareholders.]

    Shareholders are to be informed "whether a company has a process for communications by shareholders to directors," "whether communications are screened, " and "whether material actions have been taken as a result of shareholder communications." As a matter of common sense, diligent Shareholders have always forwarded information/comments directly to Directors. There is no proposed Rule dealing with the current failure/refusal of Directors, CEOs and outside auditors to respond to such communications or, even, to acknowledge receipt of such communications.

    Shareholders do not need better "understanding of the proxy process regarding nomination and election of Directors" or "understanding of how they can interact with Directors and Director processes." Shareholders need a means to enforce Director accountability and to cure fundamental conflicts of interest. The new disclosures would do nothing to alleviate that need.

    The Committee urges you to express your Comments, via email, directly to the SEC. All Comments must be received by September 8, 2003. Time is of the essence. (Please feel free to cut and paste information contained on this website in your Comments.)


    Sample Responses From Individual Investors

    Reader reaction (e-mails to the SEC and/or the Committee and posts on financial message boards) to information exposing the hurdles of nominating/electing truly independent Directors and calling for reform has been positive and overwhelming. We thank you. Sample responses are as follows:

    "The problem is indeed the cozy relationship between the BOD which is virtually handpicked by the CEO and the CEO who is insulated from the shareholders by the BOD. The BOD is given the 'mushroom treatment,' getting their information spoon fed to them by --- you guessed it --- the CEO, and his appointed CFO, and COO. This enables the CEO to operate with little or no regard for the interests of the shareholders, employees or customers of the company and deflect blame for his mismanagement of the company by conveniently sacrificing the careers of subordinates whenever he has to report bad news. ... Without a way to nominate truly independent directors ... there is little influence concerned shareholders can exert.... True reform of corporate America will not take place until shareholders' interests are more adequately represented."

    "A tiny and closed fraternity of privileged men, elected by no one, and enjoying a monopoly sanctioned and licensed by government. Spiro T. Agnew"

    "The shareholders of American corporations no more elect their boards of directors than the Iraqi people elect Saddam Hussein."

    "There is definitely an old boys' network in place. If you develop a reputation of being a board member who does not play ball (i.e., award stock options for management) you will get thrown out of the network."

    "Currently, we have big-name directors who are on the board because of their claim to fame; not because they contribute to the running of the company. These directors tend to rubber stamp everything the CEO puts in front of them because the CEO rewards them for behaving."

    A private investor in Germany wrote, "When I have started to invest in the USA about 3 years ago I was sure that elections of directors are fair. ... So when I have discovered that elections of directors of USA public companies are not democratic I was very surprised and disappointed. ... This is EXACTLY how voting in communist countries worked. Everyone could vote, but there was just NO CHOICE of candidates. The point was not how to be elected, but how to get on the election list. With this system no changes were possible, so there was no motivation to improve the governance." (Emphasis in original.)

    "If ... your (a CEO's) primary objective is to milk the stockholders for your own bank account and pride, you get YES-man (and women) on the Board to rubber-stamp your plans. ... All these corporate scandals could not have happened if Board Members were doing their jobs. Let's join this group in petitioning ... to make changes in current law."

    "Shareholders should have direct access to all elections and not have to react to the 'chosen' names on the ballot."

    "[The Petition for Rulemaking (SEC File No. 4-461) is] new legislation allowing independent candidates to corporate boards, not just management approved shills. This could be the most important change in the market place since J. M. Keynes."

    Several persons commented upon the potential economic and psychological consequences of failing to implement reform. "I'm going to be out of common stocks until there is a real change in the rules. It is all too obvious that the current rules are stacked against owners." Individual investors set forth their opinions in e-mails to the SEC. "Please consider the proposal by Committee of Concerned Shareholders as the best method of turning this situation around --- if we don't have a voice we won't invest anymore." "To not rescind this rule [Rule 14a-8(i)(8)] is to risk total disillusionment by individual stockholders and a stock market starved for investors." "Investor confidence is severely shaken. As the public becomes aware of how little control is allotted to the actual owners of corporations, this confidence will certainly erode even further."


    Shareholders Unite! - Petition for Rulemaking (SEC File No. 4-461)

    Shareholders should be entitled to nominate and elect truly independent Directors --- those who are not beholden to Management and/or fellow Directors for their selection, retention and/or the financing of their proxy solicitation efforts.

    Will Companies voluntarily make it realistically possible for Shareholders to elect Directors not selected by Management and/or incumbent Directors? The last time someone voluntarily relinquished real power was in 1797 --- George Washington resigned from office.

    On August 2, 2002, the Committee and James McRitchie, Editor of CorpGov.Net, jointly filed a formal Petition for Rulemaking (SEC File No. 4-461) with the SEC that requested, in substance, Rule 14a-8(i)(8) be eliminated. You may view the official copy of the Petition for Rulemaking and Description of Proposed Amendments. Hundreds of investors have formally registered their Comments with the SEC in support of the Petition. They express the view that it is time that true democracy comes to the corporate ballot.

    Will the SEC modify SEC Rule 14a-8(i) to provide Shareholders with a level playing field? It all depends on YOU! Join us with our efforts. Please e-mail Mr. Jonathan G. Katz, Secretary, at the SEC, indicating that you support the Petition for Rulemaking (SEC File No. 4-461) submitted by the Committee and James McRitchie. A sample e-mail is set forth below. 2/ Samples of communications to the SEC by three of our supporters can be found on Yahoo! at TAA Message Board Post # 15407, IFLO Message Board Post # 10057 and IFLO Message Board Post # 10068. TAA Message Board Post # 15407 has received at least 119 (!!) “Recommendations.” Also, you may sign, with many others, an Internet petition in support of the Petition.

    If YOU want corporate governance to improve, YOU must take action to improve it. Otherwise, after a cooling off period, Companies and their Boards of Directors will go back to "business as usual" until the next series of financial fiascos.

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