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Financial Times, February 25, 2011 article


FT Home  

Calpers triumph set to drive more reforms

By Dan McCrum

Published: February 24 2011 22:39 | Last updated: February 24 2011 22:39

Calpers claimed a high-profile scalp this week, as the largest US pension fund by assets under management won a shareholder vote to improve corporate governance at Apple, the second-largest US company by market capitalisation.

The non-binding resolution should pave the way for similar reforms to the way board members are elected elsewhere, correcting an anomaly that sees the US as the last developed market not to impose majority voting for directors on listed companies.

“Even Russia, that bastion of shareowner democracy, allows for some form of shareholder director nominations,” says Anne Sheehan, director of corporate governance for the California State Teachers’ Retirement System, which has joined Calpers and Florida’s pension fund in the campaign.

Poison pills, golden parachutes and options backdating have all been tackled over the past 20 years. However, with many of these governance battles now won, the remaining question is the ability of shareholders to engage with and police the companies they own.

“The US system is adversarial,” says John Wilcox of consultancy Sodali. “Companies view governance as a set of obligations imposed from the outside.”

He blames this on the serial failure of US corporate groups to advocate dialogue or a collaborative approach to shareholder rights. “The pattern of governance reform is linear and uniform,” he says.

Abuses, such as excessive executive benefits, prompt complaints and calls for reform. A lack of change prompts shareholders to press the Securities and Exchange Commission or Congress for action, and after a big battle companies are left with rigid and costly rules imposed.

The latest example of this is the fight for proxy access.

Last summer’s Dodd-Frank legislation authorised the SEC to introduce rules allowing certain shareholders to include their nominations for directors in a company’s own proxy materials sent to shareholders.

Challenging a company would thus become much cheaper and accessible for activist investors. However the US Chamber of Commerce is fighting the new rules in court because it is fearful that the new rights will be hijacked by special interest groups pushing a narrow agenda.

For now companies must contemplate other changes introduced as a result of Dodd-Frank, including “say on pay” rules and an end to discretionary voting of clients’ shareholder votes by stockbrokers.

The former had threatened to “suck all of the air out of the room this proxy season”, says Pat McGurn of Institutional Shareholder Services, a proxy adviser, as investors struggled to deal with several thousand companies adopting the measure at once.

While some see it as a box ticking measure, Stephen Brown, director of corporate governance for TIAA-CREF, which manages $453bn in assets, argues that it is “a tool to have greater dialogue with the board on executive compensation”.

An end to broker voting is more significant, according to Stephen Davis, executive director of the Milstein Center for Corporate Governance, who characterises broker voting as “legalised ballot stuffing”. “In some way what Dodd-Frank is doing is placing an enormous bet on shareholder’s ability to police the market on their own,” he says.

Efforts by the large funds are now moving toward improvements in the quality of independent board members. At the same time the requirements on shareholders have increased.

TIAA-CREF on Thursday published its first update to its governance standards since 2007. Prominent among the changes was a shift from a the “rights and responsibilities” of shareholders to their “duties and responsibilities”.

Mr Brown, argues that a shift is already under way.

“Since the summer we have seen many more companies reaching out to us. They understand that we are in a new era and that there is a need to reach out to shareholders.”

“Dodd-Frank has encouraged those weren’t part of the trend to get involved.”

© Copyright The Financial Times Ltd 2011.




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