FROM WALL STREET WALK TO WALL STREET TALK:
THE CHANGING FACE OF CORPORATE GOVERNANCE
Jayne Elizabeth Zanglein*
TABLE OF CONTENTS
I.
INTRODUCTION
II.
THE FIDUCIARY DUTY TO VOTE PRoXIES.•......................... .48
A.
Exclusive Benefit Rule
.49
a.
Prudence Rule
C.
Plan Documents Rule
1.
1.
D.
ill.
45
51
Analysis of Economic Impact
:
Investment Policy Statements and
Proxy Voting Guidelines
52
57
.59
Delegation ofDuty to Vote
63
1.
2.
3.
4.
63
64
65
68
Directed Trustees and Named Fiduciaries
Investment Managers
Disclaimers
Participant-Directed Voting
SHAREHOLDER ACTMSM
A.
Relational Investing, In General
B.
The 1998 Proxy Season
1.
The Leadership Role of Union and
Public Funds
2.
Binding Shareholder Proposals
:
3.
Focus Lists, Chronic Under-performers,
and Key Votes
4.
AFL-CIO Key Votes Project..
C.
AFL-CIO Model Guidelines for
Delegated Proxy Voting Responsibility
IV.
PROXY REGULATION REFORM BY THE SEC
A.
Proxy Rules, In General
B.
Cracker Barrel
C.
Discretionary Voting
*
Professor of Law, Texas Tech University School of Law.
43
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68
68
73
73
79
80.
85
87
97
97
104
105
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CORPORATE GOVERNANCE STANDARDS
A.
B.
C.
D.
VI.
[Vol. 11:43
Council ofInstitutional Investors
CalPERS
Voting Proxies ofForeign Corporations
OECD and Other Groups
107
107
112
117
119
122
CONCLUSION
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I. INTRODUCTION!
The choice of a common stock is a continuing process.
Certainly there is just as much reason to exercise care andjudgment
in being a shareholder as in becoming one. 2
Pursuing increased shareholder value is less a matter of
pulling out of a company aryl more an exercise in working within.
The Wall Street walk has given way to the Wall Street talk. The
bigger the investment fund, the bigger the incentive to continually
ensure that corporate governance standards enhance shareholder
investment. 3
Pension funds are financial giants whose slightest move can
shake the stock market. Pension funds cm:rently have assets of $5.7
trillion, nearly half of the $12 trillion held by all institutional
investors. 4 Pension funds internally manage 58.8% of their assets. s
Collectively, all institutional investors, including pension funds,
control about sixty percent of the stock of the one thousand largest
U.S. public corporations. 6 Pension funds alone, hold 25.8% oftotal
U.S. equity outstanding.? The twenty-five largest institutional
investors control nearly twenty percent of all outstanding stock! and
1. I have previously addressed these issues in Jayne Zanglein, High Perfornulnce
Investing: Harnessing the Power of Pension Funds to Promote Economic Growth and
Workplace Integrity, 11 LAB. LAW 9 (1995), Jayne Zanglein, Who's Minding Your
Business?, 10 HOFSTRA LAB. L. J. 23 (1992), Jayne Zanglein, Pensions, Proxies and
Power, 7 LAB. LAW 771 (1992); and JAYNE ZANGLEIN, SOLELY IN OURlNTEREST (1992).
2. B. GRAHAM AND D. DODD, SECURITY ANALYSIS 508 (1934).
3. CalPERS Press Release, Wall Street Walk Being Replaced with Wall Street
Talk (July 9, 1998), <http://www.caIpers.ca.gov/whatshap/news/releases
Irecentlpr19980709c.htm> .
4. U. S. Institutional Investors Sharply Step Up Asset Holdings, PR NEWSWIRE
(June 11, 1998).
5. Id.
6. Institutional Investors-Especially the Top 25-Are Gaining More Power and
Control Over the Largest U.S. Companies, PR NEWSWIRE (Aug. 20, 1998) [hereinafter
Institutional Investors-Especially the Top 25]. Forty percent of the top 1,000 companies
had institutional ownership in excess of seventy percent. Ten years ago, only eleven
percent of these companies were more than seventY percent controlled by institutions. Id.
(paraphrasing Carolyn Kay Brancato).
.
7. U.S. Institutional Investors Sharply Step Up Asset Holdings, supra note 4.
8. See generally Institutional Investors-Especially the Top 25, supra note 6.
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more than seventy percent of the one thousand largest corporations. 9
For example, institutional owners own more than ninety-five
percent of Federated Department Stores,10 eighty percent of
Chiquita Brands, Storage Technology and Owens-Corning
Fiberglass, and more than seventy-five percent of Deere, Gannett,
Hercules, Whirlpool, Xerox, Armstrong World Industries, and
.
Pitney Bowes. ll
Wh~n institutional investors first approached underperforming corporations in the early 1990s, the basic corporate
attitude was, "Go away ... if you don't like the stock, sell it.."12
But large pension fund investors like the California Public
Employees Retirement System ("CalPERS") could not sell off the
stock ofunder-perfotming companies without lowering the stock's
market price. 13 Unable to do the "Wall Street Walk," large pension
funds opted for "Wall Street Talk. "
At first, the funds were unsuccessful. Richard Koppes,
formerly general counsel to CalPERS reminesces: "We couldn't get
anyone to pay attention to us. ,,14 Corporate officers were clearly
hostile to overtures made by pension fund executives. One CEO
replied to a letter from CalPERS: "What is truly alarming is the
substance and tone of your letter, which demonstrates a remarkable
lack of understanding of our industry, our company, our
performance, and our prospects. ,,15 The CEO refused to meet with
CalPERS, noting that the fund only held 0.5 percent of the
9.
10.
Id.
Share/wlder Resolutions Winning Majority Votes in 1998, XV IRRC CORP. Gov.
BULL. 6 (Apr.-June 1998).
11. The Top 100 U.S. Companies Ranked by Stock Market Value, Bus. WK., 1992
Special Bonus Issue, at 118.
12. Michael Yabara, Money Talks, 15 CAL. LAW. 50, 54 (Feb. 1995) (quoting Dale
Hanson, then CEO of CaiPERS).
13. Because of their size, many pension funds cannot sell corporate stock without
"disrupting trading and lowering share prices." Robert B. Reich, A Moral Workout for Big
Money, N.Y. TIMES, Sept. 11, 1994, at C9. See also Leslie Wayne, Seeking Investment
with Principle, N.Y. TIMES, Aug. 10, 1993, at Cl (quoting Assistant Secretary of Labor
Olena Berg as saying: "Given the size of funds, it doesn't make sense to try to beat the
market for a quarter ... when you are the market, as funds are, you can't beat it. The
goal should be an overall lifting of the economic boats by investing in ways that are
economically productive and create more and better jobs. "
14. Yabara, supra note 12, at 53.
15. Id. at 54.
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company's stock. I6 .
Five years later, John M. Nash, CEO of the National
Association of Corporate Directors complimented CalPERS:.
"CalPERS has accomplished more in 5 years than we did in 17, by
virtue of $80 billion dollars. Money talks. ,,17 Now, "Wall Street
Talk" has become more effective than the "Wall Street Walk."
In order to prepare to talk with CEOs of under-performing
companies, pension fund executives need to closely monitor the
governance of the corporations whose stock they hold. In recent
years, at the urging of the Department of Labor, pension funds have
become more actively involved in monitoring corporate
performance and communicating with corporate officials, either
informally, or through the proxy process. The Department of Labor
has encouraged pension funds to exercise their shareholder rights.
In July 1994, the Department issued an interpretive bulletin on
voting proxies, monitoring corporate performance, and
communicating with management. 18
In its interpretive bulletin, the Department emphasized that
in voting proxies, a fiduciary should "consider those factors that
may affect the value of the plan's investment and not subordinate the
interests of the participants and beneficiaries in their retirement
income to unrelated objectives. ,,19 The fiduciary must also act
solely in the interest of the plan participants and beneficiaries and
its vote cannot be influenced by its relationship with the plan
sponsor. 20
The interpretive bulletin consolidates the Department's
position, as stated in previous advisory opinions,21 that plan
fiduciaries have a duty to vote proxies appurtenant to shares of stock
16. ld.
17. ld. at 55.
18. Interpretive Bulletins Relating to the ERISA of 1974, 59 Fed. Reg. 38,860,
38,863 (1994), (codified at 29 C.F.R. pt. 2509.94-2 (1994» [hereinafter Interpretive
Bulletins].
19. ld.
20. ld.
21. See Letter from Department to Helmulth Fandl, Chairman of the Retirement
Board of Avon Products (Feb. 23, 1988), reprinted in 15 Pens. & Ben. Rep. (BNA) 391
(F~b. 29, 1988) [hereinafter Avon Letter]; Letter from Department to Robert A.G. Monks
of Institutional Shareholder Services, Inc. (Jan. 23, 1990), reprinted in 17 Pens. & Ben.
Rep. (BNA) 244, 245 (Jan. 29, 1990) (Monks Letter).
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held as plan assets. 22 The bulletin clarifies that a named fiduciary
who appoints an investment manager may require the investment
manager to vote proxies according to investment policy guidelines·
adopted by the named fiduciary. 23 The bulletin also encourages
active monitoring of corporate management by plan fiduciaries. 24
The first part of this article will focus on ERISA's fiduciary
rules as they relate to the voting of proxies held by pension plans
and the Department of Labor's position on proxy voting, as
enunciated in advisory opinions and Interpretive Bulletin 94-2. The
second section will describe recent trends in institutional proxy
voting as exhibited during the 1998 proxy season. The third section
will describe the Securities and Exchange Commission's recent
amendments to the Rules on Shareholder Proposals which became
effective in June 1998. The final section will discuss the
proliferation of national and international Corporate Governance
Standards by pension funds and other institutional investors.
II. THE FIDUCIARY DUTY TO VOTE PROXIES
The Department of Labor has ruled that the exercise of
voting rights which have an economic impact on the value of stock
held by a plan, is a fiduciary act governed by the Employee
Retirement Income Security Act ("ERISA").25 Proxy voting rights
are plan assets which must be voted in accordance with ERISA's
fiduciary duties. 26 According to the Department, "the fiduciary act
of managing plan assets which are shares of corporate stock . . .
include[s] the voting of proxies appurtenant to those shares of
stock. ,,27 Thus, when exercising voting rights, fiduciaries must
comply with ERISA Section 404(a)(1)(A), (B), and (D).28
22.
23.
24.
25.
26.
27.
28.
Interpretive Bulletins, supra note 18.
[d.
[d.
AvonLetter, supra note 21, at 391.
[d.
[d.
Interpretive Bulletins, supra note 18.
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A. Exclusive Benefit Rule
ERISA Section 404(a)(l)(A) establishes the exclusive benefit
rule. This rule requires fiduciaries to act solely in the interest of
plan participants and beneficiaries and for the exclusive purpose of
providing plan benefits and defraying reasonable .expenses of plan
administration. 30 Fiduciaries must act "with an eye single to the
interests of the participants and beneficiaries ,,31 and may not place
themselves in a position where they are required to compromise
their duty of undivided loyalty to plan participants. 32
Although the Department of Labor has stated that the
exclusive benefit rule prohibits "a fiduciary from subordinating the
interests of participants and beneficiaries in their retirement income
to unrelated objectives, ,,33 the Department has never taken the
position that incidental benefits are prohibited under all
circumstances. 34 More than a decade ago, the Department indicated
that although Section 404(a) "does not exclude the provision of
incidental benefits to others, the protection of retirement income is,
and should continue to be, the overriding social objective governing
the investment of plan assets. ,,35 More recently, the Department
stated that "pension plan investments must be based upon what is in
the economic interest of the plan as a separate and distinct legal
29
29. ERISA §404(a)(I)(A); 29 U.S.C. §l104(a)(I)(A) (1998).
30. Id.
31. Donovan v. Bierwirth, 680 F.2d 263,271 (2d Cir. 1982).
32. Id.
33. AvonLetter, supra note 21, at 393 n. 4.
34. Address by Dennis Kass, Assistant Secretary of Labor, Pension and Welfare
Benefits Administration, U. S. Department of Labor, Current Developments at the
Department ofLabor, at the Annual Conference in Las Vegas, Nev., sponsored by the Int'l
Found. of Employee Benefit Plans (Nov. 1986), reprinted in INT'L FOUND. OF EMPLOYEE
BENEFIT PLANS, EMPLOYEE BENEFITS ANNUAL 235, 236 (1987). Dennis Kass, then
Assistant Secretary of Labor explained: "There is nothing in ERISA, however, requiring
that an investment decision be wholly uninfluenced by the desire to achieve social or
incidental objectives if the investment, when judged solely on the basis of its economic
value to the plan, is equal or superior to alternative investments otherwise available." Id.
35. Ian Lanoff, The Social Investment of Private Pension Plan Assets: May It Be
DoneLawfully Under ERISA?, 31 LAB. L.J. 387, 389 (1980). However, Lanoffcautioned
that "[t]o introduce other social objectives may be to dilute this primary objective." Id.
Later, Lanoff commented, "[I]t may not be consistent with ERISA standards to pursue .
. . [social goals], with plan assets, except as incidental to the fundamental ERISA purpose
of assuring retirement income." Id. at 391.
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entity established for the purpose of providing retirement income,
[and] that other considerations can be considered provided that they
are incidental and do not compromise the required investment
decision. ,,36
In an advisory opinion issued in May 1998, the Department
of Labor stated that "the fiduciary standards . . . do not preclude
consideration of collateral benefits, such as those offered by a
'socially responsib~e' fund, in a fiduciary's evaluation of a particular
investment opportunity. ,>37 The Department continued: "However,
the existence of such collateral benefits may be decisive only if the
fiduciary determines that the investment offering the collateral
benefits is expected to provide an investment return commensurate
to alternative investments having similar risks. ,,38
This duty to act solely in the interest of plan participants and
beneficiaries applies to proxy voting. 39 Fiduciaries must cast their
votes so as to "maximize the economic value of plan holdings."4O
The duty to maximize does not mandate short-term maximization of
profits. The Department of Labor has said that "[p]lan fiduciaries
are not required to take the 'quick buck' if they believe, based on an
appropriate and objective analysis, the plan can achieve a higher
economic value by holding the shares.... ,,41
Various factors must be considered by plan fiduciaries who
are deciding whether to take the "quick buck" or wait for long":term
share appreciation. For example, in the context of tender offers, the
Department has observed that
36. Pension Investments: Hearing Before the New York State Pension Investment
Task Force, 190 - 91 (Mar. 3, 1989) (testimony of David Walker, Assistant Secretary for
Pension and Welfare Benefits, U.S. Department of Labor).
37. Letter from Department of Labor to William M. Tartikoff, Senior Vice President
and General Counsel, Calvert Group Limited (May 28, 1998), reprinted in 25 Pens. &
Ben. Rep. (BNA) 1328 (June 8, 1998) [hereinafter Calvert Letter].
38. Id.
39. Avon Letter, supra note 21, at 393.
40. Address by William Brock, Secretary of Labor, before the Ass'n of Private
Pension and Welfare Plans (Apr. 30, 1986), quoted in KRiKORIAN, FiDUCIARY STANDARDS
IN PENSION AND TRUST MANAGEMENT FuND 224 (1989).
41. Opening Statements by M. Peter McPherson, Deputy Secretary of the Treasury
and David Walker, Assistant Secretary, Pension and Welfare Benefits Administration,
Department of Labor, at the Pension Briefing on ERISA and Takeovers, at 2 (Jan. 30,
1989) (statement by David Walker) [hereinafter Opening Statements].
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it would be appropriate to weigh a tender offer
against the underlying intrinsic value of the target
company, and the likelihood of that value being
realized by current management or by possible
subsequent tender offer. It would also be proper to
weigh the long-term value of the company against
the value presented by the tender offer and the ability
to "invest the proceeds elsewhere. In making these
determinations, the long-term business plan of the
target company's management would be relevant. 42
This balancing test is equally applicable to decisions regarding
proxy issues. Long-term growth can be favored over short-term
gains if the fiduciaries' decision is in the economic best interest of
plan participants. 43
B:
Prudence Rule
ERISA Section 404(a)(I)(B) requires fiduciaries to act with
"the care, skill, prudence, and diligence under the circumstances
then prevailing that a prudent man acting in a like capacity and
familiar with such matters would use in the conduct of an enterprise
of a like character and with like aims.,,44 Courts have interpreted
the prudence rule as imposing "an extremely high standard of
conduct, ,,45 "the highest mown to the law.,,46 Prudence is an
"objective standard which can be consistently applied ill. all cases. ,,47
Courts have defined prudence as a procedural test which requires
fiduciaries to conduct an "intensive and scrupulous" investigation. 48
42. Joint Department of LaborlDepartment of Treasury Statement of Pension
Investments (Jan. 31, 1989), reprinted in 16 Pens. & Ben. Rep. (BNA) 215 (Feb. 6, 1989)
[hereinafter Joint Statement).
43. Of course, the prudence rule of ERISA § 404(a)(1)(B) also must be satisfied.
44: ERISA § 404(a)(1)(B); 29 U.S.C. § t"104(a)(1)(B) (1998).
45. Marshall v. Mercer, 4 Employee Benefits Cas. (BNA) 1523, 1532 (N.D. Tex.
1983).
46. Donovan v. Bierwirth, 680 F.2d 263,272 n. 8 (2d Cir. 1982), cert. denied, 459
U.S. 1069 (1982).
47. Freund v. Marshall &. llsley Bank, 485 F. Supp. 629, 635 (W.D. Wis. 1979).
48. Donovan V. Bierwirth, 538 F. Supp. 463, 470 (B.D.N.Y. 1981), afj'd as
modified, 680 F.2d 263 (2d Cir.), and cert. denied, 459 U.S. 1069 (1982).
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Courts will not focus on the success or failure of the investment to
determine if an investment is prudent. Instead, they will examine
the methodology employed by the fiduciaries. 49
The fiduciary also must apply procedural due diligence when
voting on a proxy issue. A fiduciary must carefully analyze the
issues involved. A fiduciary who "fails to vote, or casts a vote
without considering the impact of the question, or votes blindly with
management" will violate the prudence rule. 50
In other contexts, courts have held that a fiduciary who lacks
"the education, experience and skill required to make a decision
concerning the investment of a plan's assets, ... has an affirmative
duty to seek independent counsel in making the decision. ,,51 The
failure of an inexperienced fiduciary to seek expert advice is a
violation of the prudence rule. 52 It appears that if a fiduciary lacks
the expertise to analyze a proxy issue, the fiduciary must seek
professional guidance to satisfy the prudence rule.
1. Analysis of Economic Impact
In its interpretive bulletin, the Department also addressed
institutional shareholder activism. The Department noted that
"where proxy voting decisions may have an effect on the value of
a plan's underlying investment, plan fiduciaries should make proxy
voting decisions with a view to enhancing the value of the shares of
stock, taking into account the period over which the plan expects to
hold such shares. ,,53 The Department also endorsed the monitoring
or influencing of corporate management where the fiduciary expects
that the acts of monitoring or influencing corporate management
either alone, or in conjunction with other shareholders, are likely to
49. Donovan v. Walton, 609 F.Supp. 1221, 1222, 1228 (S.D. Fla. 1985), ajf'd,794
F.2d 586 (11th Cir. 1986).
50. Ball Signals Continued Commitment to Proxy Voting Issues at Department, 17
Pens. & Ben. Rep. (BNA) 207 (Jan. 29, 1980) (statement of David George Ball, then
Assistant Secretary of Labor for Pension and Welfare Benefits Administration).
51. Katsaros v. Cody, 568 F.Supp. 360, 367 (B.D.N.Y. 1983), a!f'd in pertinent
part, 744 F.2d 270 (2d Cir. 1984), cert. denied sub nom. Cody v. Donovan, 469 U.S.
1072 (1984). See also Letter from U.S. DepaJ,tment of Labor to Charles R. Smith (Nov.
23, 1984), reprinted in 12 Pens. & Ben. Rep. 52 (BNA) (Jan. 7, 1985).
52. Katsaros, 568 F. Supp. at 367.
53. Interpretive Bulletins, supra note 18.
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enhance the value of plan-held stock.54 The Department suggested
that shareholder activism is appropriate where a stock portfolio such
as an index fund is being held on a long term basis or where the
. plan cannot easily dispose of the stock without affecting the stock's
value. 55 The Department further suggested that shareholder
communication might be proper on issues such as board
Independence, candidates' qualifications, executive compensation,
board policies on mergers and acquisitions, the company's longterm business plans, the extent of debt financing, the company's
investment in work force training and other workplace practices,
and fInancial and non-financial measures of corporate
performance. 56
Monitoring and communication can· be
accomplished through correspondence, meetings with management,
and exercising legal shareholder rights. 57
These duties apply only to voting rights which, when
exercised, will have an economic impact on the value of stock held
by the plan. 58 The Department of Labor has identifIed several
shareholder proposals which are likely to have an economic effect
on shares held by the plan. One such issue is a proposed change in
the company's state of incorporation. 59 Because a change in the
state of incorporation may affect the rights of shareholders to
participate in the corporate decision-making process, the proposal
may have an impact on the value of plan-owned stock. 60
The Department of Labor also has stated that poison pills
have an economic impact on the value of shares held by a plan. 61
The Department's conclusion is supported by a 1986 study, in
which the SEC's Office of Chief Economist balanced management's
enhanced negotiating power which results from the adoption of a
54.
55.
56.
57.
58.
59.
60.
Id.
Id.
Id.
Interpretive Bulletins, supra note 18.
Avon Letter, supra note 21, at 393.
Id.
Id.
61. Id. A poison pill is a "strategic move by a takeover-target company to make its
stock less attractive to an acquirer." DOWNES & GOODMAN, BARRON'S FINANCE AND
INvESTMENT HANDBOOK 393 (1987) [hereinafter DOWNES & GOODMAN]. The strategy
usually has such a severe economic impact that it is as if the acquirer swallowed a "poison
pill." Id.
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poison pill against possible costs where entrenched management
uses a poison pill to prevent a lucrative buyout. 62 The SEC Chief
Economist found that on average, when a company adopts a "poison
pill [plan] in the midst of takeover speculation" the company's stock
declines 2.4 percent net of market. 63 The Chief Economist
concluded "that the market considers the typical poison pill to be
significantly harmful to shareholder welfare when takeover
speculation is present.,,64 Therefore, a shareholder proposal to
redeem a poison pill plan may increase shareholder value because
it will make takeover attempts easier and will prevent management
entrenchment. 65
Although the Department of Labor has not formally
addressed greenmail or shark repellents, such issues affect the value
of shares held by pension plans, and therefore, fiduciaries must vote
on such issues. The SEC Chief Economist has analyzed the impact
of greenmail on stock prices. 66 In a 1984 report, the Chief
Economist concluded that "non-participating shareholders suffer
substantial and statistically significant share price declines upon the
announcement of [greenmail]. ,,67 The average decline in stock price
was 5.2 percent. 68 The Chief Economist said that the "evidence
does not support the general view that the [troublemaking minority
shareholders] are destructive corporate raiders, or that the
repurchases are valuable investments because the target's stock is
undervalued. ,,69 The Chief Economist concluded that generally,
62. OFFICE OF THE CHIEF EcONOMIST, SECURmES AND EXCHANGE COMMISSION,
THE EFFECTS OF POISON PILLS ON THE WEALTH OF TARGET SHAREHOLDERS 2 (Oct. 23,
1986), reprinted in Corporate Takeovers(Part 2): Hearings Before the House Subcomm.
on Telecommunications, Consumer Protection and Finance ofthe Comm. on Energy and
Commerce, 99th Cong., 1st Sess. 690, 697-703 (1985) [hereinafter Corporate Takeovers
(Part 2)].
63. [d. at 2, 13.
64. [d. at 13.
65. See Avon Letter, supra note 21, at 393 (stating that a proposal to rescind a poison
pill involves a fiduciary act of plan management).
66. OFFICE OF THE CHIEF EcONOMIST, SECURmES AND EXCHANGE COMMISSION,
THE IMPACT OF TARGETED SHARE REpURCHASES (GREENMAIL) ON STOCK PRICES (1984),
reprinted in Corporate Takeovers (Part 2), supra note 62, at 581 [hereinafter Greenmai[J.
Greenmail is the payment to a raider by a target company to buy back shares at a premium
in return for the raider's agreement not to further pursue the target. [d.
67. Greenmail, supra note 66, at 2.
68. [d. at 13.
69. [d. at 14.
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greenmail is not in the best interest of shareholders. 7o
In a 1985 study, the SEC Chief Economist analyzed the
effects of antitakeover amendments ("shark repellents") on stock
prices.71 The Chief Economist found an average net-of-market stock
return of negative 1.31 percent for all types of antitakeover
amendments. 72 When the statistics are broken down by category,
the effect of certain shark repellents on stock prices becomes
apparent.
The average stock decline after adoption of a
supermajority provision73 was 1.25 percent, while enactment of a
supermajority provision with a board override caused a decline of
4.86 percent. 74 Classified board amendments75 resulted in a net-ofmarket return of negative 2.42 and the authorization of blank-check
preferred stock resulted in a negative 2.84 return. 76
One study concluded that "on average, a firm taken at
random from the market has approximately a 4.9 percent chance of
becorirlng a takeover target in a given year and that, if such a bid
should occur, the expected premium is approximately 45 percent
greater than previous market values. ,m
The adoption of
70. Id. at 15.
71. OFFICE OF THE CHIEF EcONOMIST, SECURITIES AND EXCHANGE COMMISSION,
SHARK REPELLENTS AND STOCK PRICES: THE EFFECTS OF ANmAKEOVER AMENDMENTS
- SINCE 1980 (1985), reprinted in Corporate Takeovers (Part 2), supra note 62, at 604
[hereinafter SHARK REPELLENTS AND STOCK PRICES].
72. Corporate Takeovers (Part 2), supra note 62, at 604, Table 4.
73. Supermajority provisions require "a substantial majority (usually 67% to 90%)
of stockholders [to] approve important transactions, such as mergers." DOWNES &"
GOODMAN, supra note 61, at 485.
74. Corporate Takeovers (Part 2), supra note 62, at 604, Table 4.
75. Classified board provisions "classify (or stagger) the board into (usually three)
groups so that only a fraction of all directors are elected each year. Classification makes
it more difficult to change the composition of the incumbent board, therefore making it
more difficult for any insurgent shareholder or group to gain control of the firm." SHARK
REPELLENTS AND STOCK PRICES, supra note 71, at 10.
76. Id. at 32. The SEC notes that:
[A]uthorization to issue blankcheck preferred stock allows the board
of directors to establish voting, dividend, conversion and other rights
for preferred stock that the company may issue...• [T]his device also
allows the board to discourage hostile bidders by issuing to friendly
parties preferred stock with special voting rights and/or by creating a
"poison pill" security.
Id. at 11.
77. Pound, The Effects ofAntitakeover Amendments on Takeover Activity: Some
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antitakeover amendments creates a loss of approximately five to
seven percent of annual expected returns. 78 The study found that
supermajority and classified board amendments, "increase the
bargaining power of management in the event of a control bid, to
the detriment of shareholder wealth. These amendments appear to
reduce the frequency of takeover bids significantly while not
improving the expected value of shareholder gains in those takeover
contests that do occur. ,,79
However, it appears that the
implementation of a fair price provision80 does not adversely affect
stock prices. 81
The Department of Labor has not announced specifically
whether voting on dual stock recapitalization plans and golden
parachutes proposals are acts of fiduciary duties. However, these
proposals have an effect on the value of plan-owned shares and
would involve fiduciary decisions. In a 1987 report, the SEC Chief
Economist found "significant and negative abnormal stock returns
at the announcement of the dual class recapitalization.,,82 The
adoption of lucrative golden parachutes also may affect share
values.
The Department has noted however, that ministerial or
routine issues such as the uncontested appointment of accountants
do not involve acts of fiduciary duty. 83 For example, absent
, extraordinary circumstances, fiduciaries are not required to vote on
uncontested appointments of accountants. 84
Direct Evidence, 30 J.LAW & EcON. 353, 361 (1987) (footnotes omitted) [hereinafter
Effects ofAntitakeover Amendments]. See also Pound, Shareholder Activism and Share
Values: The Causes and Consequences of Countersolicitations Against Management
Antitakeover Proposals, 32 J. LAW & EcON. 357, 366 (1989).
78. Pound, Effects ofAntitakeover Amendments, supra note 77, at 362.
79. [d. at 367.
80. Fair price provisions usually provide that a supermajority amendment will be
waived if an equal price is paid for all shares of a target's stock in a merger.
81. [d. at 367. The SEC Office of the Chief Economist also has concluded that the
adoption of fair price provisions has a statistically insignificant impact on the value of
shares. See also SHARK REPELLENTS AND STOCK PRICES, supra note 71, at 30.
82. OFFICE OF THE CHIEF EcONOMIST, SECURmES AND EXCHANGE COMMISSION,
UPDATE - THE EFFECfS OF DUAL-CLASS RECAPITALIZATIONS ON SHAREHOLDER WEALTH:
INCLUDING EVIDENCE FROM 1986 AND 1987 8 (July 16, 1987).
83. Klevan, Fiduciary Duty and Proxy Voting, 7 ANN. REv. BANKING L. 229, 232
(1988).
84. [d.
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Summary of Research on Proxy Issues Which Have an
Economic Impact on Plan-Held Assets8S
6:.
,. ProxyAssne'il" '
••• : ' 0
,Economic, b.npaet~¥; .lif
"
Change in Company's
State of Incorporation
Implementation of Poison
Pill
Redemption of Poison Pill
'~
".
-.
SourceH':'
~'!;!;~
"!"
~,.. i'r~_.
CF
Avon Letter (198&)
-2.4%
SEC Office of Chief
Economist (986)
SEC Office of Chief
Economist (1986)
SEC Office of Chief
Economist (1984)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1985)
SEC Office of Chief
Economist (1987)
-5.2%
Anti-takeover amendments
On average, -1.31 %
Supermajority Provisions
-1.25%
Supermajority Provision
with a board override
Classified Board
Amendments
Authorization of Blankcheck Preferred Stock
Fair Price Provision
-4.86%
Dual Class
Recapitalization
.., .$,- 4.
Some
Positive
Greenmail
:"
. ~~'-~~':~~_~~":.
,
-2.42%
-2.84%
No impact
Negative
L
c. Plan Documents Rule
ERISA section 404(a)(1)(D) requires fiduciaries to act "in
accordance with the documents and instruments governing the plan
insofar as such documents are consistent with [ERISA]. ,,86 Under
this rule, plan fiduciaries must vote in accordance with any voting
policies adopted by the board of trustees or named fiduciary. frJ The
85. But see Bernard S. Black, Does Shareholder Activism Improve Company
Performance?, 19 CORP. BD. 1 (Mar. 13, 1998); Paul G. Barr, Study: Activism Has No
Impact, PENS. & INV. (Sept. 30, 1996) <http://www.pioniine.comlhtml/news/piI996
/960930-61-Q1.html. >.
86. 29 U.S.C. §1104(a)(I)(D) (1998).
87. But see Central Trust Co. v. American Avents Corp., 11 Employee Benefits Cas.
(BNA) 1850 (S.D. Ohio, 1989) (the court held that an ESOP trustee did not violate its
fiduciary duty when it ignored a plan provision that required the plan's participants to vote
on tender offers. The court found that the trustee's decision to accept the tender offer was
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Department has interpreted section 404(a)(1)(D) to require records
to be maintained with respect to the voting of proxies, the voting
procedure followed by the investment manager, and individual
votes. 88 Proxies received by the investment manager must be
matched with the plan's holdings on the record dates and voted in
accordance with the plan's voting procedure. 89
In an advisory letter to Avon Products, Inc., the Department
of Labor stated that the prudence rule requires fiduciaries to develop
proxy voting guidelines and to record voting decisions. 90 The
Department said that "with respect to proxy voting, . . . an
investment manager or other responsible fiduciary [must] keep
accurate records as to the voting of proxies. ,,91 This is especially
important since the plan document rule requires fiduciaries to act
"in accordance with the documents and instruments governing the
plan insofar as such documents and instruments are consistent with
[ERISA]."92 This rule requires investment managers to vote in
accordance with voting policies adopted by the fiduciaries or board
of trustees unless such policies are contrary to ERISA.
In the Monks Letter, the Department also described the
information that a plan fiduciary must review. in carrying out its
responsibility to monitor the activities of the investment manager
relating to proxy voting. Records must be kept on the voting of
proxies, the voting procedure pursuant to which the investment
manager votes the proxies, and individual votes. This information
is necessary for the fiduciaries to monitor the investment manager
to ensure that he is "fulfilling his fiduciary obligations in a manner
which justified the continuation of the management appointment. ,,93
based on its conclusion that accepting the offer would be in the economic interest of the
plan participants).
88. Monks Letter, supra note 21, at 244-46.
89. Id. at 245.
90. Avon Letter, supra note 21, at 395.
91. Id.
92. ERISA §404(a)(l)(D), 29 U.S.C. §1104(a)(I)(D) (1998).
93. Monks Letter, supra note 21, at 246. A 1989 survey by the Department found
that almost 40% of investment managers surveyed did not keep proxy voting records. Joel
Chernoff, Washington Working to Change System, PENS. & INV. AGE, Apr. 16, 1990, at
19.
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1. Investment Policy Statements and Proxy Voting Guidelines
Interpretive Bulletin 94-2 also addr~ssed the role of
investment policy statements in governing the conduct of investment
managers.94 The Department stated that a named fiduciary has
authority under ERISA section 402(c)(3)95 to appoint an investment
manager. Inherent in this authority is the fiduciary's power to issue
investment policy statements which will govern the conduct of
investment managers. 96 Investment policy statements are plan
documents97 and investment managers are required to follow a
policy statement to the extent the document i~ consistent with
ERISA.98
The Department took care to distinguish investment policy
statements from directions given by a named fiduciary to a trustee
under ERISA section 403(a)(1).99 The Department considers an
investment policy statement to be general guidelines. Examples
include the
identification of acceptable classes or types of
investments, limitations on investment categories as
a percentage of the plan's portfolio, or generally
applicable guidelines regarding voting positions in
proxy contests (for example, criteria regarding the
support of or opposition to recurring issues, such as
94. For a description of investment policy statements and sample guidelines see
supra note 1, at ch. 15, and app. C. The Department
defines an investment policy statement as a "written statement that provides the fiduciaries
who are responsible for plan investments with guidelines or general instructions concerning
various types of categories of investment management decisions, which may include proxy
voting decisions." Interpretive Bulletins, supra note 18. The term does not include
specific directions given to an investment manager with respect to the purchase or sale of
a specific security at a designated time or the voting of a particular proxy. Id.
95. 29 U.S.C. § l102(c)(3) (1998).
96. Interpretive Bulletins, supra note 18.
97. Id.
98. Id. The Department states that "a trustee to whom a statement of investment
policy applies would be required to comply with such policy unless, for example, it would
be imprudent to do so in a given instance." Id.
99. ERISA § 403(a)(I) (1998). Section 403(a)(I) provides that if a plan expressly
provides that the trustee is subject to the direction of a named fiduciary who is not a
trustee, the trustee shall be subject to proper directions which are made in accordance with
the terms of the plan which are not contrary to ERISA. Id.
ZANGLEIN, SOLELY IN OURlNTERESI',
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proposals to create classified boards of directors or
to provide for cumulative voting for board
members). 100
The Department does not consider specific instructions as to the
purchase or sale of a specific security at a designated time or
instructions to vote certain proxies in a specific manner to be
investment policy statements. 10l
Although ERISA does not require investment policy
statements to be adopted by fiduciaries, the Department "believes
that such statements serve a legitimate purpose in many plans by
helping to assure that investments are made in a rational manner and
are designed to further the purposes of the plan." 102 The
Department has noted that proxy voting guidelines may be
particularly helpful where a fund employs numerous investment
managers because the guidelines might prevent investment managers
from taking conflicting positions on the same proxy issue. 103 This
occurs quite frequently. Last year, the AFL-CIO conducted a
survey that found that investment managers often vote contrary to
the trustees' proxy voting guidelines, but also take conflicting
positions on the same proxy issues. 104
The Department has observed that managers of pooled
accounts who are governed by multiple proxy voting guidelines
must, to the extent possible, comply with each policy. 105 Where the
policies conflict, the investment manager should vote the proxies "to
reflect each policy in proportion to the respective plan's interest in
the pooled account." 106 If an investment manager cannot feasibly
100. Interpretive Bulletins, supra note 18.
lO1.Id.
102.Id.
103.Id.
104. Interpretive Bulletins, supra note 18. See discussion of the AFL-CIO survey on
10 key votes, infra note 250 and accompanying text.
105. Interpretive Bulletins, supra note 18.
106. Id. A 1992 survey found that 88% of investment managers surveyed have
sufficient staff and resources to vote proxies according to proxy voting guidelines of
individual pension fund clients. Who's Minding Your Business?, supra note I, at 96-97.
Six percent of investment managers do not have sufficient resources to provide
individualized proxy voting, and 6% said they would do it only under certain circumstances
and for certain types of fund. Id.
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vote proxies according to each individual proxy voting guideline,
then the manager may require all clients to agree to the manager's
master proxy voting guidelines. 107
In 1989, the Department of Labor conducted a proxy
survey.l08 The Department found that seven percent ofpension fund
investment managers had no written proxy guidelines and almost
twelve percent maintained a policy of voting with management. 109
Only eighty-three percent of the managers who had written proxy
guidelines actually followed those guidelines. 110 In a report on its
findings, the Department warned investment managers to maintain
proxy voting procedures and "adequate record keeping to document
the proxy voting process. ,,111 The Department cautioned investment
managers against voting only on non-controversial issues. 112 In a
1991 investigation of bank trust departments, the Department found
"pockets of non-compliance." 113 Some banks did not maintain
permanent proxy voting records or did not vote on de minimis
amounts of stock, and some abstained on social responsibility issues
and poison pills. 114
In public speeches after the Avon Letter was issued, David
Walker, then Assistant Secretary of Labor, urged investment
managers and other fiduciaries who vote proxies to establish a
general policy on recurrent voting issues. lIS Large pension funds
107. Interpretive Bulletins, supra note 18. The master policy then would become the
plan document and the manager would be required to follow the document.
108. U.S. DEP'TOFLABOR, PROXY PROJEcr REpORT (1989).
109.Id. at 6.
110.Id.
l11.Id. at 9.
112. U.S. DEP'TOFLABOR, PROn:PROJEcrREpORT, supra note 108, at 8.
113. Corporate Governance: DOL Announces Preliminary Results of Bank Trust
Department Investigation, 18 Pens. & Ben. Rep. (BNA) 323 (Feb. 25, 1991).
114.Id.
115. Pension Investments: Public Hearing Before the New York State Pension
Investment Task Force 202 (1989) (testimony of David Walker, Assistant Secretary of
Labor for Pension and Welfare Benefits, U.S. Department of Labor). Walker further
advised trustees to consider the following factors when voting on proxies:
Number one, the nature of the issue and whether or not the issue itself
is likely to have an effect on the underlying value of the stock;
Secondly, what your investment philosophy and strategy is, how long
do you plan to hold this investment and how does that play into the .
issue;
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heeded this message. A 1992 survey of large pension funds found
that eighty-nine percent of public funds had proxy voting guidelines
and seventy-seven percent of union funds had adopted voting
guidelines. 116 Ninety-seven percent of investment managers
reported that they had adopted guidelines. ll7 It is doubtful that these
statistics are applicable for smaller funds.
The Department's study of proxy voting policies was
updated in 1996. 118 The updated survey found that one-hundred
percent of the plans surveyed "had clearly delegated authority to
investment managers to vote proxies or had clearly designated
another plan fiduciary to vote proxies. ,,119 One-hundred percent of
the investment managers surveyed had written proxy voting
policies. 120 The depth of the policies varied, ranging from an overly
broad command to vote "in the best interests of the client,"121 to
detailed instructions on how to vote on executive compensation and
poison pills.122 Likewise, all of the investment managers maintained
voting records, but about sixteen percent did not report their voting
decisions to clients and twenty-five percent only reported on proxy
voting on a quarterly or annual basis. 123
The 1996 report discovered some problem areas. Many of
the plans surveyed did not provide their investment managers with
proxy voting guidelines and many did not review their guidelines
with a potential manager during the hiring process. 124 A
"significant number of plans do not routinely monitor investment
And, thirdly, quite candidly, your confidence in management.
Id. at 203.
116. Who's Minding Your Business?, supra note I, at 76.
117.Id.
118. Proxies: PWBA Study of Voting Policies Reveals Progress, Room for
Improvement, 23 Pens. & Ben. Rep. (BNA) 549 (Feb. 26, 1996) (quoting Olena Berg,
assistant Secretary of Labor for the Pension and Welfare Benefits Administration)
[hereinafter Proxies].
119. Id.(quoting OIena Berg, Assistant Secretary of Labor for the Pension and Welfare
Benefits Administration).
120.Id.
121. Proxies, supra note 118, at 549 (quoting Olena Berg, Assistant Secretary of
Labor for the Pension and Welfare Benefits Administration).
122. Proxies, supra note 118, at 549.
123.Id.
124.Id.
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managers' voting to insure that proxies are voted in accordance with
the plans' or managers' stated policies. ,,125
D. Delegation ofDuty to Vote
The duty to vote proxies may be imposed on one of four
groups: named fiduciaries, trustees, investment managers, or
participants. ERISA Section 403(a) requires plan assets to be held
in trust by one or more trustees. 126 Trustees have the exclusive
authority and discretion to manage plan assets unless such authority
is delegated to an investment manager, 127 or unless the plan provides
that the trustees are subject to proper direction by a named
fiduciary .128 In Interpretive Bulletin 94-2, the Department reaffirmed
its view that the plan trustee has the exclusive right to vote proxies
unless the trustee is subject to the directions of a named trustee or
the power to manage plan assets has' been delegated to investment
managers. 129
1. Directed Trustees and Named Fiduciaries
ERISA Section 403(a) requires trustees to follow the
directions of the named fiduciary so long as the directions are
properly made in accordance with the terms of the plan and are not
contrary to ERISA. 130 The Department of Labor has stated that "[i]f
the plan expressly reserves to the named fiduciary the authority to
direct the trustee with respect to proxy voting, the trustee must
follow such directions so long as the directions are proper, in
accordance with the terms of the plan, and not contrary to the
125.Id. (quoting Olena Berg, Assistant Secretary of Labor for the Pension and
Welfare Benefits Administration).
126. ERISA § 403(a), 29 U.S.C. §1l03(a) (1998).
127. ERISA § 403(a)(2), 29 U.S.C. § 1l03(a)(2) (1998).
128. ERISA § 403(a)(I), 29 U.S.C. § 1l03(a)(I) (1998). A named fiduciary is a
person designated as a fiduciary in accordance with plan procedures. ERISA § 402(a)(2),
29 U.S.C. § 1l02(a)(2) (1998). Named fiduciaries may be named in plan documents or
may be chosen by the plan sponsor through a procedure which is specified in the plan. Id.;
Avon Letter, supra note 21, at 392.
129. Interpretive Bulletins, supra note 18.
130. ERISA § 403(a)(I), 29 U.S.C. § 1103(a)(I) (1998).
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provisions of ERISA. ,,131 A trustee is absolved from liability for
following the proper directions of a named fiduciary. 132 In the
context of participant-directed accounts, a trustee is protected in
following directions of participants if the participants were not
subjected to undue pressure from the employer to vote their shares
in a particular manner. 133 Trustees must analyze the directions
given by the named fiduciary to determine whether the directions
comport with the plan and ERISA. 134 If the trustees blindly follow
improper directions given by the named fiduciary, the trustees may
be held liable for breach of fiduciary duty under ERISA.
2. Investment Managers
A named fiduciary may delegate authority to an investment
manager 135 to manage and control plan assets. 136 In an advisory
letter to Avon Products, Inc., the Department of Labor stated that
if proxy voting authority has been delegated to the investment
manager, then only the investment manager can vote the proxies
unless the named fiduciary has reserved the right to direct the
trustee with respect to proxy voting. 137 A violation will occur if any
person other than the investment manager (or a person under the
supervision of the investment manager) votes the proxies. Once the
named fiduciary delegates its investment authority to the investment
131. Monks Letter, supra note 88, at 244 n.3.
132. ERISA § 405(b)(3)(B), 29 U.S.C. § 1l05(b)(3)(B) (1998).
133. See Letter from U.S. Department of Labor to John Welch (Apr. 30, 1984),
reprinted in 11 Pens. & Ben. Rep. (BNA) 633 (May 7, 1984) [hereinafter Carter Hawley
Hale Letter].
.
134.Id.
135. An investment manager is defined as a fiduciary (other than a trustee or named
fiduciary) who:
(i)
has the power to manage, acquire, or dispose of any asset of a plan;
is registered as an investment adviser under the Investment Advisers
Act of 1940; is a bank, as defined in that Act; or is a qualified insurance
company; and
(iii)
has acknowledged in writing its fiduciary status with respect to the
plan.
(ii)
ERISA § 3(38), 29 U.S.C. § 1002(38) (1998).
136. ERISA § 402(c)(3), 29 U.S.C. § 1l02(c)(3) (1998).
137. Avon Letter, supra note 21, at 3-4; Monks Letter, supra note 88, at 245.
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manager, it "no longer has the authority to decide how the
investment manager votes proxies and would be engaging in a
section 404(a)(1)(D) violation in doing so unless, in delegating such
management responsibility to the investment Iilanager, it reserves to
itself the right to vote proxies. ,,138
3. Disclaimers
One year after the Department of Labor issued the Avon
Letter, the Department further delineated its position on proxy
voting in the Monks Letter. In announcing the letter to Robert A.G.
Monks, then president of Institutional Shareholder Services, Inc.,
David George Ball, the head of the Pension and Welfare Benefits
Administration stated, "Privilege bears responsibility." 139 [W]hen
institutional investors don't vote, or vote without paying close
attention to the implications of their vote for the ultimate value of
their holdings, they are hurting not only themselves but also the
beneficiaries of the funds they hol~ in trust. ,,140
. The Department responded to several questions raised by
Monks. The first question was whether an investment manager can
effectively avoid responsibility for voting proxies by including a
disclaimer in the investment management contract. The Department
clarified that "[i]f the plan expressly reserves to the named fiduciary
the authority to direct the trustee with respect to proxy voting, the
trustee must follow such directions so long as the directions are
proper, in accordance with the terms of the plan and not contrary to
the provisions of ERISA. ,,141 The Department noted that "[a]n
ERISA violation will occur if the investment manager is explicitly
or implicitly assigned the authority to vote proxies . . . and the
named fiduciary, trustee, or any person other than the investment
138. Avon Letter, supra note 21, at 4. In the Monks letter, the Department noted that
"[a]n ERISA violation will occur if the investment manager is explicitly or implicitly
assigned the auiliority to vote proxies ... and ilie named.fiduciary, trustee, or any person
oilier ilian ilie investment manager makes the decision how to vote iliose same proxies."
Monks Letter, supra note 88, at 245.
139. Ball Signals Continued Commitment to Proxy Voting Issues at Department, 17
Pens. & Ben. Rep. (BNA) 207 (Jan. 29, 1990).
140.Id.
141. Monks Letter, supra note 88, at 245.
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manager makes the decision how to vote those same proxies. ,,142
Even if the investment management agreement provides that the
manager is not required to vote proxies, "a delegation of authority
to the investment manager to vote such proxies will ha~e occurred
and the investment manager must vote the proxies. ,,143 However,
if the trust agreement does not grant the trustees the authority to
delegate the voting of proxies, or if the trust agreement requires any
investment manager who is appointed to assume the duty to vote
proxies, any investment management agreement which provides to
the contrary would be void to the extent inconsistent with plan
documents. l44 If the plan documents prohibit the investment
manager from voting proxies, the trustees have the exclusive
responsibility to vote the proxies. Where the plan requires the
trustees to act subject to the direction of a named fiduciary, then the
trustees must vote the proxies at the direction of the named
fiduciary. 145
Morton Klevan, an official of the Department of Labor
provides the following example of the complexity of proxy
delegation rules:
Assume that there is a chief financial officer,
"CFO," of Company A. She directs Bank X, the
trustee of A's pension plan, to vote in favor of
Company A's proposals, which include super
majority voting provisions and the creation of a new
class of stock for the management group which
carries ten times the votes of regular shares of stock.
Under ERISA, the first question to ask is whether
the plan expressly provides for directed trustees.
The trustees have the exclusive authority to manage
and dispose of plan assets unless the plan provides
for directions by a named fiduciary and they get
142.Id.
143.Id.
144. The Department noted that "[t]he interpretation of any particular plan provision
or investment management contract is, however, inherently factual in nature." Id.
145. K1evan, Fiduciary Duty and Proxy Voting, 7 ANN. REv. BANKING L. 229, 233-34
(1988), reprinted in KRIKORIAN, FIDUCIARY STANDARDS IN PENSION "AND TRUST
MANAGEMENT 230 (1989).
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proper directions from the named fiduciary. It is
then necessary to consider whether the plan
contemplates directions to be given as to these sorts
of issues, and if so, whether the CFO is the person
described in the plan as the one to give the
directions. If not, the directions should be ignored
by the trustee because the plan has not properly
provided direction for the trustees. If the plan
specifies that the trustees should be subject to the
CFO's directions with respect to the voting of
proxies on all issues except routine matters, the
trustees are still not insulated. They must decide
whether these directions . . . may violate Title I of
ERISA, particularly the solely in the interest
provision of section 404(a), the 'exclusive purpose'
provisions of sections 404(a), and the prohibited
transaction provisions of section 406. If the
directions contravene these provisions, the trustees
would be duty bound to ignore them. 146
In his letter to the Department of Labor, Monks also inquired
whether an investment manager has a fiduciary obligation to
reconcile proxies with holdings on a record date. The Department
responded that "the fiduciary who has the authority to vote proxies
has an obligation under ERISA to take reasonable steps under the
particular circumstances to ensure that the proxies for which it is
responsible are received." 147 Reasonableness is determined on the
basis of relevant facts and circumstances. The Department warned
that an investment manager who has made no effort to reconcile
proxies would be acting in violation of ERISA. 148
146.Id.
147. Monks Letter, supra note 88, at 245.
148. A 1992 survey found that 70% of investment managers reconcile proxies, 8%
cannot reconcile, and 22% do not attempt to reconcile. Who's Minding Your Business?,
supra note 1, at 94-95.
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4. Participant-Directed Voting
ERISA section 404(c) permits an individual account plan to
allow participants to control the investments in their respective
accounts by passing through to the participants the right to vote on
proxies or respond to tender offers. 149 If the participants exercise
their pass-through voting rights, the named fiduciary may be
relieved of any liability that results from the exercise of control by
the participants. 150 The Department of Labor has issued several
advisory opinion letters concerning pass-through voting
procedures,151 but a detailed discussion of such voting procedures is
beyond the scope of thi~ article. 152
III. SHAREHOLDER ACTIVISM
A. Relational Investing, In General
Interpretive Bulletin 94-2 signals the Department's
encouragement of "relationship investing. ,,153 John Wilcox,
managing director of Georgeson & Company, a proxy solicitation
firm, says: "This adds a regulatory seal of approval to what had
been a maverick activity. . .. [p]ension plans have profoundly
changed Corporate America and this is another part of that
change. ,,154 Olena Berg, former assistant Secretary of Labor,
endorsed this concept, defining "relationship investing" as a longterm approach in which pension fund investors "own larger stakes
in fewer companies, giving them more leverage [to negotiate issues
of concern] with corporate management and the board of
149. See 29 U.S.C. § 1l04(c) (1998).
150. ERISA § 404(c)(2), 29 U.S.C. §1l04(c)(2) (1998).
151. Carter HawLey HaLe Letter, supra note 134, at 633; Labor Department Opinion
Letter on Tender Offers, dated Feb. 23, 1989, 16 Pens. & Ben. Rep. (BNA) 390 (Mar. 6,
1989) [hereinafter Polaroid Letter].
152. For an in-depth analysis of pass-through voting arrangements, see Donald J.
Myers & Michael B. Richman, Pass-Through of Proxy and Tender Decisions C New
Guidance From the NationsBank Case, 25 Pens. & Ben. Rep. (BNA) 775 (Mar. 3D, 1998).
153. Ken Silverstein, Clinton Administration OfficiaL Advocates Relationship Investing;
Pension Funds, PENSION WORLD, July 1994, at 6 [hereinafter Clinton Administration].
154. Leslie Wayne, U.S. Prodding Companies to Activism on Portfolios, N.Y TIMES,
July 29, 1994, at Dl.
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directors. ,,155
Studies have shown that relationship investing works. A
study by Wilshire Associates tracked forty-two companies during
five years that the CalPERS was actively involved in corporate
governance. According to the study, these forty-two companies
"beat the S. & P. 500 by 41 percent - while in the prior five years
the same companies underperformed the S. & P. 500 by 66
percent. ,,156 As Samuel Johnson said, "Depend upon it, sir, when
a man knows he is about to be hanged in a fortnight, it concentrates
his mind wonderfully." The 1990's spin on this phrase was coined
by former Secretary of Labor Robert Reich: "Nothing concentrates
the mind of a corporate executive quite so sharply as a pointed
inquiry from a large investor or outside director. ,,151
A more recent study by Tim Opler and Jonathan Sokobin158
concluded that companies on the Council of Institutional Investors'
focus list of poor performing companies, "experienced
improvements in operating profitability and share returns" in the
post-listing period. 159 The study found that the "focus list firms
under performed the S & P 500 by 72.9% in 48 months before
listing and by 22.4% in the 12 months before the listing." 160 In the
12 months after the listing, "the mean return of the portfolio of
focus list firms" exceeded the S & P by 5.9%, a statistically
significant difference. In the 24 months after the listing, the
portfolio return exceeded the S & P by 9.2%. However, this
difference is not statistically significant. 161 Additionally, the focus
list firms experienced substantial improvements in profitability in
the 24 months after the listing. 162 Some of these returns may be
155. Clinton Administration, supra note 153, at 6.
156.Id. But see Robert C. Pozen, Institutional Investors: The Reluctant Activists,
HARV. Bus. REv., Jan.-Feb. 1994, at 140; Ken Silverstein, Pension Funds Increase
Presence in Corporate Boardrooms, PENSION WORLD, May 1994, at 4.
157. Patrick S. McGurn, DOL Issues New Guidelines on Proxy Voting, Active
Investing, IRRC CORP. Gov. BULL., July-Aug. 1994, at 1,4.
158. Tim C. Opler & Jonathan Sokobin, Does Coordinated Institutional
Sharehalder Activism Work? (May 1998) <http://www.cob.ohiostate.edurfinlfaculty
lopler/ciiweb/textof.htm> .
159.Id.
160.Id.
161.Id.
162. Opler & Sokobin, supra note 158.
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attributable to a 12.7% increase in divestitures, and a higher-thanaverage CEO turnover rate. 163
A third study by Diane Del Guercioico and Jennifer
Hawkins found that targets of shareholder proposals by the "largest
and most active funds" such as CalPERS, the New York City funds
and the State of Wisconsin Investment Board ("SWIB") from 1987
through 1993, "experienced 'higher senior management turnover,'
more 'governance events,' such as shareholder lawsuits, and
'responsive corporate policies, such as asset sales, restructurings
and layoffs. ,,,164 The authors concluded that shareholder resolutions
"are a low cost mechanism that can be fruitfully used to further a
number of goals, such as putting pressure on management, signaling
to the market the views of the fund regarding target company
management and building shareholder support for more costly
governance activities such as takeovers. ,,165
Corporations and analysts recognize that pension funds
represent a threat to the autocratic control exercised by most
corporate boards:
"Relational investing" is emerging as a new
"buzzword" for this era of rejuvenated investor
activity. In its mildest form, it incorporates little
more than improved communications between
management and shareholders. At its extreme,
relational investing anticipates that "institutions will
acquire large ownership positions, voluntarily
commit to hold stock for the long term, occupy seats
on boards of directors, participate in corporate
decision making, and act like 'owners' rather than
.
investors. ,,166
163.Id.
164. Diane Del Guercioico & Jennifer Hawkins, The Motivation and Impact of
Pension Fund Activism, J. FIN. EcON.,(forthcoming), quoted in JAMES E. Heard & Patrick
S. McGurn, Corporate Governance Auditfor 1998, INSIGHTS, Dec. 1997, at 3.
165.Id.
166. Karl A. Groskaufmanis, Proxy Reform and the Brave New World of Investor
Relations: Ten Rules of Thumb for the 1990s, INSIGHTS, Dec. 1993, at 18 (quoting John G.
Wilcox, Relational Investing: Can It Really Work?, N.Y.L.J., May 6, 1993, at 5). See
also Richard Koppes & Maureen L. Reilly, An Ounce ofPrevention: Meeting the Fiduciary
Duty to Monitor an Index Fund Through Relationship Investing, 20 J. CORP. L. 413 (1995);
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71
Advocates of relationship investing point to its benefits:
First, it helps solve a problem executives have
complained of for years: short-term investing. By
creating a class of enlightened investors who give
companies patient capital, relationship investing
should free management to focus on the long term.
Over time, that should lift profits, productivity, and
prospects.
And that would boost U.S.
competitiveness.
Second, the very existence of a new breed of active
capitalists fixes another failing of U.S. corporations:
"the imperial CEO, unchecked by a pliant board of
directors.... Investors who actively monitor their
holdings would introduce a badly needed measure of
management accountability. 167
The tactics used by institutional investors are working. 168 In 1993,
John c. Wilcox, Managing the Proxy Process, INSIGHTS, Dec. 1993, at 3; Robert C.
Pozen, supra note 156, at 140; Norma M. Sharara and Anne E. Hoke-Witherspoon, The
Evolution of the 1992 Shareholder Communication Proxy Rules and Their Impact on
Corporate Govemaru:e, 49 Bus. LAW. 327 (1993); Dennis J. Block and Jonathan M. Hoff,
Corporate Governance Reform and Directors' Duty of Care, N.Y.L.J., May 20, 1993, at
5; John Wilcox and Richard Wines, Investor Targeting: A Quantitative Approach to
Reaching Institutions, INSIGHTS, May, 1993, at 14; Judith H. Dobrzynski, Relationship
Investing, Bus. WK., Mar. 15, 1993, at 68; The New Governance Paradigm; CE
Roundtable, CHIEF ExECUTIVE, Apr. 1994, at 40; Mary McCue, Matching Perceptions to
Reality: Communicating Effectively with Shareholders, INSIGHTS, Dec. 1994, at 22; Ethan
Stone, Must We Teach Abstinence? Pensions' Relationship Investments and the Lessons of
Fiduciary Duty, 94 COL. L. REv. 2222 (1994); Robert Kleiman, Kevin Nathan, and Joel
Shulman, Are There Payoffs for "Patient" Corporate Investors?, MERGERS &
ACQUlsmONS, Mar.-Apr. 1994, at 34; Mark J. Roe, The Modem Corporation and Private
Pensions, 41 UCLAL. REv. 75 (1993); JohnH. Matheson and Brent A. Olson, Corporate
Cooperation, Relationship Management, and the TriakJgical Imperative for Corporate Law,
78 MINN. L. REv. 1443 (1994); Bernard S. Black and John C. Coffee, Hail Britannica?:
Institutional Investor Behavior Under Limited Regulation, 92 MICH. L. REv. 1997 (1994);
Edward B. Rock, Controlling the Dark Side ofRelational Investing, 15 CARDOZO L. REv.
987 (1994); Ian Ayres and Peter Cramton, Relational Investing and Agency Theory, 15
CARDOZO L. REv. 1033 (1994); Jill E. Fisch, Relationship Investing: Will it Happen? Will
it Work?, 55 OHIO ST. L.J. 1009 (1994).
167. Dobrzynski, supra note 166, at 68.
168. For a more detailed description of the history of shareholder activism, see
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pension fund investors complained to management when James
Robinson III announced his intention to resign as CEO but remain
as chairman of th~ board of American Express. 169 The funds wanted
Robinson to resign from both positions. Less than a week after the
funds complained, Robinson announced his intention to resign from
both positions. 170 Pension funds were also the impetus behind the
firing or resignation of other corporate chieftains including John F.
Akers of International Business Machines, Paul Lego of
Westinghouse Electric Corporation, Kay B. Whitmore of Eastman
Kodak Company, Anthony D'Amato of Borden, Inc., 171 and Robert
Stempl of General Motors Corporation. 172 Nell Minow, co-founder
of LENS, Inc., has dubbed this phenomenon the "Queen of Hearts
theory of activism: 'Off with their heads! ,,,173
This demand for corporate accountability has CEOs
listening. James E. Preston, chairman and CEO of Avon Products,
recalls:
Five years ago when I became chairman and CEO of
Avon Products, I learned an important lesson about
communication. The company had been under
intense scrutiny by a number of shareholder activist
groups because of dismal performance for about a
decade. During my first year, I discovered that open
communication with your larger shareholders and
shareholder rights groups can go a long way toward
weathering the storm. Through the years, we've
built on that lesson. We recently invited between 70
and 80 institutional investors to two meetings, one in
Pensions, Proxies, and Power, supra note 1. See also Gerald F. Davis and Tracy A.
Thompson, A Social Movement Perspective on Corporate Control, 39 ADM. SCIENCE Q.,
Mar. 1994, at 141; Thomas A. Stewart, The King is Dead, FORTUNE, Jan. 11, 1993, at 34.
169. See generally Vidya N. Root, Marking a 'Sea Change' in Corporate Life, the
Boards Bite Back, THE BUFFALO NEWS, Jan. 23, 1994.
170.Id.
171.Id.
172. Nell Minow, Turning Back the Queen ofHearts, THE REcORDER, Mar. 30, 1994,
at 7.
173. Id. Minow notes that studies have shown that stock prices increase significantly
when the CEO is fired. However, she believes that firing the CEO is not always the best
response. [d.
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New York and the other in California.
feedback from those meetings was terrific.174
The
B. The 1998 Proxy Season
1. The Leadership Role of Union and Public Funds
[For the first time this year, U.S. shareholder groups got
more than 50% ofthe vote in a majority ofshareholder resolutions.]
That is a major first . .. and companies pay attention . . . they
measure power. Sara Teslik, Executive Director, Council of
Institutional Investors. 175
Union plans and staff retirement funds are becoming a
powerful force. 176 During the 1998 proxy season, multiemployer
funds and staff plans had "between 70 and 100 resolutions either
submitted, under negotiations with the SEC or management, or in
the drafting process. ,,177 One-third of the resolutions that passed
were submitted by union groupS.178 The Teamster filed the most
resolutions, with seventeen proposals, followed by SEIU with eight
proposals, the CWA with six proposals, and the IUOE and HERE
with five and three respectively.179
With assets of $2.8 trillion, public funds have even more
180
Public funds own about 12.5 % of all corporate stock. 181
clout.
The New York City Funds filed twenty-eight shareholder proposals
during the 1998 proxy season,l82 followed by CalPERS' five
174. The New Governance Paradigm; CE Roundtable, supra note 166, at 40.
175. Wall Street Walk Being Replaced with Wall Street Talk: Corporate Governance
Changes Spurred by Increased Voice of Shareholders Worldwide., Bus. WIRE, July 9,
1998.
176. Labor's Growing Shareholder Activism Agenda, PENS. & INv. (Mar. 23, 1998)
< http://www.pionline.comfhtmllnews/pi1998/980323-12-2.html. >.
177. David Moberg, Union Pension Power, THE NATION, June I, 1998, at 15-16.
178. Kenneth A. Bertsch & Virginia Rosenbaum, Shareholders Increase Support for
Resolutions on Board Independence, Annual Election of Directors, XV IRRC CORP. Gov.
BULL. 6 (Apr.-June 1998) [hereinafter Shareholders Increase Support].
179.Id.
180. Moberg, supra note 177, at 15-16.
181.Id.
182. Bertsch & Rosenbaum, supra note 178, at 7. See also Ricki Fulman,
Shareholder Activism: Shareholders Keep Directors Feeling the Heat, PENS. & INv., Feb.
9, 1998, at 19; Heard & McGurn, supra note 164, at 3 (citing a recent study which found
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proposals, three sponsored by the State of Wisconsin Investment
Board,183 and two filed by the College Retirement Equity Fund. 184
These figures do not include "stealth" resolutions that are the
subject of quiet negotiations with the company and subsequently
withdrawn. 185 For example, CREF sponsored seven resolutions on
board independence and withdrew them after the companies
increased board independence and committed "to sustaining board
independence on an on-going basis. ,,186
Support for proposals sponsored by these large funds
averaged 38.1 % of shares voted, compared with an average of
25.2 % for all corporate governance resolutions. l87 According to the
Investor Responsibility Research Corporation, "[fjund-sponsored
resolutions tend to be grouped near the top in voting support within
each category of shareholder resolution. ,,188
While it is "conventional wisdom . . . that shareholder
proposals will receive more support at firms with a high proportion
of shares held by institutional investors," Professor Bernard Black
disputes this wisdom. 189 Professor Black states that "[i]n fact,
institutional ownership has no significant effect on shareholder
support for corporate governance, and firms with high institutional
ownership are no more likely than other firms to receive a
shareholder proposal. ,,190 However, data compiled by the Investor
Responsibility Research Corporation ("IRRC") shows that all of the
that CREF negotiated agreements with all but three companies it approached between 1993
and 1996. Of these three, two have been acquired.) Id.
183. Bertsch & Rosenbaum, supra note 178, at 7. SWIB also requested 22 companies
to give a firm commitment not to reprice options in the future. Id. Companies targeted
by SWIB are corporations in which SWIB owns 7-10% of the stock. Id.
184. TIAA-CREF also fired the "shot heard around the world" when it "ousted the
entire board of Furr'slBishop's, Inc." Richard Koppes, Corporate Governance, NAT'L
LAW J., at B6 (July 6, 1998). TIAA-Cref commented that the board of directors "'has not
provided tangible evidence of meaningful or sustained growth', is ineffective and has been
.
unable to provide direction, guidance or effective leadership." Id.
185. Bertsch & Rosenbaum, supra note 178, at 1, 7. These figures only include those
corporate governance resolutions monitored by the Investor Responsibility Research
Corporation, which monitors about 2000 companies. Id.
186.Id.
187.Id.
188.Id.
189. Bernard S. Black, Does Shareholder Activism Improve Company Performance?,
19 CORP. BOARD 1 (M:AR. 13, 1998).
190.Id.
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corporate governance shareholder resolutions that passed in the
1998 proxy season were passed at corporations with institutional
holdings of fifty-three percent or more. IRRC reports that a strong
correlation coefficient of 0.8 percent exists between vote levels and
institutional ownership on anti-poison pill proposals during 1997
and 1998. 191 The correlation between corporate performance and
votes is weaker, "suggesting that while target companies frequently
are chosen based on performance, institutional voting is guidelinedriven, and many institutions support the resolution regardless of
performance history. ,,192
Institutional Holdings of Corporations at which Corporate
Goverance Shareholder Resolutions Were Passed193
Company
(Sponsor)
Issue
AlliedSignal
(fl. Mathis)
Bausch & Lomb
(W. Steiner)
Bristol-Myers
Squibb (E. Davis)
ConsolidatelJ
Natural Gas
(Lon2View Fund)
CSX
(D. Garland)
Eastman Kodak
(SElU)
Federated Dep't
Stores (E. Davis)
Fleming (NYCFire)
Require only majority
vote
Repeal classified board
Great Lakes
Chemical
Submitted Institutional
by
Ownership
institutional
Owner?
No
69.0%
Vote
58.4%
No
73.7%
58.8%
Repeal classified board
No
59.2%
74.3%
Redeem or vote on
poison pill
Yes
55.0%
55.5%
Redeem or vote on
noison nill
Repeal classified board
No
60.1%
63.4%
Yes
55.1%
71.4%
Repeal classified board
No
95.2%
84.6%
Repeal classified board
Yes
62.2%
74.3%
Repeal classified board
Yes
79.7%
55.0%
(N¥~JI:RS) __
191. Bertsch & Rosenbaum, supra note 178, at 6.
192. Id. However, all of the anti-poison pill proposals, except one, were submitted
at under-performing corporations. Id.
193. Compiled from Shareholder Resolutions Winning Majority Votes in 1998, XV
IRRC CORP. Gov. BULL. 6 (Apr.- June 1998).
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Huffy (C. Miller)
[Vol. 11:43
Repeal classified board
No
62.0%
59.4%
Redeem or vote on
Doison Dill
Jostens (W. Steiner) Repeal classified board
No
78.7%
71.0%
No
78.7%
64.5%
Repeal classified board
Yes
75.4%
52.6%
Jostens (K. Steiner)
King World
Productions
(LongView Fund)
Nash Finch (C.
Miller)
Nashua (Gamco
Investors)
Ogden (W. Steiner)
Repeal classified board
No
53.1%
51.6%
Redeem or vote on
Doison Dill
Repeal classified board
Yes
64.7%
64.2%
No
61.9%
65.3%
Quaker Oats
(LoneView Fund)
Sybase (CaIPERS)
Redeem or vote on
Doison Dill
Repeal classified board
Yes
59.0%
51.7%
Yes
54.9%
68.4%
U.S. Surgical
(IUOE)
Unisys (NYC
Teachers)
Confidential voting
Yes
65.7%
62.6%
Shareholders can call
special meeting/act by
written consent
Redeem or vote on
Doison Dill
Vote on poison pill or
let it expire
Yes
62.0%
66.5%
Yes
79.6%
67.8%
Yes
84.8%
80.7%
Wellman (UNITE)
Woolworth
)
During the 1998 proxy season, resolutions to repeal a
classified board led the pack, with resolutions filed at 63
corporations. Classified board resolutions passed at twelve
corporations. l94 The New York City Fire Department won support
of 74.3 % of the voting shareholders to repeal Fleming's classified
board. 195 CalPERS supported a resolution at Sybase which received
support from 68.4% of the voters, and which requires Sybase to
elect the directors annually.196 The New York City Teachers
Retirement System won a proposal submitted at Unisys to restore
194. Bertsch & Rosenbaum, supra note 178, at 6. (The classified board resolutions
passed at the following companies: Bausch & Lomb, Bristol-Myers Squibb, Eastman
Kodak, Federated Department Stores, Fleming, Great Lakes Chemical, Huffy, Jostens,
King World Productions, Nash Finch, Ogden, and Sybase). Id.
195.Id.
196.Id.
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WALL STREET WALK
shareholder rights to call speCial meetings and act by written
consent. l97 Of the resolutions which passed so far in the 1998 proxy
season, 54 % were to repeal a classified board, 32 % were to redeem
or vote on a poison pill, 10% were on confidential voting, 4% were
to require majority vote, and 4 % to allow shareholders to call
special meetings and to act by written consent. 198
Corporate Governance Proposals Filed in 1998 Proxy
Seasonl99
Average Votes
Issue
Total Proposals
Filed
Total Proposals
Filed
1998
1997
Redeem or require vote on
Ipoison pill
Confidential Voting
56.7%
17
3i
45.2%
8
6
Repeal Classified Board
44.5%
63
71
Restrict non-employee
director pension
Provide for Cumulative
Voting
Vote on Future Golden
Parachutes
Majority of Independent
Directors
Independent Compensation
Committee
Separate CEO &
Chairman
Independent Nominating
Committee
No repricing undenvater
stock options
Increase Board Diversity
30.1%
7
16
26.1%
40
39
25.6%
6
8
23.8%
9
17
21.6%
5
1
21.2%
6
7
19.9%
7
6
19.0%
7
0
15.1%
18
16
13.0%
4
24
Pay directors in stock
-- --
A ••
_ _ _ _ _
~
197. Bertsch & Rosenbaum, supra note 178, at 6.
198.Id.
199. Compiled from Voting on U.S. Governance Shareholder Resolutions, XV IRRC
CORP. Gov. BULL. 3 (1998).
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Sell company! spin off!
hire investment manae:er
Restrict Executive
Comnensation
Disclose Executive
Compensation
Link executive pay to
social performance
[Vol. 11:43
10.1%
46
46
9.5%
29
79
5.9%
9
10
5.1%
25
19
The Hotel Employees and Restaurant Employees
International Union ("HERE,,)2°O initiated a fight against Mariott
International's management proposal to bundle a dual class stock
recapitalization proposal with a restructuring proposal.201 HERE
was joined in its efforts by other large pension funds. Marriott
bundled a highly attractive proposal -- acquisition of the North
American assets of Sodexho Alliance, a French corporation, and
spinning off Marriott's main business units into a new corporation
that would keep Marriott's name - with a widely opposed dual class
common stock proposal.202 Marriott used this bundling tactic to
ensure the passage of the unpopular dual class recapitalization by
coupling it with the widely supported acquisitio~ proposal. The
dual class recapitalization would create two classes of stock:
"'supervoting' A shares, with 10 votes each, and regular old shares
with one vote apiece. This dual-elass stock structure would let the
Marriott family sell up to half of its 20 percent stake in the
company, while retaining more than 90 percent of its voting
power. ,,203 After HERE objected to the bundling of proposals,
Marriott agreed to unbundle the proposals and hold separate votes
con~ingent on the shareholders approving the dual class stock
structure and split-up.204 HERE refused to agree. 205 Marriott barely
won the two-thirds vote of outstanding shares needed to pass the
restructuring proposal. Later, when Marriott offered shareholders
200. Unions and lheir funds filed seventy-six corporate governance proposals in 1998.
Bertsch & Rosenbaum, supra note 178, at 4.
201. Id. at 1.
202. Shareholder Groups Score Victories at Marriott International, Furr's/Bishop's,
XV IRRC CORP. Gov. BULL. 5 (Apr. - June 1998).
203. Koppes, supra note 184, at B6.
204.Id.
205.Id.
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"the choice of two dual stock proposals, shareholders voted down
both proposals.
2. Binding Shareholder Proposals
The newest trend, observable in the 1998 proxy season, is
the use of binding bylaw amendments. 206 This tactic was used by
the Teamsters Union in 1997 against Fleming. 207 The Teamsters
fIled a proposal that would require Fleming to redeem its
. shareholders rights plan and submit any future rights plan to a vote
of the shareholders. 208 Fleming redeemed its shareholders rights
plan and filed a suit claiming that the proposal was not proper action
for shareholders under state law. 209 The district court for the
Western District of Oklahoma held that Fleming was required to
submit the resolution to shareholder vote as it is a "proper subject
for shareholder action under Oklahoma law. ,,210 The court noted
that Oklahoma law "vests initiative in the Board of Directors, but
does not foreclose shareholder action in this matter. ,,211
Subsequently, Fleming appealed and fIled a motion to suspend the
district court's order pending appeal. 212 The court denied Fleming's
motion because it was so novel that the court could not assess the
likelihood of success on appeal. 213
The court also rejected
Fleming's claim that it would be irreparably harmed if a stay were
not granted. The court noted that if the appellate court reverses the
district court, "the shareholder vote will be nullified. ,,214 The
proposal received a vote of 61.9% of the shares. 21s The parties are
awaiting a decision of the appellate court.
206. Binding Bylaw Amendments to Mark 1998 Shareholder Resolution Activity, XV
IRRC CORP. Gov. BULL. r (Oct. - Dec. 1997).
207.Id.
208.Id.
209.Int'1 Bro. of Teamsters General Fund v. Fleming Companies, Inc., 1997 U.S.
Dist. LEXIS 2980 (yt. D. Okla. 1997).
210.Id.
211.Id.
212. Int'l Bro. of Teamsters General Fund, v. Fleming Companies, Inc., 1997 U.S.
Dist. LEXIS 2979 (yt. D. Okla. 1997).
213.Id.
214.Id.
215. Binding Bylaw Amendments to Mark 1998 Shareholder Resolution Activity, supra
note 206, at 1.
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D. Craig Norlund, chair of the Securities Law Committee of
the American Society of Corporate Secretaries, views the use by
shareholders of binding bylaw proposals as a sign "that shareholders
are willing to escalate the battle when companies ignore non-binding
resolutions receiving majority votes. If these efforts are successful,
I have no doubt that they will become a trend...216 Binding bylaw
proposals were also filed at Kmart,217 Pennzoil,218 Dole Food,219
CardioThoracic Systems,no Shiva,221 and SuperValu. 222 To date, the
binding proposals were withdrawn at Pennzoil and SuperValu after
the companies substantially complied with the shareholder
demand. 223 SWIB filed suit against Shiva but was unsuccessful in its
attempt to obtain a court order requiring Shiva to put the resolution
to a shareholder vote. 224 The shareholder proposal passed at
Fleming, but· failed to gain majority support at Kmart and
CardioThoracic Systems. 225
3. Focus Lists, Chronic.Under-performers, and Key Votes
Pension funds take varying approaches to corporate
governance: sending a written demand for justification to the board
of directors; meeting with corporate boards; filing shareholder
216. Shareholder Proposals Down But Nwnber ofBinding Bylaws Up, 25 Pen. & Ben.
Rep. (BNA) 558 (Mar. 9, 1998) [hereinafter Sharehalder Proposals Down].
217. The proposal was for the repeal of a classified board. Id.
218. Six proposals were filed including binding proposals to set an expiration for its
poison pill, require unanimous board vote on takeover defenses, and allow shareholders to
call special meetings. Id. The proposals were withdrawn after the company substantially
complied with the demand. Shareholders Increase Support for Resolutions on Board
Independence, Annual Election ofDirectors, XV IRRC CORP. GOY. BULL. 1 (Apr. - June
1998).
219. The proposal would require Dole to have an independent nominating committee.
See generally Shareholder Proposals Down, supra note 216.
220. The proposal would have prohibited the repricing of stock options without
shareholder approval. Shareholders Increase Support, supra note 178, at 1.
221. Shareholder Proposals Down, supra note 216, at 558. The proposal would
prohibit options repricing. Id.
222. Shareholders Increase Support, supra note 178, at 1. The proposal was
withdrawn after the company substantially complied with the demand. Id.
223.Id.
224.Id. See also Koppes, supra note 184, at B6.
225. Koppes, supra note 184, at B6; Shareholders Increase Support, supra note 178,
at 1.
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resolutions; instituting proxy campaigns .against management
proposals; and possibly engaging in a proxy fight for control.
Richard Koppes, formerly general counsel for CalPERS, explains:
[T]he successful use of the proxymecbanisrn does
not depend exclusively on attaining the support of
the majority of the proxies cast. In dozens of
instances, companies agreed to make concessions to
shareholders not only in the way they are managed,
but also in the way they are governed. In many
cases, shareholders were able to take at least a small
step -- if not a giant leap -- toward achieving their
objectives. 226
Most funds take the CalPERS approach - "buy low, talk loud. Or
more precisely, [CalPERS] buys passively, sells never and agitates
to improve performance. ,,227 Others engage in quiet diplomacy.228
CalPERS' approach is the most well-known, since CalPERS has
been setting the trend for years. CaIPERS indexes its pension
fund. 229 Each year it targets the corporations which are the poorest
performers in its portfolio. William Crist, president of the CalPERS
board describes the goal of its program: "The policies of these
companies have consistently been destructive of shareowners
interests. It's clear that they have ignored the responsibilities and
duties of shepherding capital that shareowners have entrusted them
226. Koppes, Corporate Governance, supra note 184, at B5.
227. Buy Low, Talk Loud, PENSIONS & INv., July 11, 1994, at 10.
228. Bernard Black notes:
.
Shareholder activism . . . has generally involved two distinct
approaches. The first involves presenting (or threatening to present)
a shareholder proposal on a corporate governance issue at a company~s
annual meeting. The second involves "jawboning" a particular firm's
managers or board of directors to achieve a change in management or
strategy.
Black, supra note 189, at 1; see also Heard & McGurn, supra note 182, at 3.
229. Maureen Reilly, California Public Employees' Retirement System: Why
Corporate Governance Today? A Policy Statement, reprinted in HANDLING MERGERS AND
ACQUIsmONS IN A HIGH-TECH AND EMERGING GROWTH ENVIRONMENT (Michael J.
Kennedyed. 1997).
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with. As long-term investors, it is our responsibility to be a
constructive voice in urging improved corporate governance
practices and company performance. ,,230 This proxy season,
CalPERS is using stock performance, corporate governance
practices, and an economic value-added evaluation231 to rank the
corporations in its index portfoliO. 232 Tier-one companies, also
called the "Focus 10," were sent a letter requesting a meeting with
management. If management does not agree to meet, CalPERS will
either file a shareholder proposal or withhold its votes from
directors. Tier-two companies were sent a letter requesting a
written explanation for their poor performance. 233
A 1994 study by Wilshire & Associates examined the
performance of 42 companies targeted by CalPERS between 1987
and 1992. 234 The study concluded that the stock price of the
targeted companies trailed the S & P 500 Index by 66 % -- (or
negative 17.9% annually) in the five years before being targeted.
Stock returns increased to 41 % (or 7.1 % annually) in the five years
after being targeted.235 A 1995 update of the survey concluded that
once five year histories for all targeted companies were compiled,
the increase was 52.5%.236 A similar study by the Gordon Group,
Inc. concluded that "[t]he overall evidence ... shows that over the
past several decades active investment strategies have consistently
led, on average, to significant value increases. ,,237
230. Laura Mahoney, CalPERS Issues Annual List ofWorst Performing Companies,
25 Pen. & Ben. Rep. (BNA) 501 (Mar. 2, 1998).
231. Economit; value-added is "a company's net operating profit minus an appropriate
charge for capital required to produce the income. The evaluation corrects for an illusion
of profitability for companies that may appear profitable under generally accepted
accounting principles but are destroying value by earning a profit below the opportunity
cost of capital. According to CaIPERS, EVA has enabled the system to pinpoint
companies in which poor market performance is due to underlying economic performance
problems, and not industry or extraneous factors." Id.
232.Id.
233.Id.
234. Steven L. Nesbitt, Long-Term Rewards From Shareholder Activism: A Study of
the "CalPERS Effect," J. APPL. CORP. FIN. (Winter 1994).
235.Id. See also Ed McCarthy, Pension Funds Flex Shareholder Muscle, 32 PENS.
MGMT. 16. (Jan. 1996).
236. Steven L. Nesbitt, The "CalPERS Effect": A Corporate Governance Update, July
19,1995.
237. See Why Corporate Governance Today?, <http://www.calpers.ca.gov/invest
Icorpgov/whycg.htm. > (visited Sept. 8, 1998).
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The New York State Common Retirement Fund also targets
companies :~8
In Phase One, the fund will screen its stock portfolio
to identify long-term corporate underperformers on
the basis of 17 performance indicators which include
stock returns, valuation ratios, accounting data and
capital spending. These variables will be calculated
for one- and five-year periods adjusted for risk and
grouped by industry. The boards of those companies
that fail all performance measures will receive a
letter from the fund requesting an explanation of the
steps being undertaken to improve performance. In
Phase Two, each of these companies will be
reviewed to narrow the focus to the most poorly
performing companies. Companies that fail both
phases of review will be the subject of other
governance initiatives which may include
correspondence, meetings with the board, and
attendance at annual shareholder meetings. As a last
resort, the fund may [have] meetings with
management. 239
The State of Wisconsin Investment Board ("SWIB") also screens its
portfolio for corporations in which the fund owns five to ten percent
of the shares and which are chronic underperformers. 240 SWIB
negotiates with these corporations on poison pills and compensation
practices. 241 Where negotiations fail, SWIB will submit shareholder
proposals. 242 For the 1998 proxy season, SWIB sponsored three
shareholder resolutions, and received 29% supporf43 on a binding
proposal to require shareholder approval for options repricing at
238.Id. James E. Heard & Jill Lyons, Labor Unions and Public Funds Set Active
Shareholder Agenda/or 1995, INSIGHTS, Dec. 1994, at 3.
239.Id. See also Patrick McGurn, New York State Fund: Back to Activism, IRRC
CORP. Gov. BULL. 4 (Sept.-Oct. 1994).
240. Heard & Lyons, supra note 238, at 3.
241.Id.
242.Id.
243. Shareholders Increase Support, supra note 178, at 7.
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Cardio Thoracic Systems. 244 This percentage is astonishingly high,
especially since director and officers own 32.6% of the
corporation's shares and institutions own 25.2%.245
TIAA-CREF has instituted a "corporate assessment
program.,,246 Each year, the fund evaluates the practices of all of its
portfolio companies, "based initially on proxy statement
disclosure. ,,247 If problems with corporate governance exist, the
funds set up meetings to discuss the problem with management. 248
Peter Clapman describes TIAA-CREF's approach to corporate
governance:
TIAA-CREF has not viewed the shareholder
proposal process as a substitute for continued
discussion with portfolio companies. Such
discussions have resulted in positive changes by
244.Id. These repricing provisions "with the stroke of a pen, [transform] worthless
options into 'in-the-money' options." Kathy B. Ruxton, SWIB Tries to Break Repricing,
XV IRRC CORP. Gov. BULL. 13 (Apr. - June .1998). The proposal says:
Option Repricing. In no event shall any stock option already issued
and outstanding be repriced to a lower strike price at any time during
the term of such option, without the prior approval of stockholders.
Any amendment or appeal of this provision requires the affirmative
vote of the holders of a majority interest of the capital stock present
and entitled to vote.
Id. A spokesperson for TIAA-CREF describes the dangers of repricing provisions:
Repricing undermines the rationale for establishing an option plan in
the first place. Repricing gives management a benefit unavailable to
shareholders and thereby reduces the alignment of interests between
shareholders and management.
Id.
While the proposal was pending, CardioThoracic's Board approved the repricing of
190,000 stock options previously granted to its CEO. The original exercise price of. the
options ranged between $7.688 to $21.125 per share. The options were exchanged, with
board approval, for options with an exercise price of $5.50 per share. Id. at 14.
245. Shareholders Increase Support, supra note 178, at 7.
246. Peter Clapman, Independent Board Key to Firm Management, PENS. & 00. 12
(Apr. 20, 1998).
247.Id.
248.Id. See also Peter C. Clapman, TIAA-CREF Policy Statement on Corporate
Governance, SC53 ALI-ABA 183 (1997).
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companies, thus obviating the need to file
shareholder resolutions or, in some instances,
enabling TIAA-CREF to withdraw resolutions
because the company's response meets the objectives
of the resolution. For example, nearly all companies
with which the board independence issue was raised
chose to add a significant number of independent
directors so as to meet our concerns. 249
4. AFL-CIO Key Votes Project
In 1997, the AFL-CIO initiated a "10 Key Votes Survey
Project. ,,250 The survey canvassed multiemployer plan investment
managers to determine how 46 managers controlling $203 billion,
voted on ten key votes of the 1997 proxy season. 251 The votes
included:
AFL-CIO 1997 Key Votes252
I
Company
Beverly Enterprises
I
Issue
"Just vote no"
a.e:ainst directors
Shareholder
Columbia HCA
approval of poison
Ipill
Dillard Department Majority
Stores
independent board
. of directors
Enron Corporation Adoption of
cumulative voting
General Electric
Shareholder
approval of
performance-based
executive pay
I
Sponsor
SElU
LongView
Fund
I
Vote
I
61:5%/ passed
Nat'l Elec.
Benefit Fund
45.8%
lUOE
Pension Fund
Teamsters
29.1%
8.1%
249.Id.
250. AFL-CIO, 10 KEy VOTES SURVEY (1997).
251. Steve Hemmerick, Unions Quiz Money Managers: Proxy Votes Eyes By the AFLC/O, PENS. & INV. 2 (Dec. 8, 1997).
252. AFL-CIO, 10 KEy VOTES SURVEY (1997); Checklist of 1997 U.S. Corporate
Governance Shareholder Proposals, XV IRRC CORP. GOV. BULL. 30 - 43 (July. - Sept.
1997).
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Harrah's
Entertaimnent
Bylaw amendment
to redeem poison
I pill
The Limited, Inc.
Majority
independent board
of directors
May Department
Bylaw amendment
to redeem poison
Stores
I pill
Mobil Corporation No exercise of
executive stock
options after layoffs
Unisys Corporation Declassify board of
directors
HERE
[Vol. 11:43
51.4% (did not pass:
needed majority of
outstandin.p: shares to oass)
Kentucky
4.1%
Carpenters
Pension Fund
So. Regional
43.0%
BdUNITE
Pension Fund
Teamsters
9.2%
Affiliates
Pension Fund
63.5% (did not pass:
mOE
needed majority of
Central
Pension Fund outstanding shares to oass)
Of the 46 managers surveyed, only 14 investment managers
followed the AFL-CIO voting guidelines for all ten key votes. 253
Two managers did not follow the guidelines for even one of the ten
voteS. 254 The survey concluded that the investment managers "cast
an average of 44% of their votes against the union's position, on
corporate governance in 1997. ,,255 Sixty-seven percent of the
managers voted against a shareholder proposal at Mobil Oil
Corporation which would have forbid executives from exercising
stock options after employee layoffs. 256 Says one Union trustee: "It
was a real wakeup call for me. These managers smile at you and
then cast votes against you behind your back. ,,257 Dennis Kass,
former administrator of the PWBA and now a managing director at
J.P. Morgan says that "his fIrm doesn't plan to change the way it
votes, " and that corporate governance matters should not be
construed as "opposing unions or union views. ,,258
In 1998, the
259
AFL-CIO expanded the voting list to 46 key votes. Five of these
resolutions passed: Consolidated Natural Gas, Eastman Kodak,
253.Id.
254.Id. See Steve Hemmerick, Managers Vote Against Clients, PENS. & !Nv. 2 (Apr.
20,1998).
255. AFL-CIO, 1998 PROXY SEASON KEy VOTES SURVEY (1998).
256.Id.
257.Id.
258.Id.
259.Id.
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Fleming, Unisys, and Wellman. 260 Resolutions at Texaco,
WorldCom, and' Gannett, and Allied Signal were narrowly
defeated. 261
1998 AFL-CIO Key Votes that Passed262
Comnanv
Issue
Consolidated Natural Gas Redeem Poison Pill
Sponsor
LongView Fund
Vote
55.5%
Eastman Kodak
Declassify Board
SEIU
71.4%
Fleming
Declassify Board
NYC Fire
74.3%
Unisys
Right to act by written
consent/call special
meetings
Redeem Poison Pill
NYC Teachers
66.5%
UNITE
67.8%
Wellman
c.
AFL-CIO Model Guidelines for Delegated Proxy Voting
Responsibility
In February 1991, the AFL-CIO adopted Model Guidelines
for Delegated Proxy Voting Responsibility to provide guidance to
trustees of Taft-Hartley Plans who have delegated to investment
managers their duties with respect to proxy voting. 263 These
guidelines were updated in 1997.264 The guidelines also can be used
260. Shareholders Increase Support, supra note 178, at 27-32.
261. Id. See also Randall S. Thomas & Kenneth Martin, Should Labor Be Allowed to
Make Shareholder Proposals?, 73 WASH. L. REv. 41 (1998); Marleen O'Connor,
Organized Labor a Shareholder Activist: Building Coalitions to Promote Worker
Capitalism, 31 U. RICH. L. REv. 1345 (1997).; Stewart J. Schwab & }WIdall S. Thomas,
Realigning Corporate Governance: Shareholder Activism by Labor Unions, 96 MICH. L.
REv. 1018 (1998).
262. AFL-CIO, 1998 PROXY SEASON KEy VOTES SURVEY (1998); Checklist of1998
U.S. Corporate Governance Shareholder Proposals, XV IRRC CORP. GoV. BULL. 27 - 34
(Apr. - June 1998).
263.Model Guidelines for Delegated Proxy Voting Responsibility, adopted by the
AFL-CIO Executive Council, Feb. 1991, reprinted in AFL-CIO, INVESTING IN OUR
FuTURE: AN AFL-CIO GUIDE To PENSION INVESTMENT AND PROXY VOTING 4 (1991).
264. INVESTING IN OUR FuTURE: AFL-CIO PROXY VOTING GUIDELiNES (1997)
[hereinafter Model Guidelines].
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by trustees who have retained responsibility to vote proxies. 265
Comments by union officials indicate that unions will focus more on
worker concerns like downsizing, executive compensation, and
employee stock options, and long-term corporate health. 266 These
issues are of special concern to union employees who are "longterm shareholders with a unique perspective. ,,267
The AFL-CIO model guidelines are based on language in the
Joint Statement on Pension Investments issued by the Department of
Labor and Department of the Treasury.268 In the Joint Statement,
the Departments indicated that under ERISA, prudence is defmed
"with reference to what is in the economic best interest of a plan's
participants and beneficiaries"269 and that fiduciaries are not
required to "automatically tender shares held by the plan to capture
the premium over market represented by the tender offer" where the
long-term value of the target company's shares outweighs the shortterm gains which may result from the tender offer.270
The AFL-CIO model guidelines adopted this language and
provide that fiduciaries must vote in the economic best interests of
plan participants and beneficiaries, but are not required to maximize
short-term gains if inconsistent "with the long-term economic best
interests of the participants and beneficiaries. ,,271 The guid~lines list
several issues which may affect these long-term interests:
•
Share value and dividend yield;
•
Corporate policies that affect employment security
and wage levels of plan participants;
•
Corporate policies that affect local economic
development and stability;
•
Corporate policies that affect growth and stability of
the overall economy;
265. Id. at 1.
266. Hemmerick, supra note 251, at 2.
267. Id. (quoting Ed Durkin, director of special programs at the Corporate
Governance Project at the Carpenters International Union.)
268. Joint Statement, supra note 42.
269. Id. at 2.
270.Id.
271. Model Guidelines, supra note 264, at 1.
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•
Corporate responsibility to employees and local
communities where the firm operates; and
•
Workplace and environmental safety and health. 272
The policy establishes guidelines for six categories of proxy
decisions: election of directors; routine board' of directors'
proposals; corpor~te governance and changes in control; employeerelated proposals; executive compensation; corporate responsibility;
and other issues. Each of these categories will be briefly
described.
Election ofDirectors - Under the AFL-CIO guidelines, the
voting fiduciary must predict whether the director candidate will
have a positive impact on the long-term value of the corporation. In
making this decision, the fiduciary must consider the following
factors:
1)
The company'sjinancial performance as judged by
total returns and other relevant financial indicators in
comparison to a group of its peers as well as a broader
market such as the S & P 500.
2)
Independence is defined as having only one nontrivial
connection to the corporation: that of his or her directorship.
The overall conduct of the company. ...
4)
Attendance records of incumbent directors.
5)
The ability of the candidate(s) to devote sufficient
time and energy to the oversight of the company. . . .
6)
The view of employee and shareholder groups.273
3)
If the election is uncontested, the fiduciary may support the
management slate unless the record indicates that the mcumbents
have not acted in the "long-term economic best interests of plan
participants and beneficiaries. ,,274 If the incumbent management has
not acted in the participants' best interests, the fiduciary may
attempt to remedy management's lack of response to the long-term
272.Id.
273. Id. at 4-5
274. Id. at 13.
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interests of plan participants by withholding votes, meeting with the
management or director candidates, or supporting relevant
shareholder resolutions. 275
Other Board of Directors Proposals -- As a general rule,
fiduciaries may vote with management on routine issues unless the
proposal would adversely affect the long-term economic best
interests of plan participants and beneficiaries. 276 Therefore, each
proposal must be examined on a case-by-case basis to determine if
it will have an economic impact on the value of plan-owned shares.
The policy specifically provides guidelines on nine other
types of directors' proposals:
1)
Independent directors. In general, the voting
fiduciary should support shareholder proposals seeking to
require that a majority of directors be independent. . . .
2)
Separate Offices of Chairperson and Chief
Executive Officer. In general, the voting fiduciary should
support shareholder proposals seeking to require that
different persons serve as the chairperson and the chief
executive officer. . . .
3)
Independent Nominating, Compensation and
Audit Committees. The voting fiduciary should support
proposals that all, or a majority of, directors on these
committees by independent directors. . . .
4)
Classified Boards. The voting fiduciary's analysis
must take into consideration the fact that classified, or
staggered term, boards reduce the ability of shareholders to
influence corporate policy versus the potential benefit of
discouraging transactions that may be detrimental to the
long-term economic best interest of plan participants and
beneficiaries.
5)
Term Limits. The voting fiduciary may vote against
proposals to limit terms of directors because they result in
prohibiting the service of directors who significantly
contribute to the company's success and represent
shareholders' interests effectively. In general, the trustees
275. Model Guidelines, supra note 264, at 13.
276.Id.
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support holding individual nominees to high standards when
they seek election; requiring annual elections of directors
better advances shareholders' interests.
6)
Director Liability. . .. Specifically, the voting
fiduciary should oppose' management proposals that limit
liability for (i) a breach of the duty of loyalty; (ii) acts or
omissions not in good faith or' involving intentional
misconduct or knowing violations of the law, (iii) acts
'involving the unlawful purchase or redemption of stock, (iv)
the payment of unlawful dividends or (v) the receipt of
improper personal benefits. In addition, the voting fiduciary
generally should oppose proposals to reduce or eliminate
directors' personal liability when litigation is pending
~gainst current board members.
7)
Indemnification. . . . The voting fiduciary may
support these proposals when the company persuasively
argues that such action is necessary to attract and retain
directors, but the voting fiduciary generally should oppose
indemnification when it is being proposed to insulate
directors from actions they have already have taken.
8)
Outside Director Compensation and Benefits. . .
. [T]he voting fiduciary should support the payment of
directors solely in the form of equity and cash and should
support management and shareholder proposals to eliminate
pension and benefit programs.
9)
Broader Participation on the Board. The voting
fiduciary should support proposals requesting companies to
make efforts to seek more women and minority group
members for service on boards. 277
Corporate Governance and Changes in Control -- Where a
corporate governance proposal has not been made in response to a
contest for corporate control, the fiduciary must consider how the
vote will affect the value of plan assets "as well as the ability of
shareholders to hold management accountable for corporate
performance. ,,278 If the proposal relates to a change in control, the
277. ld. at 5-7.
278. ld. at 7.
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fiduciary must conduct a more intensive review.279 The review must
include a detailed and independent cost/benefit analysis of th~
probable economic effect of the proposed transaction involving a
change in control.280 The guidelines do not require the fiduciary to
maximize short term gains if disruption of the stability and
continuity of the corporation is inconsistent with the long-term
economic best interests of plan participants and beneficiaries. 281 The
policy also provides specific guidance for fiduciaries on proposals
relating to increasing authorized common stock,282 blank-check
preferred stock,283 reincorporation,2~ poison pills,285, insider
trading,286 board size and composition,287 supermajority voting
requirements,288 dual class voting,289 confidential voting and
279. Model Guidelines, supra note 264, at 7.
280.Id.
281.Id.
282. Id. at 8. Generally, the fiduciary may support management proposals requesting
shareholder approval to increase authorized common stock when management provides
persuasive justification for the increase. Id.
283. Model Guidelines, supra note 264, at 8. The fiduciary "should oppose requests
to authorize blank-check preferred stock...." Id.
284.Id.
285.Id. The fiduciary "must consider whether a poison pill proposal by management
requires management to submit the pill periodically to a shareholder vote." Id. The
fiduciary also "must consider the impact of acquisition attempts that may be detrimental
to the long-term economic best interests of plan participants and beneficiaries." Id. at 8.
286. Model Guidelines, supra note 264, at 8. The fiduciary "should support proposals
that establish 'zero tolerance' policies for illegal insider trading activity." Id.
287. Id. The fiduciary should consider whether the directors have provided a
satisfactory reason for any proposed change in board size or composition.
288.Id. The fiduciary should balance the potential risk that the provision will
undermine voting rights against the potential benefit of protecting the interests of minority
shareholders. Id.
289. Model Guidelines, supra note 264, at 8. The fiduciary "must take into
consideration the principle of one share, one vote, the impact of any dilution in shareholder
voting rights; and any decrease in share price likely to result from issuing a new class of
stock with unequal voting rights." Id.
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independent tabulation,290 cumulative voting,291 shareholders' right
to call special meetings,292 and approving other business. 293
Executive Compensation - The AFL-CIO guidelines
support executive compensation that provides "challenging
performance objectives and serve[s] to motivate executives to
excellent performance. ,,294 An executive compensation plan should
not be supported if the plan exceeds the requirement necessary to
attract and retain qualified and skilled managers, adversely affects
shareholders, is excessively generous, lacks clear and challenging
performance goals, or adversely affects employee productivity and
morale. The guidelines list seven factors fiduciaries should consider
when evaluating a proposed executive compensation plan:
•
Whether a proposed stock-based compensation plan
generally is available to other managers and employees in
the company, or is targeted narrowly to the top executives
of the company. Broad-based stock option plans may
provide a significantly greater improvement in employee
productivity and company performance than those narrowly
targeted to top managers.
•
The effect of a stock-based plan on the potential
dilution, of outstanding shares. Proposals with relatively
high potential dilution levels (more than 10 percent) impose
potentially large future liabilities that erode shareholder
value. However, the voting fiduciary should consider
whether the dilution is due to stock compensation targeted to
top executives or is a broad-based plan generally available
to all employees.
290. [d. The fiduciary should consider the use of corporate funds by management to
coerce or lobby shareholders tp vote in a particular manner. [d.
291. Model Guidelines, supra note 264, at, 16. The fiduciary "must consider the fact
that cumulative voting is a method of obtaining minority shareholder representation on a
board and of achieving a measure of board independence from management control." [d.
292. [d. The fiduciary must consider "that this right enhances the opportunity for
shareholders to raise issues of concern with the board of directors [and weigh this] against
their potential for facilitating changes in control." [d.
293. [d. The fiduciary "should oppose management requests to approve other business
because this gives management broad authority to take action without shareholder consent
even when shareholders have an interest in the issue." [d.
294. [d.
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•
Whether a compensation plan permits the
replacement or repricing of "underwater" stock options (that
is, stock options whose exercise price is below the market
price of the company stock). The repricing of stock options
-- by lowering the exercise price of the stock -- can serve to
reward managers for the poor performance of the company's
stock, undermining the perforrpance-based nature of stock
option awards.
•
Whether the stock-based compensation plan provides
for stock options that are "premium" priced, linked to a
market or industry stock price index or other performance
measure. Premium-priced stock options as well as options
whose exercise is dependent on exceeding a market index
ensure that management compensation is linked clearly to
superior stock performance
•
Whether the compensation plan creates or
exacerbates disparities in the workplace that may adversely
affect employee productivity and morale. In addition, the
voting fiduciary should examine whether the performance
goals established in a compensation plan for executives
include goals or targets related to employee compensation,
benefit levels or other measures of a high-performance
workplace.
•
Whether a compensation plan permits additional
stock option grants or other forms of stock compensation for
executives who already hold considerable stock through the
exercise of prior stock options or grants, or who have a
large number of unexercised stock options or unvested stock
grants. While the trustees support stock compensation as an
appropriate incentive for managers, providing additional
stock compensation to these managers may offer diminished
incentive and needlessly dilute the company's shares.
•
Whether a plan authorizes multiple types of
compensation awards, provides for substantial discretion by
the compensation committee (or similar entity) to issue a
wide range of stock-based awards and/or provides directors
with substantial discretion to' set and/or amend the
performance criteria of a plan. The voting fiduciary should
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not support compensation plans that are needlessly complex,
inconsistent and complicated, or plans that weaken
performance criteria by providing directors with excessive
discretionary power. 295
The guidelines also recommend that a fiduciary support proposals
"that link executive compensation to the company's achievement of
goals that improve the long-term performance of the company. ,,296
"CEOs are now getting paid based on how well the market is doing
rather than how well they personally are doing. ,,297 Generally,
golden parachute proposals should be voted against.
Employee-Related Proposals -- The guidelines specify
voting for two types of employee-related proposals: 298 employee
stock purchase plans and high performance workplaces. Generally,
a fiduciary "should support employee stock purchase plans" because
employee ownership "serves to link the interests of employees of
the company with the interests of shareholders of the company,
which benefits shareholders in the long run. ,,299 The guidelines
suggest that fiduciaries should support proposals which encourage
high-performance workplace practices such as "employee training,
direct employee involvement in decision-making, compensation
linked to performance, employment security and a supportive
environment. ,,300 The guidelines state:
High-performance workplace practices
can
contribute to both a company's productivity and
long-term financial performance. However, the
voting fiduciary should review these proposals to
ensure that they are in the shareholders' best
interests and do not unduly interfere with the
company's operation. 30l
295. Model Guidelines, supra note 264, at 9-10.
296.Id. at 10.
297. Robert W. Newbury & Beth Duncan, Shareholder Activists Likely to Target
Poison Pills, Exec Pay in 1998 Proxy Season, 24 Pen. & Ben. Rep. 2759 (Dec. 15, 1997).
298. Model Guidelines, supra note 264, at 9.
299.Id.
300.Id.
301.Id.
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Corporate Responsibility Proposals -
The AFL-CIO
guidelines require fiduciaries to support certain other shareholder
proposals which enhance or have a neutral effect on the long-term
economic best interests of plan participants and beneficiaries. 302
These include proposals relating to the formation of special policy
review shareholder advisory comrilittees,303 corporate conduct and
human rights,304 adoption of the MacBride Principles,305 adoption of
the Ceres Principles,306 compliance with labor standards and equal
employment opportunity,307 supplier standards,308 and fair lending. 309
Other Issues -- In the guidelines, the AFL-CIO observes
that not all issues which have a significant economic impact on the
value of corporate stock are addressed by means of a proxy.310
Where the proxy mechanism is inappropriate, the fiduciary should
consider alternatives such as meeting with management to discuss
the issues, supporting shareholder resolutions, or requesting board
committees to study the issue. 311 Issues which fall within this
302. Model Guidelines, supra note 264, at 10.
303. [d. at 10-11. Such shareholder resolutions establish special committees which
typically discuss shareholder relations, environmental issues, occupational safety and
health, and executive compensation. [d.
304. [d. These proposals "call for the adoption and/or enforcement of principles or
codes relating to a company's investments in countries in which there are patterns of
ongoing and systematic violation of human rights, a government is illegitimate or there is
a call by human rights advocates, pro-democracy organizations, or legitimately elected
representatives for economic sanctions." [d. at 11.
305. Model Guidelines, supra note 264, at 11. The fiduciary "must consider whether
it is in the long term economic best interest of plan participants and beneficiaries for the
company to conduct its business in accordance with such proposals." [d.
306. [d. The fiduciary "should generally support these proposals, for they improve
the company's public image and may improve its operations, both of which enhance
shareholder value." [d.
307. Model Guidelines, supra note 264, at 11.
308. [d. These resolutions "call for the corporation to take reasonable steps, or
institute a review process, to ensure that it does not and will not do business with foreign
suppliers that manufacture products for sale in the United States using forced labor, convict
labor or child labor, or that fail to comply with all applicable laws and standards protecting
their employees' wages, benefits, working conditions, freedom of association and other
rights." [d.
309. [d. These proposals "call for financial institutions to affirmatively comply with
fair-lending regulations and statutes, institute or report on overall fair-lending policies or
goals by the parent and financial subsidiaries of the corporation or disclose lending data to
shareholders and the public." [d.
310. Model Guidelines, supra note 264, at 11.
311. [d.
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category include equal access by the shareholder to the proxy
machinery,312 fair price provisions,313 greenmail payments,314 and
auditors. 315
IV.
PROXY REGULATION REFORM BY THE SEC
A. Proxy Rules, In General
. The Securities Exchange Act of 1934 regulates the activities
of institutional investors who use the proxy process to influence
corporate behavior. Regulation 14A316 relates to the solicitation of
proxies and Rule 14a-8 governs shareholder proposals. 317 This
regulap.on was amended effective June 1998.318 The amendments are
much more modest than expected. 319 Three major changes were
made: (1) The SEC's 1992 ruling in Cracker Barrel was reversed,
(2) the corporation's right to discretionary voting was amended to
reflect the SEC's ruling in Idaho Power, and (3) the minimum stock
ownership was increased from $1,000 to $2,000. The rules were
also written in plain language and question and answer form. The
shareholder proposal rules, as amended, will be described below.
The ownership of a share of stock conveys three basic
rights: the right to receive a return on the investment, the right to
receive a proportionate interest in net assets on liquidation, and a
right to vote. 320 This right to vote is exercised at annual shareholder
312.ld.
313. ld. at 12. The fiduciary must consider that fair price "provisions guard against
coercive pressures of two-tiered tender offers ... [and that such provisions may minimize]
the company's debt." ld.
314. Model Guidelines, supra note 264, at 12. The fiduciary "must consider that
greenmail discriminates against other shareholders and may result in decreased stock
price." ld.
315. For another example of proxy voting guidelines, see CalPERS, Domestic Proxy
Voting Guide (Mar. 16, 1998) <http://www.Calpers.ca.gov>.
316.17 C.F.R. § 240.14a-l to § 240.14b-2 (1996).
317.17 C.F.R. § 240.14a-8 (1998).
318. Amendments to Rules on Shareholder Proposals, Exchange Act Release No.
40,018 [Current Transfer Binder] Fed. Sec. L. Rep. (CCll) , 86,018 (May 21, 1991).
319. Rosemary Lally, Carolyn Mathiasen, & Ken Bertsch, SEC Adjusts Shareholder
Proposal Rule, XV IRRC CORP. Gov. BULL. 15 (Apr. - June 1998).
320. H. HENN & J. ALEXANDER, LAWS OF CORPORATIONS AND OTHER BUSINESS
ENTERPRISES 396 (3d ed. 1983).
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meetings at which shareholders can elect directors and vote on
certain corporate matters. Because ownership of most publicly-held
corporations is widely dispersed, it is unrealistic to expect all
shareholders to personally attend the annual shareholder meeting.
Instead, management mails to each shareholder a proxy form, along
with a proxy statement and annual report. The proxy form
authorizes the proxy holder to represent the shareholder and vote his
or her shares at the annual shareholder's meeting. 321 The
shareholder may direct the proxy holder to vote in a certain manner,
but more typically the shareholder grants the proxy holder authority
to vote according to the proxy holder's preference which must be
clearly indicated on the proxy form. 322 The proxy also may confer
321. Rule 14a-4 describes the requirements for a proxy form. 17 C.F.R. § 240. 14a-4
(1998). A proxy form must:
1)
identify in boldface type the person or group which is
soliciting the proxy. Rule 14a-4(a)(I).
2)
provide a "specifically designated blank space for dating the
proxy card." Rule 14a-4(a)(2).
3)
clearly and impartially identify the matters to be voted upon.
Rule 14a-4(a)(3).
4)
provide the shareholder with the opportunity to choose
between approval, disapproval or abstention with respect to all matters
to be voted upon other than the election of directors. Rule 14a-4{b)(I).
5)
set forth the names of each person nominated as a director
and provide the shareholder with a means by which to withhold
authority to vote for a particular nominee. If a means is provided for
the shareholder to grant authority to vote for the nominees as a group,
then a means must also be provided for the shareholder to withhold
authority to vote for the entire group. Rule 14a-4{b)(2).
6)
provide that the shares represented by the proxy will be
voted, and if the shareholder properly has indicated his or her choice
of approval, disapproval, or abstention, the proxy will be voted in
accordance with the shareholder's instructions. Rule 14a-4(e).
322.17 C.F.R. § 240. 14a-4{b)(I) (1998). Proxy forms generally contain language
such as: "THIS PROXY WILL BE VOTED IN THE MANNER DIRECTED ABOVE.
IF NO DIRECTION IS GIVEN, TIllS PROXY WIlL BE VOTED FOR THE ELECTION
OF ALL NOMINEES NAMED IN PROPOSAL (1) AND AGAINST [FOR] PROPOSAL
(2)". Bagley, Proxy Contests and Corporate Control, 20-3rd C.P.S. (BNA) at A-64 n. 28.
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discretionary authority upon the proxy holder to vote upon matters
which management, within a reasonable time before the proxy form
was mailed, did not know would be presented at the meeting.
The proxy statement is a detailed communication which must
clearly disclose all material informationll3 in such a manner that it
can be easily understood by the shareholders. 324 Schedule A
describes specific items that must be disclosed in the proxy
statement. These items include information regarding the person
who is making the solicitation,325 the directors and executive
officers,326 their compensation,327 as well as corporate financial
information.328
Rule 14a-2 requires any person who solicits proxies from
more than ten shareholders to comply with certain filing and
disclosure requirements. 329 The term "solicitation" is broad and
includes "[t]he ~shing of a form of proxy or other
communication to security holders under ~ircumstances reasonably
calculated to result in the procurement, withholding or revocation
of a proxy. ,,330 Thus, institutional investors which solicit ten or
more shareholders are subject to additional requirements and
restrictions. 331
Management's decision to solicit proxies from its
shareholders triggers a limited duty to include in its proxy
solicitation materials and at management's expense, certain
proposals sponsored by shareholders. 332 Shareholders must meet
certain holding requirements in order to take advantage of this rule.
The shareholder "must have continuously held at least $2,000 in
market value, or 1 % of the company's securities entitled to be
voted on the proposal at the [shareholder] meeting. ,,333 This flat
323.17 C.F.R. § 240.14a-9 (1998).
324.17 C.F.R. § 240.14a-5(a) (1998).
. 325.17 C.F.R. § 240. 14a-l01 Schedule 14A (Item 4) (1998).
326.17 C.F.R. § 240.14a-l01 Schedule 14A (Item 7) (1998).
327.17 C.F.R. § 240.14a-101 Schedule 14A (Item 8) (1998).
328. 17 C.F.R. § 240.14a-l0l Schedule 14A (Item 13) (1998).
329.17 C.F.R. § 240. 14a-2(b)(2) (1998).
330. 17 C.F.R. § 240.14a-l(I)(I)(iii) (1998).
331. 17 C.F.R. § 240. 13(d) (1998).
332.17 C.F.R. § 240. 14a-8(a) (1998).
333. Shareholder Proposals, 63 Fed. Reg. (29119) (to be codified at 17 C.P.R. §
240. 14a-8).
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dollar amount was increased from $1,000 to $2,000, effective June
1998. While this change will probably not have a great impact on
institutional investors, it will affect individuals, some local unions,
and church groups. The shareholder must have held the securities
for at least one year and must continue to hold them through the
date of the meeting. ,,334 The shareholder may submit only one
proposal, regardless of the number of shares held335 and the
shareholder or a qualified representative must be present at the
annual meeting to present the proposal. 336 If the shareholder or a
representative does not attend the meeting to present the proposal,
the company can exclude all of the shareholder's proposals for
company meetings held during the next two years. 337 The
submission must be filed timely.338 The shareholder proponent must
limit the proposal and any supporting statement to five hundred
words. 339 The shareholder also is limited by subject matter.
Management may exclude certain proposals that relate to
elections,340 personal grievances,341 the ordinary business operations
of the company,342 the amount of dividends,343 matters that are not
proper subjects for shareholder action,344 those proposals which do
not meet the resubmission thresholds, and other categories.345
334.17 C.P.R. § 240.14a-8(a)(1) (1998).
335.17 C.P.R. § 240. 14a-8(a)(4) (1998).
336.17 C.P.R. § 240.14a-8(a)(2) (1998).
337.Id.
338.17 C.F.R. § 240.14a-8(a)(3) (1998).
339.17 C.F.R. § 240. 14a-8(a)(4) (1998).
340.17 C.F.R. § 240.14a-8(c)(7) (1998).
341. 17 C.P.R. § 240. 14a-8(c)(4) (1998).
342.17 C.P.R. § 240. 14a-8.(c)(7) (1998).
343.17 C.P.R. § 240.14a-8(c)(13) (1998).
344.17 C.F.R. § 240. 14a-8(c)(1) (1998). Applicable state law will detennine whether
a proposal is a proper subject for action.
345. The complete list of proper omissions is: 1) the proposal is not a proper subject
for shareholder action under the laws of the jurisdiction of the company's organization; 2)
the proposal would violate state, federal, or foreign law, if implemented; 3) the proposal
or supporting statement is contrary to any of the SEC proxy rules, including Rule 14a-9
which prohibits false or misleading statements in proxy soliciting materials; 4) the proposal
relates to a personal claim or grievance; 5) the proposal relates to operations which account
for less than five percent of the corporation's total assets and for less than five percent of
its net earnings and gross sales for the most recent fiscal year, and is otherwise not
significantly related to the corporation's business; 6) the proposal is beyond the company's
power to effectuate; 7) the proposal deals with a matter that relates to the corporation's
ordinary business operations; 8) the proposal relates to an election of office; 9) the proposal
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\
The 1998 amendments did not increase the resubmission
thresholds. The original rule required management to include
shareholder proposals that gained support from at least 3 % of the
vote if the proposal was made at least once in the previous five
years; 6% of the vote on its last submission to the shareholders if it
was proposed twice during the preceding five years; and 10% if
proposed three or more times during the last five years.346 The
proposed rules would have increased these limits to 6 %, 15 % and
30%. Fortunately, this proposal did not pass. The Investor
Responsibility Research Corporation predicted that an increase in
the minimum thresholds would have allowed the companies to
exclude 40 % of the proposals submitted.347
Although Rule 14a-8 curtails the right of shareholders to
make shareholder proposals, the Securities and Exchange
Commission has narrowly 'construed these exclusions. Proposals
which are advisory or precatory are typically allowed. 348 For
example, the SEC has permitted shareholder proposals relating to
South Africa,349 the environment,350 affirmative action,351 the
is contrary to a proposal which will be submitted by the corporation at the meeting; 10) the
proposal has been SUbstantially implemented; 11) the proposal substantially duplicates a
proposal already received by the corporation which will be included in the proxy materials
for the meeting; 12) the proposal deals with substantially the same subject matter as a
proposal submitted within the last five years, and certain timing and voting requirements
have been met; and 13) the proposal relates to specific amounts of cash or stock dividends.
17 C.F.R. § 240.14a-8(c)(I)-(13) (1998).
346.17 C.F.R. § 240.14a-8c(12)(I) (1998).
347. Kenneth Bertsch, Raised Resubmission Thresholds May Trim Shareholder
Resolutions, IVX CORP. Gov. BULL. 8 (July - Sept. 1997).
348. Eppler & Leibowitz, Dealing with Rule 14a-B Shareholder Proposals 8 (1990),
reprinted in PU, PROXY CONTESTS, INSTITUTIONAL INVESTOR INITIATIVES, MANAGEMENT
REsPONSES 1990779, 788 (1990).
349. Raytheon Co., 1990 SEC No-Act. LEXIS 556 (Mar. 28, 1990); USG
Corporation, 1990 SEC No-Act. LEXIS 450 (Mar. 12, 1990); The Dow Chemical Co.,
1990 SEC No-Act. LEXIS 323 (Feb. 16, 1990).
350. The Dow Chemical Company, 1991 SEC No-Act. LEXIS 377 (Mar. 6, 1991);
American Electric Power, 1991 SEC No-Act. LEXIS 24 (Jan. 3, 1991); Exxon Corp.,
1990 SEC No-Act. LEXIS 131 (Jan. 26, 1990); Exxon Corp., 1990 SEC No-Act. LEXIS
149 (Jan. 31, 1990); Knight-Ridder, Inc., 1990 SEC No-Act. LEXIS 193 (Feb. 2, 1990);
Union Pacific Corp., 1990 SEC No-Act. LEXIS 387 (Feb. 21, 1990).
351. See American Telephone & Telegraph Co., 1990 SEC No-Act. LEXIS 20, (Jan.
5, 1990); but see Wal-mart Stores, Inc., 1991 SEC No-Act. LEXIS 572 (Apr. 10, 1991).
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McBride Principles,352 golden parachutes,353 secret balloting,354
periodic reports by the board of directors to shareholders,355 poison
pillS,3S6 corporate finance,357 and independent directors. 3s8
The rules establish a "fairly simple and straightforward"
procedure: 3s9
A shareholder must send a copy of his or her
proposal to the company in time to meet the deadline
imposed by the rule. Generally, the company has
the burden of showing that it is entitled to exclude a
proposal. If the company intends to omit the
proposal from its proxy materials, it must first
submit its reasons to the SEC, and simultaneously
provide the proponent with a copy of its
submission.360
The company can exclude proposals which:
(1)
(2)
(3)
are improper under state law;
would, if implemented, violate the law;
contain materially false or misleading statements;
(4)
relate to the redress of a personal grievance;
(5)
relate to operations which account for less than 5
percent of the company's total assets at the end of its most
352. V. F. Corporation, 1991 SEC No-Act. LEXIS 319 (Feb. 21, 1991); Mobil
Corp., 1990 SEC No-Act. LEXIS 167 (Feb. 7, 1990).
353. State Bank of Long Island, 1991 SEC No-Act. LEXIS 497 (Mar. 28, 1991);
Eastman Kodak Company, 1991 SEC No-Act. LEXIS 160 (Jan. 30, 1991); TPI
Enterprises, Inc., 1990 SEC No-Act. LEXIS 480 (Mar. 13, 1990); The Pittson Company,
1990 SEC No-Act. LEXIS 328 (Feb. 15, 1990).
354. Amoco Corporation, 1990 SEC No-Act. LEXIS 234 (Feb. 14, 1990); Mobil Oil
Corp., 1990 SEC No-Act. LEXIS 359 (Feb. 28, 1990).
355. Centerior Energy Corp., 1990 SEC No-Act. LEXIS 367 (Feb. 23, 1990).
356. Champion International Corp., 1990 SEC No-Act. LEXIS 451 (Mar. 13, 1990).
357. Crane Company, 1990 SEC No-Act. LEXIS 407 (Mar. 1, 1990).
358. Dillard Department Stores, Inc., 1991 SEC No-Act. LEXIS 403 (Mar. 7, 1991);
Waste Management, Inc., 1991 SEC No-Act. LEXIS 450 (Mar. 8, 1991); Tribune
Company, 1991 SEC No-Act. LEXIS 360 (Mar. 7, 1991); The Dow Chemical Company,
1991 SEC No-Act. LEXIS 391 (Mar. 7, 1991).
359. JAMES HAMILTON, 1998 SEC PROXY REFORM: SHAREHOLDER PROPOSALS (1998).
360. [d. at 10.
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recent fiscal year, and for less than 5 percent of its net
earnings and gross sales for its most recent fiscal year, and
is not otherwise significantly related to the company's
business;
(6)
the company lacks authority to implement;
(7)
deal with the company's ordinary business
operations;
(8)
relate to an election of the board of directors;
.(9)
conflict with a management proposal which will be
submitted at the same meeting;
(10) the company already has substantially implemented;
(11) substantially duplicates another proposal already
submitted by a shareholder that will be presented at the same
meeting;
(12) deal with the same subject matter as another proposal
that has previously been included in the company's proxy
materials within the last five years and the proposal is made
within three years of the last time the resolution was
included and the proposal received:
(i)
less than 3 % of the vote if proposed once in
the last five years;
(ii)
less than 6 % of the vote if proposed twice
within the last five years; and
(iii)
less than 10 % of the vote on its last
submission if proposed three or more times within
the last five years.
(13)
relate to specific amounts of dividends. 361
If the company plans to exclude a shareholder proposal, "it must file
its reasons with the Commission no later than 80 calendar days
before it files its definitive proxy statement with the
Commission. ,,362 The company must include an "explanation of why
. the company believes that it may exclude the proposal, which
should, if possible, refer to the most recent applicable authority,
361.17 C.F.R. § 240.14a-8(i)(1998).
362.17 C.F.R. § 240.14a-8G)(2)(1998).
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such as prior Division letters issued under the rule. ,,363 The
shareholder may, but is not required to submit a response to the
company's arguments. 364
The SEC's staff will issue a written response in which it
concurs or declines to concur with the company's reasoning. 365 This
letter is not legally binding and "does not necessarily reflect the
SEC's view. ,,366 A company or shareholder who disagrees with the
SEC's opinion may seek a legally binding decision from a federal
court.
B. Cracker Barrel
In 1993, the SEC affirmed" a staff-issued no action letter
which stated that Cracker Barrel could omit, under the ordinary
business exclusion, a proposal submitted by NYSCERS, that the
company adopt a non-discrimination employment policy with
respect to sexUal orientation. 367 In a no-action letter, the staff had
stated that a shareholder proposal concerning a company's
employment policies which is tied to a social issue, will no longer
be viewed as removing the proposal from the ordinary business
operation exclusion. 368 The SEC afftrmed this decision and
NYSCERS ftled a suit in federal court. 369 The SEC's decision was
affirmed. 370
The Cracker Barrel decision has created a controversy since
the no action letter was issued. In the amended shareholder proposal
rules, the SEC reversed its decision in Cracker Barrel. 371 The
Commission will decide all future employment-related proposals
363.Id.
364.17 C.F.R. § 240. 14a-8(k)(1998).
365. HAMILTON, supra note 359, at 10.
366.Id. See NYCERS v. SEC, 45 F.3d 7 (2d Cir. 1995); NYSCERS v. American
Brands, 634 F. Supp. 1382 (S.D.N.Y. 1986).
"
367. Cracker Barrel Old Country Store, 1992 SEC No-Act. LEXIS 984 (Oct. 13,
1992).
368. See Letter from Jonathan G. Katz, Secretary to the Commission, to Sue Ellen
Dodell, Deputy Counsel, Office of the Comptroller, City of New York (Jan. 15, 1993).
369. Amendments to Rules on Shareholder Proposals, Exchange Act Release No.
40,018 [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) , 86,018, at 80,541 (May 21,
1998).
370.Id.
371.Id.
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which raise social policy issues on a case-by-case basis. 3n The SEC
plans to "use the most well-reasoned and consistent standards
possible, given the inherent complexity of the task. ,,373 The SEC
"aCImowledge[s] that there is no bright line test to determine when
employment-related shareholder proposals raising social issues fall
within the scope of the 'ordinary business' exclusion, [however],
the staff will make reasoned distinctions in deciding whether to
furnish 'no-action relief.' ,,374 The SEC cautioned that Cracker
Barrel only "relates to employment-related proposals raising certain
social policy issues. Reversal of the position does not affirm the
Division's analysis of any other category of proposal under the
exclusion, such as proposals on general business operations. ,,375
C. Discretionary Voting
A company is given authority to vote discretionary proxies
which shareholders have signed and returned, on matters which are
not specifically mentioned on the proxy card and which the
shareholders did not have the opportunity to vote on by proxy.
When a shareholder submits a shareholder proposal, "but the
company properly excludes the proposal, under Rule 14a-4, the
company has discretionary authority to vote uninstructed proxies
against that proposal if the shareholder chooses an alternate route
for its presentation to vote. ,,376 For example, the shareholder may
intend to present the proposal from the floor at the annual meeting,
or -may intend to solicit proxies through its own proxy statement and
form. 377
The prior rule allowed the company to exercise voting
authority on proposals that it did not know of a reasonable time
before the meeting. Because of the uncertainty of the phrase "a
reasonable time," the Commission amended the rules to provide for
clear guidance.
-
372.Id.
373. See Amendment to RuIes on Shareholder Proposals, supra note 369, at preamble.
374.Id:
375.Id.
376. HAMILTON, supra note 359, at 16.
377.Id.
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Under the amended shareholder proposal rules, discretionary
voting authority will be conferred on a company where the company
did not have notice of a matter "more than 45 days before the month
and day in the current year corresponding to the date on which the
company fIrst mailed its proxy material for the prior year's annual
meeting of the shareholders, or by a date established by an
overriding advance notice provision. ,,378 The SEC provides an
example:
[Assume] a company mailed this year's proxy
materials on March 31, 1998, for an annual meeting
on May 1, 1998. Next year, the company also
schedules an early May annual meeting. The notice
date established by new Rule 14a-4(c)(1) for non14a(8) proposals is 45 calendar days before March
31 or February 2. Thus, February 14, 1999 would
represent the notice date for the purposes of amended
Rule 14a-4(c)(1) unless a different date is established
by an overriding advance notice provision in the
company's charter or bylaws. 379
The rule also has been amended to clarify the company's authority
to exercise discretionary voting authority where the company has,
in its proxy materials, informed the shareholder of the nature of
proposals that may be raised. In Idaho Power 80 and Borg Wamer,381
the SEC stated that companies are required only to "advise"
shareholders, not "discuss" the nature of proposals that may be
raised. 382 Because the SEC did not intend to "depart ... from the
disclosure element of the Division's no action position, paragraph
(c)(2) as adopted replaces the word 'discussion' with 'advice. ",383
378.ld. This provision is not written in plain English. Fortunately, the SEC provides
an example.
379. Amendments to Rules on Shareholder Proposals, Exchange Act Release NO.
40,018 [Current Transfer Binder] Fed. Sec. L. Rep. (CCIl) ~ 86,018, at 80,541 (May 21,
1998).
380. 1996 SEC No-Act. LEXIS 352 (Mar. 13, 1996).
381. 1996 SEC No-Act. LEXIS 368 (Mar. 14, 1996).
382. See Amendment to Rules on Shareholder Proposals, supra note 379, at 80,542.
383.ld.
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107
CORPORATE GOVERNANCE STANDARDS
Corporate governance standards have proliferated in the last
year. In 1998, the Council on Institutional Investors ("Cll") and
CalPERS adopted new corporate governance standards. 384
A. Council ofInstitutional Investors
Cll approved an updated version of its Shareholder Bill of
Rights in March 1998.385 The revised standards are guidelines, not
mandates:
Council policies bind neither members nor
corporations. They are designed to provide
guidelines that the Council has found to be
appropriate in most situations. Most of the following
policies have withstood the test of over a decade of
corporate experience. But members are aware that
situations vary and Council members only raise
policy issues in particular situations when underlying
facts warrant. 386
The BiJl of Rights is drafted around five core policies:
CORE POLICIES
1.
Directors should be elected annually by confidential
ballots counted by independent tabulators. Confidentiality
should .be automatic and permanent; Rules and practices
concerning the casting, counting and verifying of
shareholder votes should be clearly disclosed.
2.
At least two-thirds of a corporation's directors should
be independent. A director is deemed independent if his or
384. Rosemary Lally, CalPERS, Cil Approve Comprehensive Sets of Corporate
Governance Standards, XV IRRC CORP. Gov. BULL. 1 (Jan. - Mar. 1998).
385.Id.
386. Council of Institutional Investors, Core Policies, (visited Nov. 13, 1998)
< http://www.ciicentral.comlciicentral/core-policies.htm. > .
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her only non-trivial professional, familial or fmancial
connection to the corporation or its CEO is his or her
directorship.
3.
A corporation should disclose information necessary
for shareholders to determine whether each director qualifies
as independent, whether or not the disclosure is required by
state or federal law. Corporations should disclose all
payments to directors and their families and all significant
payments to companies, non-profits, foundations and other
organizations they serve as employees, officers or directors.
4.
All members of aboard's nomination, audit and
compensation committees should be independent. 387
Committees should hav~ the opportunity to select their own
chairs and service providers. Some regularly scheduled
committee meetings should be held with only the committee
387. An independent director is "someone whose only nontrivial connection to the
corporation is that person's directorship." [d. at Explanatory Notes. A director will not
generaJly be considered independent if he or she:
(a) has been employed by the corporation or an affiliate in an executive
capacity;
(b) is, or in the past two years has been, an employee or owner of a
firm that is one of the
corporation's or its affiliate's or the CEO's paid advisers or
consultants;
(c) is employed by a significant customer or supplier;
(d) has, or in the past two years has had, a personal services contract
with the CEO, the corporation or one of its affiliates;
(e) is employed by a foundation or university that receives significant
grants or endowments from the corporation or one of its affiliates;
(f) is a relative of an executive of the corporation or one of its
affiliates; and
(g) is part of an interlocking directorate in which the CEO or other
executive officer of the
corporation serves on the board of another corporation that employs
the director.
(h) A payment to a non-profit corporation, foundation, or other
organization for which a director serves as an employee, officer or
director is significant if the corporate contribution is more than
$100,000 or one percent of annual donations received, whichever is
less, or if the director is the direct beneficiary of any donation to such
an organization.
[d.
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members (and, if appropriate, the committee's independent
consultants) present. The process by which committee
members and chairs are selected should be disclosed to
shareholders.
5.
A majority vote of common shares outstanding
should be required to approve major corporate decisions
concerning the sale or pledge of corporate assets which
would have a material effect on shareholder values. 388
The Bill of Rights also sets forth ell's positions on common
shareholder issues such as Board shareholder accountability ,389
388. Council of Institutional Investors, Core Policies, supra note 386.
389. CIT's position is:
Shareholders' right to vote is inviolate and should not be abridged.
Corporate governance structures and practices should protect and
enhance accountability to, and equal financial treatment of,
shareholders. An action should not be taken if its purpose is to reduce
accountabiiity to shareholders.
Shareholders should have meaningful ability to participate in the major
fundamental decisions that affect corporate viability.
Shareholders should have meaningful opportunities to suggest or
nominate director candidates.
Shareholders should have meaningful opportunity to suggest processes
and criteria for director selection and evaluation.
Absent special circumstances, companies should encourage directors
to acquire and maintain a meaningful position in company common
stock.
Absent compelling and stated reasons, directors who attend fewer than
75 percent of board and board-committee meetings for two years
running should not be renominated. .
.
Boards should evaluate themselves and their individual members on a
regular basis. Board evaluation should include an assessment of
whether the board has the necessary diversity of skills, backgrounds,
experiences, ages, race and gender valuable to the company's on-going
needs. Individual director evaluations should include high standards for
in-person attendance at board and committee meetings and disclosure
of all absences or conference call substitutions.
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Board size and service390 Board meetings and operations ,391 and
Compensation. 392 cn provides guidance on a number of concerns
[d.
390. Cll's position is:
A board should neither be too small to maintain the needed expertise
and independence, nor too large to be efficiently functional. Absent
compelling, unusual circumstances, a board should have no fewer than
5 and no more than 15 members. Shareholders should be allowed to
vote on any major change in board size.
Companies should set and publish guidelines specifying on how many
other boards their directors can serve. Absent unusual, specified
circumstances, directors with full-time jobs should not serve on more
than two other boards. If the director is a currently serving CEO; he
or she should only serve as a director of one other company, and do so
only if the CEO's own company is in the top half of its peer group.
Board service guidelines should also cover maximum directorships or
other outside commitments for directors who do not hold full-time
jobs.
Council of Institutional Investors, Core Policies, supra note 386.
391. Cll's position is:
Directors should be provided meaningful information in a timely
manner prior to board meetings. Directors should be allowed
reasonable access to management to discuss board issues.
Directors should be allowed to place items on board agendas.
Directors have an affirmative obligation to stay up to date on
developments in finance, accounting and corporate governance.
Directors have an affirmative obligation to become and remain
independently familiar with company operations-directors should not
'rely exclusively on information provided to them by the CEO to do
their jobs.
The board should hold regularly scheduled executive sessions at which
only directors (and no staff) are present in person. Independent
directors should also hold regularly scheduled in-person executive
sessions.
If the CEO is chairman, a contact director should be specified for
directors wishing to discuss issues or add agenda items that are not
appropriately or best forwarded to the chair/CEO.
The board should approve and maintain a CEO succession plan.
Council of Institutional Investors, Core Policies, supra note 386.
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voiced by institutional shareholders during the 1998 proxy season.
For example, in response to the bundling of shareholder proposals
by Marriott and·other corporations, Cll's policy states:
Shareholders should be allowed to vote onumelated
issues individually.
Individual voting issues,
particularly those amending a company's charter, bylaws or anti-takeover provisions, should not be
bundled. 393
The Council also addresses the common concern that corporations
frequently ignore shareholder proposals which receive a majority
vote but do not pass:
A majority vote of common. shares outstanding
should be sufficient to amend company bylaws or
take other action requiring or receiving a shareholder
vote.
The Council suggests that if a non-binding proposal receives a
majority vote of votes cast for and against the proposal for two
consecutive years, it should be voted on at the next shareholder
meeting as a binding proposal. This policy would not apply "if the
resolution requested the sale of the company and within the last six
months the board retained an investment banker to seek buyers and
no potential buyers were found. ,,394 The Council also recommends
that non-votes and absentions by brokers should be counted for the
purpose of a quorum only, and should not be counted for votes
which require less than a majorIty of outstanding shares. 395
392. Equity-based pay for directors and managers should be indexed to peer or market
groups, absent unusual and specified reasons for not doing so. Boards should consider
options with forward contracts to align managers' interests with shareholders'. Id.
393.Id.
394. Council of Institutional Investors, Core Policies, supra note 386.
395.Id.
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B. CalPERS
CalPERS has adopted U.S. Corporate Governance Core
Principles and Guidelines. 396 In its introduction, CalPERS quotes
attorney Ira Millstein:
Darwin learned that in a competitive environment an
organism's chance of survival and reproduction is
simply not a matter of chance. If one organism has
even a tiny edge over the others, the advantage
becomes amplified over time. In "The Origin of the
Species, " Darwin noted, c~ grain in the balance will
determine which individual shall live and which shall
die. " I suggest that an independent, attentive board
is the grain in the balance that leads to a corporate
advantage. A performing board is most likely to
respond effectively to a world where the pace of
change is accelerating. An inert board is more likely
to produce leadership that circles the wagons. 397
CalPERS, like crr, has adopted a set of core principles which are
recommendations, not mandates. CalPERS states its belief that the
"criteria contained in both the Principles and Guidelines are
important considerations for all companies within the U.S. market.
However, CalPERS does not expect nor seek that each company
will adopt or embrace every aspect of either the Principles or
Guidelines. ,,398
CalPERS recognizes that some of these may not be
appropriate for every company due to differing
developmental
stages,
ownership
structure
competitive environment, or a myriad of other
distinctions. CalPERS also recognizes that other
approaches may equally -- or perhaps even better -396. CaIPERS, U.S.
(1998).
397. [d. at 6.
398. [d. at 7.
CORPORATE GOVERNANCE CORE PRINCIPLES AND GUIDELINES
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achieve the desired goal of a fully accountable
governance structure. CalPERS has adopted these
Principles and Guidelines to advance the corporate
governance dialogue by presenting the views of one
shareholder, but not to attempt to permanently
enshrine those views. 399
The Core Principles consist of three issues: Board Independence and
Leadership, Board Processes and Evaluation, and Individual
Director Characteristics. With respect to Board Independence and
Leadership, CalPERS suggests that:
1.
A substantial majority of the board consists of
directors who are independent. 4OO
2.
Independent directors meet periodically (at least once
a year) alone, without the CEO or other non-independent
directors.
399.ld.
400. CalPERS, u.s. CORPORATE GOVERNANCE CORE PRINCIPLES AND GUIDELINES
(1998). An "independent director" means a director who:
· has not been employed with the Company in an executive capacity
within the last five years.
· is not, and is not affiliated with a company that is, an adviser or
consultant to the Company or a member of the Company's senior
management;
· is not affiliate with a significant customer or supplier of the
Company;
· has no personal services contract(s) with the Company, or a member
of the Company's senior management;
· is not affiliated with a not-for-profit entity that receives significant
contributions from the Company.
· within the last five years, has not had any business relationship with
the Company (other than services as a director) for which the
Company has been required to make disclosure under Regulation S-K.
of the Securities and Exchange Commission;
· is not employed by a public company at which an executive officer
of the company serves as a director;
· has not had any of the relationships described above with any affiliate
of the Company; and
· is not a member of the immediate family of any person described
above.
ld. at app. B-1.
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3.
When the chair of the board also serves as the
company's chief executive officer, the board's designates formally or informally -- an independent director who acts
in a lead capacity401 to coordinate the other independent
directors.
4.
Certain board committees consist entirely of
independent directors. These include the committees who
perform the following functions:
•
•
•
Audit
Director Nomination
Board Evaluation & Governance
401. A Lead Independent Director has responsibility to:
• advise the Chair as to an appropriate schedule of Board meetings,
seeking to ensure that the independent directors can perform their
duties responsibly while not interfering with the flow of Company
operations;
· provide the Chair with input as to the preparation of the agendas for
the Board and Committee meetings;
· advise the Chair as to the quality, quantity and timeliness of the flow
of information from company management that is necessary for the
independent directors to effectively and responsibly perform their
duties; although Company management is responsible for the
preparation of materials for the Board, the Lead Independent Director
may specifically request the inclusion of certain material;
· recommend to the Chair the retention of consultants who report to the
Board;
· interview, along with the chair of the [nominating committee], all
Board candidates, and make recommendations to the [nominating
committee] and the Board;
· assist the Board and Company officers in assuring compliance with
and implementation of the Company's [Governance Guidelines]
principally responsible for recommending revisions to the [Governance
Guidelines] ;
· coordinate, develop the agenda for and moderate executive sessions
of the Board's independent directors; act a principal liaison between
the independent directors and the Chair on sensitive issues;
· evaluate, along with the members of the [compensation committee],
the CEO's performance; meet with the CEO to discuss the Board's'
evaluation; and
· recommend to the Chair the membership of the various Board
Committees, as well as selection of the Committee chairs.
Id. at app. A.
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CEO
Eval~ation
and
Compensation
•
Compliance and Ethics
115
Management
5.
No director may also serve as a consultant or service
provider to the company.
Director compensation is a combination of cash and
stock in the company. The stock component is a
significant portion of the total compensation. 402
The Core Principles also set forth guidelines for Board Processes
and
Evaluation:
,
1.
The board has adopted a written statement of its own
governance principles, and regularly re-evaluates them.
2.
With each director nomination recommendation, the
board considers a mix. of director characteristics,
experiences, diverse perspectives and skills that is most
appropriate for the company. 403
3.
The board establishes performance criteria for itself,
and periodically reviews board performance against those
criteria.
4.
. The independent directors404 establish performance
criteria and compensation incentives for the CEO, and
regularly reviews the CEO's performance against those
criteria. 405 The independent directors have access to
402. u.s. CORPORATE GOVERNANCE CORE PRINCIPLES AND GUIDELINES, supra note
397, at 7-8.
403. CalPERS further suggests that the "board take steps as may be appropriate to
ensure that the board maintains an openness to new ideas and a willingness to critically
examine the status quo." Id. at 10. Also, the board should make sure that director
nominees have a background in "accounting or finance, international markets, business or
management experience, industry knowledge, customer-base experience or perspective,
crisis response, or leadership or strategic planning." Id. at 11.
404. CalPERS also recommends that "[c]orporate directors, managers, and
shareholders come together to agree on a uniform defmition of 'independence.'" U.S.
CORPORATE GOVERNANCE CORE PRINCIPLES AND GUIDELINES, supra note 396, at 11.
405. CalPERS also recommends that "boards should re-examine the traditional
combination of the 'chief executive' and 'chairman' positions." Id.
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advisers on this subject, who are independent of
management. Minimally, the criteria ensure that the CEO's
interests are aligned with the long-term interests of the
shareholders, that the CEO is evaluated against comparable
peer groups, and that a significant portion of the CEO's total
compensation is at risk. 406
The last of the Core Principles focuses on the characteristics of
individual directors:
The board has adopted guidelines that address the competing
time commitments that are faced when director candidates
serve on multiple boards. These guidelines are published
annually in the company's proxy statement. 407
CalPERS also includes in its Corporate Governance Guidelines a list
of shareholder rights:
1.
A majority of shareholders should be able to amend
the company's bylaws by shareholder proposal.
2.
A majority of shareholders should be able to call
special meetings.
3.
A majority of shareholders should be able to act by
written consent,
4.
Every company should prohibit greenmail.
No board should enact nor amend a poison pill
5.
except with shareholder approval.
6.
Every director should be elected annually.
7.
Proxies should be kept confidential from the
company, except at the express request of shareholders.
8.
Broker non-votes should be counted for quorum
purposes only.
9.
Any shareholder proposal that is approved by a
majority of proxies cast should either be implemented by the
board, or the next annual proxy statement should contain a
406. [d. at 9.
407. U.S. CORPORATE GOVERNANCE CORE PRINCIPLES AND GUIDELINES, supra note
396, at 9.
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detailed explanation of the board's reasons for not
implementing.
10.
Shareholders should have effective access to the
director nomination process. 408
William Crist, president of the CalPERS Board, has stated that the
principles "represent the evolution and ongoing development of
CalPERS' corporate governance program. We hope they will
further strengthen independence in America's board rooms and
influence the corporate governance movement toward greater
consensus on corporate governance standards. ,,409
C. Voting Proxies ofForeign Corporations
In Interpretive Bulletin 94-2, the Department noted that
although its previous opinion letters did not address the voting of
proxies on shares of foreign corporations, the same principles
apply: "[p]lan fiduciaries have a responsibility to vote proxies on
issues that may affect the value of the shares in the plan's
portfolio. ,,410 However, the Department noted that the exercise of
voting shares of foreign corporations may entail additional costs to
the plan. Where the costs of voting on a particular proposal might
"exceed any benefit the plan could expect to gain in voting on the
proposal, ,,411 the plan fiduciary must "weigh the costs and benefits
of voting on [the] proxy proposal . . . and make an informed
decision with respect to whether voting a given proxy proposal is
prudent and solely in the interest .of the plan's participants and
beneficiaries. ,,412 The Department advised that a fiduciary, when
making this decision must "take into account the effect that the
plan's vote, either by itself or together with other votes, is expected
to have on the value of the plan's investment and whether this
expected effect would outweigh the cost of voting. ,,413 The
408. Id. at 12.
409. Lally, supra note 384, at 4.
410. Id.; Interpretive Bulletins, supra note 18.
411. Lally, supra note 384, at 4.
412.Id.
413.Id.
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fiduciary should also consider whether the difficulty and expense of
voting the shares is reflected in the market price of the shares.414
According to a recent survey, more than seventy-five
percent of shareholders hold foreign equities. 415 Over twenty.:.five
percent of institutional investors surveyed reported that their goals
include development of a global set of corporate governance
standards. 416 The figures are higher for the development of standards
in France (60%), Australia (52%), and Britain (27%).417 A recent
study by a Brussels firm, Dminor, found that "[c]ompanies that
practice good corporate governance and submit such information as
part of their listing requirements tend to perform better, achieve
higher returns and attract more capital. ,,418 English corporations
performed best, according to the study, because of "both the
recommendations from the Cadbury and the Greenbury reports, and
the fact that corporate governance standards are part of the London
Stock Exchange's listing requirements. ,,419 French firms performed
second best, possibly because although French corporations adopted
codes similar to England's in 1995, the requirements were not made
part of the Paris Stock Exchange listing requirements. 420 The study
reported that the Nethedands,421 Belgium, and Sweden422 markets
414.Id.
415. Kenneth N. Gilpin, Shareholders Push for Tighter Rules Abroad, N.Y.T1MES,
at D-2 (Apr. 6, 1998) (quoting a survey conducted by WirthIin Worldwide, Furthering the
Global Dialogue on Corporate Governance.)
416.Id.
417.Id.
418. Higher Corporate Governance Standards Can Increase Returns, Study Claims,
11 lNT'L SEC. REG. REp. (Feb. 12, 1998) [hereinafter Higher Corporate Governance
Standards]. The report examined performance in four categories:
Information to shareholders;
Rights and duties of shareholders;,
Board structure;
Absence of takeover defeses.
Id.
419.Id. (quoting Shervin Setareh, corporate governance analyst for Dminor.)
420.Id.
421. The Netherlands scored the highest in protecting companies from hostile takeover
attempts. Higher Corporate Governance Standards, supra note 418.
422. Sweden however, ranked second in providing "good information on the
composition of company boards." Id.
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are "gaining momentum, ,,423 while corporations in Germany,
Switzerland,424 Italy, and Spain are "lagging behind. ,,425
Assets of Japanese pension funds have increased twenty-five
percent between 1990426 and 1995. 427 Canadian pension fund assets
increased thirty-five-fold since 1970. 428 German assets held by
institutional investors increased five-fold between 1980 and 1995,
while French assets .increased nearly twenty-fold over the same
period.429
D. OEeD and Other Groups
An advisory group to the Organisation for Economic
Cooperation and Development has recommended that the OECD
establish international minimum standards for corporate governance.
The standards would be based on four criteria: fairness,
transparency, accountability, and responsibility.430 The advisory
group, while noting that corporate governance is the responsibility
of the private sector, recommends that OECD:
•
encourage member countries to adapt their corporate
governance. regulatory frameworks to changing competitive
and market forces;
•
formulate minimum international standards of
corporate governance designed to promote fairness,
transparency, accountability, and responsibility;
•
issue suggested guidelines for voluntary "best
practices" for boards to improve accountability, as well as
encompass board independence;
423.Id.
424. Switzerland had the strongest investor relations. Id.
425. Higher Corporate Governance Standards, supra note 418.
426.Id.
427. Wall Street Walk Being Replaced with Wall Street Talk: Corporate Governance
Changes Spurred by Increased Voice ofShareholders Worldwide, Bus. WK. (July 9, 1998).
428.Id.
429.Id.
430. Rosemary Lally and Kenneth A. Bertsch, OECD Recommends Adoption of
International Governance Standards, XV CORP. Gov. BULL. 5 (Jan•• - Mar. 1998); see
also Ira M. Millstein, Corporate Governance and Global Markets: The OECD Business
Sector Advisory Group Report, METRO. CORP. COUNSEL 1 (June 1998).
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•
encourage common principles for addressing the
comparability, reliability, and enforcement of corporate
disclosure; and emphasize the impact which changes in
corporate governance practices would have on society at
large, and on the need to clarify responsibilities between the
public and private sectors. 431
The European Corporate Governance Network ("ECGN"), the
International Corporate Governance Network ("ICGN"),432 and the
Asia-Pacific Economic Cooperation ("APEC") also are in the
process of preparing for the adoption of corporate governance
standards. 433
CalPERS has also adopted international corporate
governance standards.434 These standards are focused on five issues:
431. aCED Recommends Adoption, supra note 430, at 5.
432. Laura Mahoney, International Group to Circulate Draft of Global Governance
Principles, 25 Pen. & Ben. Rep. (BNA) 1637 (July 20, 1998). The draft guidelines make
the following recommendations:
· Corporate communications shall disclose adequate and timely
information, so as to allow investors to make informed decisions about
the acquisition, ownership, obligations and sale of its stock;
· Voting rights: Ail shareholders shall be treated equally and according
to their capital at risk. Corporations shall act to insure the owners'
right to vote. Fiduciary owners have a responsibility to vote.
Regulators and law should serve to facilitate voting rights;
· Corporate boards: The board of directors as an entity, and each
director as an individual, is a fiduciary for all shareholders, and must
be accountable to the shareholder body as a whole. Boards shall
consist of sufficient independent directors to influence the conduct of
the board as a whole;
· Corporate remuneration: Remuneration of corporate officials,
including officers and directors, shall be congruent with the interests
of shareholders;
· Shareholder returns: The basic goal of a company shall be to
optimize the economic return to shareowners over the long term;
· Investment dialogue: Shareowners, corporate officials, and other
concerned parties shall exert their best efforts to avoid confrontation
and/or litigation, by maintaining ongoing dialogue. Dissension should,
whenever possible, be resolved through negotiation, mediation, or
arbitration.
Id.
433. Jason Stuart, Recent Initiatives in Global Corprate Standards, xv CORP. Gov.
BULL. 20 (Apr. - June. 1998).
434. CalPERS, CalPERS' Global Principles for Corporate Governance ~1998).
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Principles -- CalPERS will develop a set of international
corporate governance principles for each market of study.
Participation -- CaIPERS will participate in the current
corporate governance debate in working groups and
committees in each country.
Outreach -- CalPERS will meet with foreign companies,
representatives of foreign governments, academia, and
international organizations to discuss effective corporate
governance.
Communication - CalPERS will work cooperatively with
foreign companies and establish channels of communication.
Strategy Development -- CalPERS will coordinate its
corporate governance program with potential allies and
develop strategies that further its corporate governance
objectives. 435
CaIPERS also has adopted individual proxy voting guidelines for
Japan,436 the United Kingdom,437 Germany,438 and France. 439
Corporate governance reform is rampant. Pension funds in
Brazil have spearheaded corporate governance reform;440 Canadian
funds have successfully become activist;441 and Dutch shareholders
are in the process of implementing reforms. 442 Reform is also
underway in Japan,443 India,444 Indonesia,445 South Korea,446
Poland,447 and Thailand.448
435. CaiPERS, CalPERS' Global Principles for Corporate Governance (1998). See
also International Corporate Governance, (visited Sept. 7, 1998). <http://www.calpers
.ca.gov/invesUcorpgov/inticorpgov.htm> .
436. CaIPERS, Principles for Good Governance in Japan (1998).
437. CaIPERS, Principles for Good Governance in the United Kingdom(1998).
438. CaIPERS, Principles for Good Governance in France (1998).
439. CaIPERS, Principles for Good Governance in Germany (1998).
440. Luis Eduardo Arano, Brazil's Pension Funds Lookfor Investment Advice After
Spearheading Governance Reforms, XV CORP. GOY. BULL. 17 (Jan. - Mar. 1998).
441. Andrea Duskas, Canadian Shareholder Activist's Efforts Begin to Bear Fruit, XV
CORP. GOY. BULL.19 (Jan. - Mar. 1998).
442. Amy Denkenberger, Shareholders Speculate on Implementation of Dutch
Governance Reforms, IV CORP. GOY. BULL. 21 (Jan. - Mar. 1998).
443. Yasu Izumikawa, Japanese Banks' Governance Reform is Triggered by
Government Rescue Plan, xv CORP. GOY. BULL. 22 (Jan. - Mar. 1998).
444. Subodh Mishra, Introduction of Long-Awaited Governance Reforms Appears
Near, XV CORP. GOY. BULL. 18 (Jan. - Mar. 1998).
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VI. CONCLUSION
The 1998 proxy season shows that when pension funds talk,
Corporate America listens. No longer can U.S. or foreign
corporations afford to ignore pension funds as noisemaking,
annoying gadflies. Money talks, and with assets of $5.7 trillion,
pension funds can control the agenda.
445. Chris Plath, With the IMP Applying Pressure, Indonesia Undertakes Reform, XV
CORP. GOY. BULL. 16 (Jan. - Mar, 1998).
446. Shade Ajijo, To Attract Foreign Investors, S. Korea Adopts Governance Reforms,
XV CORP. GOY. BULL. 15 (Jan. - Mar. 1998).
447. S. Craig Dunn, A New Face for Corporate Governance in Poland, XV CORP.
GOY. BULL. 26 (Apr. - June 1998).
448. Jennifer Groff, Crisi Uncovers Needfor Reform in Thailand, XV CORP. GOY.
BULL. 14 (Jan. - Mar. 1998).
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CENTENNIAL ARTICLE
FOREWORD
Richard M. Daley
Mayor of Chicago
123
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