Reuters: Do social networks like Twitter belong in media?

Fri Jul 10, 2009 3:34pm EDT

By Alexei Oreskovic - Analysis

SUN VALLEY, Idaho (Reuters) - If there's one group of executives at this week's Sun Valley media and technology conference who ought to be in good spirits, it's the handful steering the fleet of Internet social networks.

The buttresses of old media institutions, from print to television, are under stress from the advertising downturn, but social media is thriving as the world flocks to the likes of Facebook, Twitter and LinkedIn.

But the glow of social media is tempered by the hazy business models underlying the Internet's latest trend. The world is talking about Twitter, but as far as anyone knows, the San Francisco-based microblogging site has yet to earn a dime.

So even as Twitter's Evan Williams and Facebook's Mark Zuckerberg were seen conversing with CEOs from Google Inc to DreamWorks Animation SKG Inc and Amazon.com Inc to Dell Inc, there were no signs these talks would soon lead to the deals that have made the Allen & Co conference famous.

Indeed, Rupert Murdoch said Twitter would be a tough investment to justify for News Corp because it has not yet come up with a sustainable way to make money.

"Be careful of investing here," Murdoch told reporters.

Sony Corp Chief Executive Howard Stringer was similarly blunt.

"A lot of people are doing very well making very little money," he said, when asked about opportunities in social media. "That's not a club I'm willing to join."

Early combinations between old and new media, such as News Corp's acquisition of MySpace for $580 million in 2005, offer reasons for caution.

Once the top dog in social media, MySpace's popularity has been overtaken by Facebook. And when MySpace's $900 million advertising deal with Google comes to an end in July 2010, it's not clear what the future holds for the site.

Google CEO Eric Schmidt was coy when asked if he would renew the three-year deal with MySpace at $900 million.

"Never say never," he told reporters, but then talked about changes in the marketplace that could affect the terms of any deal. "We have more tricks up our sleeve now."

PAID VS FREE

Sales of traditional media staples such as newspapers and DVDs are in a multiyear and seemingly inexorable decline. By contrast, Facebook's active users doubled in eight months to top 200 million in April and U.S. visitors to Twitter surged 83 percent that month over March, according to comScore.

Social media and user-generated content have achieved a level of legitimacy in recent months as people turned to Twitter and Google's YouTube for up-to-the-minute information about major news events such as Iran's post-election protests.

"Everybody is talking about Twitter," Liberty Media Corp Chairman John Malone said. "It's got wonderful promotional juice because so many celebrities are talking about it and using it."

But he added: "It's pretty hard to think of an advertiser base for Twitter, but maybe some creative person will come up with it."

Much of the talk at Sun Valley revolved around whether social media should be free for consumers and supported by advertising, or if a fee-based business model was better.

What is also unclear is whether social networks belong under the roof of Internet companies or traditional media.

Internet entrepreneur Marc Andreessen and others have criticized MySpace under News Corp for focusing too much on selling ads and not enough on innovation.

"The issue is how do you continue to run Internet companies as Internet companies and making sure you keep that DNA," said LinkedIn founder Reid Hoffman at Sun Valley.

While News Corp's acquisition of MySpace may not be a home run, Google's $1.6 billion purchase of YouTube shows tech companies have not fared much better -- most analysts believe YouTube operates as an unprofitable unit within Google.

Still, Ironfire Capital's Eric Jackson, a former shareholder of Yahoo Inc, thinks social networks fit better with Web services offered by the likes of Google or Yahoo, than within declining traditional media businesses.

"There are questions around the revenue-generating horsepower behind some of these social networking sites," he said. "And just kind of bolting on a Twitter to a Viacom or a Time Warner, that's not going to do it."

(Additional reporting by Robert MacMillan and Yinka Adegoke, editing by Tiffany Wu and Andre Grenon)

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Ironfire Capital Letter to the SEC on why Proxy Access Needs to be Passed Now

I applaud that the SEC has taken quick steps to empower shareholders in the wake of the economic meltdown over the last 18 months. One issue still to be decided on is the issue of facilitating shareholders to nominate individuals to serve on a company's board. The issue will be voted on soon -- and hopefully won't be delayed (although the Business Roundtable has recently asked for one).

I recently submitted a letter to the SEC outlining why I think it's critical that the proposed amendments be passed. Here it is:

Ironfire Proxy Access Comment

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Minding the New York Fed

07/09/09 - 08:59 AM EDT

BAC , MS , GS , AIG , PEP , C , GE

Eric Jackson

We were all riveted last fall by the economic meltdown, which pulled down Lehman (now absorbed into Barclays (BCS Quote)) and Merrill (now part of Bank of America (BAC Quote) and forced many of us to consider the previously inconceivable outcome of a total collapse of the capital markets.

Through it all, then-Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and then-head of the New York Fed Tiimothy Geithner, tried to orchestrate an acceptable soft landing for all market participants. Many of the most pivotal planning sessions during that dark time happened at the offices of the New York Fed.

Yet, who was watching over the New York Fed at the time? As it turns out, many of the market actors were central in the drama playing out, including Lehman head Dick Fuld, who was a New York Fed director then.

Did Dick Fuld really deserve to have a say on whether BofA should buy Merrill, or on the fates of AIG(AIG Quote), Morgan Stanley (MS Quote) and Goldman Sachs (GS Quote)?

The board of directors of the New York Fed was poorly composed then, and it remains highly problematic today. Changes need to be made.

The New York Fed is basically the on-the-ground interface between Wall Street's biggest banks and the Federal Reserve. It plays part policy adviser, part diplomat and part message-runner between the two sometimes very different worlds. The bank plays a critical role in how policy is set and implemented.

During several critical moments last year (with the downfall of Bear and Lehman, the shotgun marriage between Merrill and BofA and later the pressuring of BofA to follow through with the merger) and no doubt in the future, the New York Fed has and will play a critical role in real-time decisions that can have ramifications on our markets and the broader economy for years.

It's reasonable to better understand who ultimately was responsible for directing and judging if Geithner was doing his job effectively last year. That responsibility falls on the New York Fed's board of directors.

That group is divided into three classes of directors three Class A directors who are from member banks and who are elected by member banks; three Class B directors who are elected by member banks to represent the interests of the public, and three Class C directors who are elected by the New York Fed's board of governors (who are all appointed by the president) to represent the interests of the public.

The Class A directors have been problematic in the last eight months. First, Fuld was one of them last fall when his firm became the focal point of concern for the entire U.S. financial system. Later, Stephen Freidman, then-chairman of the New York Fed and formerly with Goldman Sachs(GS Quote), was forced to resign amid revelations that he had purchased stock in his old firm -- raising questions about his impartiality overseeing the entire financial system.

There's no evidence that either Fuld or Friedman took any actions that benefitted either of those firms in their New York Fed roles, but, in matters of corporate governance, appearances count.
Currently, three of the nine seats on the New York Fed's board are vacant. It's not clear when they will be filled. Of the current directors, all three Class A directors are in place representing the interests of the member banks.

Jeff Immelt of General Electric(GE Quote) is the only Class B director. His job is to represent the public in that role. However, it's clear that his day job of overseeing GE Finance also makes him sympathetic to the needs of the member banks. Only two of the three Class C seats are filled (Lee Bollinger, the president of Columbia University, and Denis Hughes, the president of the New York State AFL-CIO).

Based on this composition, you could fairly make the case that the current board of the New York Fed is more weighted to look out for the interests of the bankers than the interests of the taxpayers and the broader economy. That needs to be immediately corrected. That means getting more experienced business executives like Pepsi(PEP Quote) CEO Indra Nooyi back on the board as Class B directors and replacing Jeff Immelt with another business executive who runs a company not as financially dependent as GE Finance.

Additionally, the open Class C position should be quickly filled with a director who is business savvy but will represent taxpayers first and foremost. Ideally, the Class C director should be someone who knows something about corporate governance and can bring that perspective to the New York Fed's board. Ira Millstein of the law firm Weil Gotshal & Manges would be fit the bill nicely.

There have been other bothersome governance issues cropping up at the New York Fed recently. It was recently reported that former New York Fed President Geithner advised the current board members to select his former lieutenant, William Dudley, as his replacement.

Although this happens a lot in companies (think Citigroup's(C Quote), Sandy Weill telling his board to replace him with then general counsel Chuck Prince), it is always a bad idea. Former CEOs and presidents can have cloudy judgment on these kinds of issues, affected by legacy or loyalty.

It's also been reported that it was due to Geithner's strong advice about hiring Dudley that former Class B director Nooyi recently stepped down from the board entirely. Take all these incidents together and you can't blame her.

The New York Fed plays a critical role in the healthy functioning of our capital markets. In my view, member danks deserve to have a seat at the table of the board of directors, but the majority of views should be separate from Wall Street and ensure that Wall Street's actions are serving the interests of the entire economy. The Federal Reserve and the U.S. government should immediately take steps to ensure that this organization's governance matches the standards they wish to see implemented in the big Wall Street banks they oversee.

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Best in Class: America's Top Boards

07/07/09 - 09:11 AM EDT

AMZN , JNJ , BRK-A , C , GE , IBM , GIS

Eric Jackson

It seemed an easy-enough question last week when someone asked me: What's the company in America with the best corporate governance? Yet, in trying to answer it, I was sent on a frustrating journey and a disappointing conclusion that there's no obvious winner. However, I'll name three good companies and look to address why it's so tough to answer the question.

In preparing this article, I reached out to some of the people I most respect in the world of corporate governance today: consultants, writers, bloggers, corporate secretaries and academics. Most of them were stumped by the question of what company is the best when it comes to corporate governance. It's certainly much easier to list 20 companies with bad governance for every company with good governance, which says a lot.

But three really good ones are Berkshire Hathaway(BRK.A Quote), Amazon.com (AMZN Quote) and Johnson & Johnson(JNJ Quote).

I'll revisit them later after I explain how I arrived at my conclusion.

To help spark my thinking, I searched the Web for recent corporate rankings of the best boards in corporate America. I came across a list from BusinessWeek from 2000. The top board on the list was General Electric (GE Quote), which unseated Campbell Soup(CPB Quote). Others near the top were IBM(IBM Quote), Home Depot(HD Quote), Intel (INTC Quote) and Cisco(CSCO Quote).

Since this ranking was issued, the combined stock returns of this group has been down 60% vs. negative 37% for the S&P 500. Three of the worst boards in 2000 in the rankings -- Walt Disney(DIS Quote), Rite Aid (RAD Quote) and Waste Management (WMI Quote) -- actually have slightly outperformed the best boards in the nine years since, but still returning on average negative 54% .

Ten years ago, GE's board was lauded for having a high number of outside directors who owned large amounts of stock in the company, which is worth 77% less today than it was back then. The board's largest move since 2000 was appointing Jeff Immelt as Jack Welch's successor rather than Bob Nardelli. It's hard to fault the board for that pick, given Nardelli's travails since then, but GE's shareholder base was frustrated with the stock's flat performance for the majority of this decade -- and that was before the wheels fell off last year with the concerns about GE Finance and its commercial real estate holdings.

Campbell Soup, the No. 1 corporate board of 1999 according to BusinessWeek, has lagged its peers like General Mills (GIS Quote) and Heinz(HNZ Quote) for a decade and barely treaded water with the S&P 500 over that time. Its stock is down 30% from 1999.

Finding the link between governance and performance has often vexed academics researching the link. At larger firms, with so many moving parts, it's often difficult to find the long-term performance effects of, say, separating the chairman and CEO roles.

''You are never going to be guaranteed total success,'' says Charles Elson, head of the Weinberg Governance Center at the University of Delaware. ''But good governance gives you protection when things go wrong. In the long run, that will play out.''

I spoke to Elson last week about the problem which many governance ratings have had in subsequently predicting company performance. He told me, in his view, that there were two critical governance factors which clearly showed a relationship to performance: (1) equity ownership of directors and (2) independence of directors.

I think he's right. Back in 2000, I was involved in a major research project which sought to link governance-related factors to subsequent company performance. The one factor which stood head-and-shoulders above any other was director stock ownership. And, by the way, owning stock through stock options or stock grants (the equivalent of "found money") didn't predict future company performance compared to when directors actually dug into their own pockets and purchased stock.

Board "independence" has been talked about often since the Enron and Worldcom scandals. We take it for granted that having a board stacked with family members or lawyers, accountants, and consultants who are paid by the company as directors is likely to produce more rubber-stamping boards than ones with more independent-minded people. However, there's still a lot of work to do in linking specific types of independent directors and company performance.

For example, I strongly believe having an independent director with industry experience is going to be more valuable in the long run compared with an independent director without that experience who doesn't want to speak up for fear of looking like a fool in front of the group. I also think too many boards lack diversity, in terms or ages, backgrounds or tenure on the board, which makes them collectively less independent thinkers than boards with such diversity. (However, adding a director for diversity's sake, without required business or industry experience, won't result in any new benefits for the group because such directors, again, will likely be too afraid to speak up.)

There's one more dimension I would add to the mix as being critical to finding a clear link between board governance and future company performance, and that's time to serve. If you go back and review the boards of the big failures from last year -- Lehman, AIG(AIG Quote) and Citigroup(C Quote) - all had a large number of directors who were too busy with other commitments to effectively serve as directors.

You had people like Anne Mulcahy and Andrew Liveris (CEOs of Xerox(XRX Quote) and Dow Chemical(DOW Quote), respectively) on Citi's board, who also served on Citi's audit committee, which is the most time-intensive of any board committee). When their own companies were seeing their stocks drop like stones last year, both Mulcahy and Liveris participated in 25 Citi board meetings and 12 audit committee meetings. In my view, they were stretched too thin from their day jobs to flag Citi's problems early enough.

Directors also can serve on too many other boards. Roland Hernandez who, in addition to serving on the board of Lehman and its "risk" committee (which failed if ever a board committee did), also served on the boards of MGM Mirage(MGM Quote), Ryland(RYL Quote), Vail Resorts (MTN Quote)and Wal-Mart(WMT Quote). Maybe if Hernandez hadn't been so over-committed he might have asked more questions about Dick Fuld's assumptions about Lehman's real estate

So, if equity ownership, independence, and time are the criteria for "good governance," along with evidence of sustained outperformance relative to peers, what are America's best boards? Like I mentioned earlier, the standouts are Berkshire Hathaway, Amazon.com and Johnson & Johnson.

Even as Berkshire Hathaway has taken its hits from the fall in financials and insurance companies, the stock still has beaten the S&P 500 in the last one, five and 10 years by a greater margin as you go back further in time. Investments made in Goldman Sachs(GS Quote), GE, and Harley-Davidson (HOG Quote) in the dark days of six months ago, look shrewd today. From a governance perspective, Berkshire is the gold standard for shareholder openness through its two to three-hour question-and-answer sessions at the annual stockholders' meeting and in its annual letter to shareholders. In terms of stock ownership, with the exception of Sue Decker who joined the board last year, each director owns at least $6 million in stock, with the median holding being $106 million. I also smile every year when I read how much Berkshire directors are paid to serve on the board. The majority of them get $2,700 a year, with a couple of special folks taking home $6,700, which is far less than the $300,000 to $400,000 a year some bank and tech directors take home.

The biggest problem I have with the Berkshire board is its average age. A third of the board is above the age of 80. These directors will have to face board succession issues, as well as CEO succession issues, over the next few years. They seem to recognize that they could benefit from some new perspectives on the board, judging from the most recent appointment of Sue Decker, formerly president of Yahoo!(YHOO Quote) and in her 40s.

Amazon.com also has been a standout performer for the last one, five and 10 years. Although consistently criticized by some for its sky-high valuation, it continues to succeed operationally and in its moves into new categories (most recently with the introduction of the Kindle electronic book reader). CEO Jeff Bezos gets the lion's share of the credit, but the company's board also is deserving. The stock ownership among the directors is high, with the median around $4 million.
But what I love most about this board is that every director has relevant tech or consumer experience which they bring to the group. Bezos didn't waste a seat around the table with the former ambassador to Ireland, buddies from the Seattle business community with no consumer background, former bosses, or the general manager of the Oakland A's baseball team. There's also a good range of ages and length of time served on the board across its eight members. A couple of the directors serve on two other boards besides Amazon's, and three have been on the board more than 13 years, which is getting a little long in the tooth, but these are very minor infractions when compared with most boards.

Johnson & Johnson's long-term corporate performance also has stood out compared with other "Big Pharma" players, and its governance has stood out as well. Unlike many New York-area boards of S&P 500-listed companies, J&J doesn't boast a board replete with active CEOs. In fact, it doesn't have any current CEOs (although disgraced former Citi CEO Chuck Prince was appointed to the board before he was ousted).

The board is a blend of retired CEOs and people from academia or with a specific health care background. The median stockholdings of directors is good at just under $900,000. My concerns with this board are that a few of the ex-CEO directors hold several other directorships -- including chair of JNJ's audit committee, James Cullen, who serves on four other boards. It's also odd that the finance committee didn't hold any meetings in 2008.

If I had to pick one of these as the best corporate board, I would say it's the board of Amazon.com. It's done things right on the most important governance factors of equity ownership, independence and time. Given this, I expect the company's positive stock performance to continue in the next 10 years. More importantly, Amazon's good governance means it's far less likely to suffer a Lehman-like shock that could destabilize or kill the company.

At the time of publication, Jackson had no positions in the companies mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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MarketWatch: SEC OK's proposal to give investors more say on TARP pay

SEC votes to approve new disclosure rule targeting conflict pay consultants

Jul 1, 2009, 5:26 p.m. EST

By Ronald D. Orol, MarketWatch

WASHINGTON (MarketWatch) --The Securities and Exchange Commission on Wednesday voted unanimously to propose a rule giving shareholders a vote on the pay of executives at banks receiving funds from the federal government's bank-bailout program.

The proposal was part of a larger package of governance and disclosure rules under consideration by the agency. Commissioners at the SEC also voted to consider transparency rules to expand disclosure of pay packages and other governance matters.

They also approved, in a split, party-line 3-2 vote, a measure introduced by the New York Stock Exchange that prohibits brokers from casting director-election votes on behalf of investors that don't vote themselves. See full story.

"All three of these measures seek to enhance the quality of the system for each of 800 billion shares voted annually," said SEC Chairwoman Mary Schapiro.

Some institutions that haven't paid back the government money from its Troubled Asset Relief Program and will need to give investors a say on pay include Bank of America (BAC) , Citigroup (C) and other financial firms. J.P. Morgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley, repaid TARP funds, in part, to avoid pay restrictions associated with the program.
TARP say on pay

The say-on-pay proposal would allow shareholders a non-binding vote on the pay packages of executives of financial institutions that have accepted funds as part of TARP.

The corporation is not required to follow the results of the vote, however a substantial vote against executive pay packages is likely to be embarrassing.

Such an approach, which Congress is considering for all U.S. corporations, would likely lead to more behind-the-scenes discussions between management and shareholders about executive pay packages.

Harvard Law School Professor John Coffee said the say-on-pay proposal is a harbinger of things to come because both Congress and the White House have expressed an eagerness to give shareholders of all corporations - not just TARP recipient banks - a say on pay. The House approved say-on-pay legislation in 2007 and lawmakers in both chambers are considering similar legislation.

"Both the House and Senate committees are going to go forward with say on pay," Coffee said. "And the Obama administration backs it as well."

Disclosure proposal

The agency also proposed new disclosure regulations, including a measure that would require corporations or dissident investors to provide more details in proxy disclosure documents about the business experience of director nominees.

Existing rules require only a brief description of the business experience director candidates have over the past five years. The agency will consider whether boards should disclose more details about why they choose a particular leadership structure.

The measure also requires corporations to provide more information about how its pay policies create incentives that impact the firm's risks and how management is controlling that risk. The measure also seeks improved reporting of stock and option awards in a compensation table based on fair value rules, which seeks to provide a more accurate sense of the officials pay at that time.

New disclosures about fees paid to consultants are also required in situations where the advisor or any of its subsidiaries provides other services to the company. The new proposal is intended to enable investors to consider pay decisions and assess any conflicts of interests a consultant may have in recommending pay packages.

Charles Tharp, vice president at the Center on Executive Compensation, said the say-on-pay rule is a step in the right direction, but more needs to be done. He said the SEC should revise its rules about what corporations need to disclose in their compensation tables to separate actual pay earned during the year, including salary and bonuses, from long term incentives.

"The current reporting of pay mixes actual pay with the accounting estimate of restricted stock and stock options that may or may not be earned, depending upon the company's performance in future years," Tharp said. "A clearer understanding of the relationship between pay and performance would benefit shareholders, compensation committees and companies."

Proxy fight disclosure -- an expedited approach

The measure also requires a corporation to disclose the results of an investor vote within four business days after the end of the meeting at which the vote was held. In many cases of contested director elections, when dissident investors nominate their candidates for election against management's slate of directors, corporations often delay release of results of elections for a week or a month after election.

David Sirignano, partner at Morgan Lewis & Bockius LLP in Washington, said that based on existing rules, corporations don't need to reveal to vote counts on disputed director elections and other matters until they release the corporation's next quarterly report.

"If they have a meeting on the first day of the quarter, the results don't have to come out until three months later," Sirignano said.

He said that in some cases it may not be practical to have corporations release the results of a contested director election within four days. He recommended requiring corporations to release the results four days after an outcome to the vote is determined, a process that could take ten days but would be significantly less than three months.

Eric Jackson, president of Ironfire Capital LLC, said Yahoo Inc. took two months to release the voting results for a "just vote no" campaign he launched seeking to oust directors at Yahoo Inc. in 2007. The meeting was in June and the results were released in mid-August.

Ronald D. Orol is a MarketWatch reporter, based in Washington.

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Uncle Sam's BofA Board

07/01/09 - 09:25 AM EDT

BAC , C , GMGMQ

Eric Jackson

Last April, all eyes were on the Bank of America (BAC Quote) shareholders meeting.

Many expected CEO Ken Lewis to lose the title of chairman -- which he did. But others, including me, expected that such a result might be a precursor to Lewis losing his job entirely and to other changes to the board.

So far, Lewis still has his job, but in a very non-public way the government appears to be engineering a number of steps to change how the country's largest bank is governed. In my view, Lewis will exit the bank sometime between September and February.

At the April shareholders meeting, anger directed toward BofA's board poured out of the audience, even in hometown Charlotte, N.C. When the results of the voting were announced, shareholders approved splitting the chair and CEO roles and almost (by less than half a percentage point) approved the right for shareholders to call special meetings to replace board members. Had broker non-votes been thrown out (as they will be next year), instead of counted as a vote for management, it's likely that Ken Lewis and Temple Sloan would not have been re-elected to the board.

BofA responded to the voting by announcing that Dr. Walter Massey, president emeritus at Morehouse College, would assume the role as independent chairman. The board also threw its support behind Ken Lewis continuing as CEO, trying to quash suspicions that he would exit the company entirely.

Several observers, however, immediately questioned the "independence" of this new chairman. For one thing, Massey is 71 and the board has a mandatory retirement age of 72. Will he really take a long-term view to ensure the board operates in a fully independent way from management, as the role implies, or will he be more of a stopgap -- until the board and/or government figure out how this bank is going to be governed moving forward? Also, how "independent" can Massey be when he's served on BofA's board (and its predecessor BankAmerica Corp.) since 1993?

Massey served under Hugh McColl and his hand-picked successor, Ken Lewis, for over a decade. It's hard for anyone to make the mental switch from being a good foot soldier director to suddenly questioning past decisions. In short, how can Massey be part of turning the page, when he was complicit in all the past decisions which brought the bank to its current weakened position?

After witnessing how swiftly and aggressively the government stepped in to take control of General Motors(GMGMQ Quote), including insisting that Rick Wagoner be replaced, you would have expected similar draconian action for the biggest bank in the industry that arguably has been the most responsible for the current economic mess -- BofA, or as 60 Minutes referred to it last September in a glowing piece, the "King of Wall Street." Based on the reports of how Lewis and BofA were viewed by top officials at Treasury and the Federal Reserve, frustration among the government appeared to be fever high.

Yet, Lewis is still in charge at Bank of America (as is Vikram Pandit at Citigroup(C Quote)). Why? I think it's because the Obama administration decided that Wall Street's and Main Street's interests were aligned in seeing a higher stock market and the realization that their anti-Wall Street rhetoric in the first two months of this year had upset the market.

I think they also watched the ripples that followed the removal of Wagoner and worried that another high-profile ouster would send the message that they were being too authoritarian.

Instead, I believe the government has shifted to backroom diplomacy at a slow and deliberate pace.

Another wrinkle that has affected the dynamics of changing the governance of BofA is that the Securities and Exchange Commission is currently seeking comments on new rules that would affect proxy access for next year's batch of shareholder meetings. The agency is seeking to allow shareholders individually or in concert who have held at least 1% of a large-cap stock like BofA for at least a year the rights to nominate candidates for election to the board.

The candidates would sit alongside management's own roster of candidates on the company's own proxy sent out to all shareholders. The directors with the most number of votes for the open seats at the board table would be elected. The change, which CEOs oppose, would make it much easier to replace directors that a majority of shareholders believed were not representing their interests.

Given what's gone on over the last 18 months though, it seems likely that proxy access will pass and come into effect for next year. Given that, and the large number of BofA's shareholders who registered their displeasure in this year's vote, it seems likely that at least one shareholder will put up some alternate candidates for next year's slate of directors, and they'll stand a good chance of winning.

If you were an old BofA director, and you thought your chances of getting booted out next year were high, why would you stick around and go through that public humiliation. Better to leave now on your own terms.

And that's just what's happened. Whether being quietly influenced by the government or choosing to leave now on their own accord, seven of the bank's 18 directors who were re-elected in April have decided to leave.

They include retired Adm. Joseph Prueher, retired Gen. Tommy Franks, Jackie Ward, Patricia Mitchell, former lead director Temple Sloan, retired Lowe's CEO Robert Tillman, and Meredith Spangler. New directors appointed to the board include ex-Fed board governor Susan Bies, ex-FDIC Chairman Donald Powell, Paul Jones and William Boardman. Note the decidedly government bent to these new board members.

When will Lewis leave? We know both the board and he have said it will be in the next three years, but I believe it will be no sooner than September, when there will likely be more evidence that the economy is starting to turn the corner, and no later than next February, when the company would start to prepare its proxy materials for next April's shareholder meeting. Lewis wants to be able to claim his vision of a large BofA including Countrywide and Merrill Lynch is paying off. He wants to see more evidence of a housing recovery and earnings firepower from Merrill to do that. The government, to this point, is being respectful.

I'm sure both BofA's board and the government would like to show shareholders by then that the bank had turned the corner and will be a cornerstone of the U.S. financial system moving forward with strong leadership and governance.

But make no mistake: The clock is ticking down on Ken Lewis' time in the corner office. I think a change at the top by the end of this year is the most likely outcome -- with a successor named at the same time as Lewis announces his departure on his own terms.

At the time of publication, Jackson did not hold any positions in the companies mentioned in the story.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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Yahoo!'s Bartz Provides Hope

06/24/09 - 09:03 AM EDT

YHOO , MSDT , GOOG , CSCO , INTC , COST , BRK.A

Eric Jackson

Yahoo!(YHOO Quote) holds its annual meeting Thursday and, unlike the previous two meetings, I'm not attending this year. It's not that I think the company is doing such a great job; it's that I sold all my shares in Yahoo! last September after being dismayed by the poor decisions being made by the board and senior management despite the company's many assets.

I didn't hold out much hope that the board would make the necessary changes to get the company back on track, after listening to it justify turning down Microsoft's(MSFT Quote) buyout offer last year and ignoring the high number of protest votes cast against the re-election of several directors in the prior two years.

But I do have to give the Yahoo! board credit in one regard: It hired a great CEO in Carol Bartz, and I believe she is doing all the right things since she came aboard to turn this company around. If she is allowed to execute the turnaround path she's on (and, really, why wouldn't she be although I wouldn't put it past Yahoo!'s board based on its track record?), Yahoo!'s stock has a much better chance of outperforming Google's (GOOG Quote) in the next two years, even if Google's operating performance and search dominance continue apace.

With Bartz, what's not to like about her turnaround focus? I went back to the "Plan B" I put forward -- with the support of other retail investors -- to Yahoo!'s board in early 2007 and it appears that a majority of these changes have now happened or are in the process of taking place. It also was refreshing to hear Bartz say recently that she agreed with the "Peanut Butter Manifesto" -- an internal Yahoo! memo that went public in late 2006 that called for much greater focus and simplification of overlapping efforts at the company.

Bartz hasn't let what I believe is a poor board of directors get in her way. For this reason, I was intrigued by her comments on Sunday to the Stanford Business School's Director's College. Bartz was full of opinions on what makes for a good board, with as many barbs tossed in the direction of sleepy directors as shareholder activists. The highlights were published by Barron's and offer a refreshingly candid viewpoint of a CEO on the topic of what makes boards work.

Here's where I think Bartz is right and where she's off-base.

Where she's right:

1. Getting a board of "high achievers" to work together well is tough.

Take any big company board and you'll find a gold-plated list of directors. These individuals haven't been asked to serve because they've been great team players. Typically, they've accomplished a lot. Throw six to eight "doers" into a room and ask them to get a task done as a team and they'll lurch around because no one has been appointed the clear leader and they all have an inherent bias to "jump in" and "fix" the situation. Throw into the mix that this is a team that only meets six times a year and you have a situation where a rhythm for working together never has a chance to develop.

In my view, without clear board leadership -- perhaps because there is no independent chairman, no lead director, or weak ones -- the pecking order of the group gets determined by a combination of who is favored by the CEO, board tenure, or dominant personality. Those factors don't translate into the most effective board discussions and decisions.

2. "We should have less middle-aged white guys."

Bartz pointed out that this narrow demographic makes up the vast majority of boards today. She spoke in favor of more diversity, but "not necessarily more women." (In fact, she discussed how one board tried to recruit her earlier in her career because it was "probably just looking for a skirt.")

I agree with her that it shouldn't matter if a director is named Jane, or John, or that he or she is this type or that type of person. What matters most is how that person will contribute to board meetings behind closed doors. The person needs to have a solid base of business and industry experience to knowledgeably examine and debate issues. Beyond that, diverse viewpoints can lead to better decisions if they help better analyze decisions. Unfortunately, Sarbanes-Oxley or stock exchange requirements define terms like "board independence" which lead to "middle-aged white guy" boards or diverse boards lacking sufficient industry experience.

3. Industry experience is a "must have" for any director.

Directors without industry experience are going to be less involved at board meetings. They are not going to want to make a comment or ask a question that might make them appear stupid. As a result, you can have an impeccably "independent" collection of directors surrounding insiders on a board, without any ability to advise or question those insiders about the business. This does no good for anyone -- unless those directors are well-paid and could care less about adding value or the insiders prefer lapdog directors.

"Industry experience" shouldn't limit directors to those who spent the majority of their careers working in that industry, but they must know enough about that industry to add value to any board discussion.

4. Have three hours of nothing planned at board meetings.

Bartz warns against the perils of over-structured and over-managed meetings. In my opinion, this is a common problem most boards have in which there is no opportunity to really debate issues, because too many "business updates" and "issue approvals" have been scheduled. Sometimes, the most valuable parts of board meetings happen during the unstructured discussions which occur in smaller side meetings or over lunch. There is great value in unstructured time during these meetings (although you must guard against the flip side of too much endless loop discussions resulting in no decisions).

Here's where I think Bartz is off-base:

1. "'Shareholder activism' is a simple but stupid concept."

What I think she's getting at in this comment is that she believes no two shareholders are the same. Everyone wants something a little different. At the Yahoo! annual meeting last August, people lined up to comment on, among other things, how (a) the board and management oversaw poor performance and inexplicably turned down the now-generous looking Microsoft offer, (b) Yahoo! didn't do enough to further human rights in China, (c) Yahoo!'s management had been unfairly criticized, and (d) Yahoo!'s fantasy sports content was fantastic and they should "keep it up."

Bartz was implying that anyone claiming to be a "shareholder activist" is really misrepresenting his own vested interests and those of the larger group. In my view, Bartz has a clear idea of where she wants to go as a manager and doesn't like anyone -- whether it's an incompetent director or misguided shareholder -- getting in her way. Sure, shareholders are a "big tent" -- just like political parties -- but they all follow certain universal truths, such as wanting to see the stock price go up (whether you're in a union, a pension holder, or an employee). She shouldn't paint activists with one brush, just as she goes out of her way to remind us that commentators shouldn't call her "old" because she's 60.

2. Get more current executives to serve on boards.

Bartz's solution to the "middle-aged white guy" problem is to get more executives from other companies to serve on boards. This would not only include CEOs but other senior talent coming up through the ranks that would bring more youthful perspectives with industry experience. I worry that these executives are already too overloaded by their day jobs and, although they'd likely want to add a few directorships to beef up their resumes, they would find it difficult keep up with the needed prep work, travel and participation in board and committee meetings.

These more youthful members of a board might also find it difficult to sit on the Cisco(CSCO Quote) board (as Bartz did when she met Jerry Yang) and challenge John Chambers, for example, about assumptions he was baking into next year's budget. In some ways, Sue Decker is a cautionary tale of the solution Bartz is proposing to the problem of narrow boards.

Decker, the former Yahoo! president, never really was able to get the company turned around successfully and yet kept piling on more board seats, including Intel(INTC Quote), Costco(COST Quote) and Berkshire Hathaway(BRK.A Quote)). As a Yahoo! shareholder during her tenure, I wished she'd never taken on any outside board seats and simply done her job, the remains of which Bartz is now trying to clean up.

From where I sit, Carol Bartz is doing all the right things as an operator of Yahoo! I hope she also will transpose many of her good ideas on corporate governance to the Yahoo! board, which could sorely use them.

Note: A new shareholder rights group called the Shareowner Education Network will be launched in Washington on Thursday, backed by some of the largest pension funds in the country. It will support issues such as promoting a shareowners bill of rights, mutual fund reform and proxy voting education. What's different about this group is that it's particularly focused on education and engaging retail shareholders as a group on these issues.

At the time of publication, Jackson was long Microsoft.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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BlackRock Has Power to Influence

06/17/09 - 02:18 AM EDT

BLK , BCS , YHOO

Eric Jackson

BlackRock's(BLK Quote) announcement last week that it would purchase Barclays Global Investors from U.K. bank Barclays(BCS Quote) for $13.5 billion confirmed that BlackRock would yield an enormous influence on corporate America.

In fact, the combined firm will own $2.8 trillion in assets, twice the size of its nearest rivals State Street (STT Quote) and Fidelity, which hold $1.4 trillion in assets each.

If you've looked up recently the shareholder ownership tables for any large or small public company, you likely have seen BGI's name among the top five holders of the stock. You've also likely seen BlackRock's name in the top 10. And, with this deal, you will now almost certainly see the new BGI (BlackRock Global Investors) in the list of top three or four shareholders.

Most financial analysis of this BlackRock-BGI tie-up have focused on the price paid, the assets now under management and the growth of BGI over the last few years as an asset for Barclays. Barclays certainly owned a jewel that they wouldn't have parted with unless external capital demands from the British government required it, and also unless BGI's own executives had a compensation structure that incented a full sale. BGI accounted for 15% of Barclays' pretax profit last year.

Yet, there's another interesting question about this tie-up that has gone unmentioned: How will this new BGI behemoth vote its shares in future corporate elections?

Until now, BGI has had a reputation among some for being a shareholder that largely votes its shares in favor of management. A third-party Web site, Proxy Democracy, founded last year by Harvard Ph.D student Andrew Eggers, which tracks how large institutional investors actually vote their shares, recently ranked BGI's family of funds at the 11th percentile in terms of their "overall activism score." This means that 89% of other mutual funds tended to vote in a more pro-shareholder fashion at corporate elections than BGI.

BGI says it has a team of 12 full-time staff globally who are fully dedicated to analyzing and executing corporate governance policy. Seven of those staff are located in the U.S. and are tasked with a special focus on North American assets.

Abe Friedman, BGI's global head of corporate governance, heads this group and is a managing director of the firm. Additionally, BGI claims to vote in 100% of the votes it is eligible to participate in every year. BGI also says it follows a rigorous set of proxy voting guidelines in deciding how to vote.

Given this level of staffing, it's puzzling that BGI's pro-shareholder voting record, according to Proxy Democracy, is so low. Eggers told me recently that BGI has been particularly low in supporting shareholder resolutions and proposals that aim to rein in executive compensation. According to their voting record posted on the site, BGI has supported management on executive compensation in 95.4% of the votes . That's particularly noteworthy, given last week's news that 400 senior Barclays' executives would receive a "windfall" $630.3 million payout from BlackRock for selling BGI, prompting shareholder outrage. BGI Chairman Bob Diamond will pocket $36.5 million from the sale, while BGI CEO Blake Grossman, will take home $91.2 million. If that's the example set from the top of BGI, I'm not surprised that the voting record says BGI supports management on executive compensation issues at such a high rate.

A couple of years ago, when I ran an activist campaign targeting Yahoo!(YHOO Quote), I reached out to all the large institutional holders of the stock leading up to the annual meeting. I had made the public argument that a few Yahoo! directors deserved to be voted off the board because of the company's poor performance and general misdirection (most of the directors I identified are still on the board, by the way).

Of the 10 largest institutions holding Yahoo! stock, I spoke with eight. Most portfolio managers covering the company or governance officers already were aware of some of my arguments about the company before I spoke to them on the phone.

BGI was one of the two institutions better protected than Fort Knox in terms of being open to discussing the issues that Yahoo! was facing. I first called BGI's San Francisco office and asked to speak to Mr. Friedman. I was told that he was no longer with the firm. I asked to speak with people on his team. The receptionist seemed confused and said that such a team wasn't in place. After calling again and asking to speak to someone responsible for voting BGI's shares, I was put to a woman's voice mail. I never received a return call.

One last attempt and voice mail message also were unsuccessful in at least having a discussion about the issues at play in the vote. Based on these interactions with the firm, I assumed no governance team existed at BGI (which I understand now is not the case; they were just simply difficult to get in touch with). Maybe I was just unlucky in my phone calls. However, at eight of the other top 10 holders of Yahoo!'s stock, who presumably were just as busy as BGI in determining how to vote their shares, I found it very easy to engage in a discussion.

Corporate governance is seen by the vast majority of institutional holders as an investment that creates far more value to their clients than the cost. I'm quite sure that if clients of these large institutions knew which ones were responsibly voting their shares on the clients' behalf, and which ones were rubber-stamping votes for less effective CEOs and boards, there would be ramifications seen through large-scale transferring of assets.

That's why sites like Proxy Democracy are so important. All of these large institutions need to be held accountable for how they vote their shares on behalf of clients. These institutions also need to understand that, it's not important how often you vote, or how many people you employ in order to vote, but how you vote your shares that matters to clients.

And this brings us back to BlackRock and the new BGI. BlackRock does have a reputation for speaking up and voting in favor of shareholder-friendly matters. On the Proxy Democracy site, BlackRock's activism score was at the 41st percentile, meaning the company is about average compared with it peers in supporting pro-shareholder votes.

As Barron's pointed out last weekend, BlackRock is also known for its much more active than passive culture compared to BGI. CEO Larry Fink has said one of the great virtues of this deal is that 80% to 90% of the two firms' activities do not overlap and can be left as is. I hope Fink will look closely at how the new BGI votes its shares and steers it closer to the BlackRock model and away from the Barclays model.

If Fink does this, and I have every reason to believe he will, the new BGI has a chance to play a powerfully positive role in voting its shares in future corporate elections.

In my view, sleepy boards and managements just lost one big chip of votes that, until now, they could count on being in their back pockets. All shareholders will benefit if there is a change in philosophy at BGI.

At the time of publication, Jackson had no positions in the stocks mentioned.

Eric Jackson is founder and president of Ironfire Capital and the general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd.

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