Thursday, July 23, 2009

Does Corporate Governance Matter?

07/22/09 - 09:33 AM EDT


Eric Jackson

After the collapse of Bear Stearns, Countrywide, Lehman Brothers, GM and AIG(AIG Quote) last year, and with Citigroup(C Quote) and Bank of America (BAC Quote) greatly diminished in stature, corporate governance has once again become a popular topic in government, the mainstream business press and on corporate boards.

Although most people intuitively think that it's a good thing for the performance of a company and its own risk management to have a strong and independent board of directors overseeing it, last year a group of Stanford professors published a working paper in which they questioned this basic assumption.

The professors examined the three largest firms that assign governance ratings each year for American public companies: RiskMetrics(RMG Quote), GovernanceMetrics International and The Corporate Library -- and concluded that none was correlated with better current performance, and few of the ratings predicted better future company performance.

Some corporate governance critics pointed to the paper's results as demonstrating their deeply held view that corporate governance is a crock and has no bearing on whether a company will have better or worse financial performance in the future.

Before we collectively toss aside the notion that the quality of corporate governance impacts a company's performance and risk management, let's examine the facts around the professors' research:

  • This is still a "working paper" and is not yet published in a peer-reviewed journal, suggesting there are still kinks being worked out in the research.
  • They found that none of the governance ratings firms' ratings were linked to how a company was currently performing. Yet, if you're thinking of making an investment in a company or writing a D&O insurance policy or making a commercial loan, you have no interest in this type of correlation; you only want to know if there's a link between today's governance structure and future performance.
  • They found that The Corporate Library's governance scores predicted a company's future operating performance and future earnings' multiples. Unfortunately, the metrics they used to find this relationship are common in the academic world (e.g., Tobin's Q) but almost never used by investors, banks, or insurance companies.

So, even with several problems, the study did still find that better corporate governance led to better future financial and stock performance. However, the study still raises the question of, if this link exists, why hasn't corporate governance become more widely used by investors as a variable to consider when making investment decisions?

I was puzzled by this and recently asked this question of several institutional investors. The most common response I heard back is that "there's no link that's been established between corporate governance and performance." Although there have been different studies that have found such a link, clearly the mountain of evidence to date hasn't been compelling enough to most investors to get them to pay attention to it.

And, if it's not compelling to investors, it shouldn't really be surprising that CEOs, senior managers and boards (all usually large shareholders themselves) haven't paid attention to implementing every purported "good governance" practice that is suggested.

The truth is that not every corporate governance improvement has been shown to improve performance over time. In my own research (going back 10 years now), I remember being surprised, for example, to find no link between a company separating the chairman and CEO roles and subsequent stock performance.

Yet, we did find a whopping relationship between outside directors' stock holdings (which they purchased themselves rather than being given stock or stock options) and future performance.
Sometimes the problems in finding a link between good governance and performance come down to defining what you mean and making sure you're actually measuring it correctly. For example, what is an "independent" board? Ask 10 people and you'll likely get 10 different answers.

So, the bottom line is that even though I (a corporate governance advocate) can quibble with the academics on the merits of their research, it is true that proponents of better corporate governance often assume their prescriptions will lead to better performance and lower risk without the empirical evidence to back up their claims.

Therefore, if you are going to build a composite score for a public company's "governance rating," the devil is in the details. If a ratings agency assigns an equal weighting in a composite score for how a company splits the chairman and CEO roles with equity ownership on the board, the result is going to be a flawed rating system.

Ratings agencies need to do a better job at ensuring each variable that goes into their scores actually predicts future performance. It all comes down to what you measure and how you measure it.

There are likely many contingency factors (such as industry or size of the public company) that strengthen or weaken the impact on performance of corporate governance factors. It's not likely that you'll find one type of board fits all types of companies.

Governance ratings firms are at a disadvantage though (as are legislators with something like Sarbanes-Oxley or regulators such as the SEC). They're on the outside to what goes on in board meetings. Third parties can only measure, rate and regulate information that's publicly available. Board "independence" defined whatever way you choose is just a proxy measure for the quality of debate and decision-making that goes on inside the boardroom. You'll never get companies disclosing the quality of their boardroom discussions in their 10-Ks to the SEC.

The investors (or insurance companies or banks) which "crack the code" to effectively track effective and ineffective governance factors that strongly predict performance will have an enormous advantage in modeling an element of risk that most investors disregard -- even after the last 18 months. That smells like a great opportunity to me.

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Thursday, July 16, 2009

Break-Up the Broadridge Monopoly on Counting Shareholder Votes

From: Eric Jackson
Sent: Thursday, July 16, 2009 3:00 PM
To: ''
Subject: Breaking Up the Broadridge Monopoly

Dear Chairman Schapiro:

I would like to urge you to consider breaking Broadridge’s monopoly in overseeing electronic proxy voting for all public companies.

As you might recall, last year, after Broardridge released the results of the Yahoo! vote, there was a large protest made by Gordy Crawford of Capital Research who questioned the veracity of the results. Because of Mr. Crawford’s stature, the fact the Cap Re was one of the largest Yahoo! investors, and the intense media interest in the Yahoo! voting results, Broadridge was forced to verify the results and admitted their results had been far off the mark.

Although Broadridge said the problem was a simple “truncation error” made by a computer, it’s clear when you look at the actual results and the ones first reported that there was human error involved. What was shocking about the incident was that it likely would never have been reported had Gordy Crawford not spoken up. It makes me wonder how many other errors made by Broadridge are never reported or acknowledged.

I understand that the only check and balance over Broadridge’s monopoly is that they have to submit regular “updates” to the SEC. I don’t believe this is sufficient, given the importance of these voting results. What does it matter if the SEC allows proxy access or get rid of broker votes, yet investors can’t trust the final voting results because of future Broadridge “truncation errors”?

In my view, investors would be best served by allowing another company to compete with Broadridge. Let the best provider to companies and shareholders be successful.

I also note that Broadridge appears to be much more company-centric (i.e., management) than shareholder-centric.

I hope you will consider adding further examination of Broadridge to your already busy list of plans.


Eric Jackson

Eric M. Jackson, Ph.D.
Managing Member
Ironfire Capital LLC

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Wednesday, July 15, 2009

Buffett Buffet: A Pricey Meal

Salida Capital, a small Canadian fund, will pay $1.68 million (which goes to charity) to dine with the Oracle in New York. But who picks up the tab?

07/15/09 - 12:54 PM EDT


Eric Jackson

For months, some of the brightest financial minds in the world have been debating whether there is imminent threat of inflation thanks to the monetary easing and other programs sponsored by the Federal Reserve in response to the economic crisis.

Until now, we've yet to see rampant inflation take hold, except in one corner of the economy: How much it costs each year to take Warren Buffett of Berkshire Hathaway(BRK.A Quote) to lunch where the proceeds go to the Glide Foundation of San Francisco helping the homeless in that city.

Last week's winner, Salida Capital -- a small Toronto-based fund whose performance dropped 66.5% last year -- won the annual auction to pay $1.68 million -- or about 0.6% of its total assets currently under management -- for eight people to lunch with Buffett at the Smith & Wollensky steakhouse on Third Avenue in Manhattan in the next eight months.

The Buffett Buffet

Year Winner Winning Bid
2000: Anonymous, $25,000
2001: Anonymous, $18,000
2002: Edward Jones Co. and 2 Anonymous, $25,000
2003: David Einhorn, Greenlight Capital, $250,100
2004: Jason Choo, Singapore, $202,100
2005: Anonymous, $351,100
2006: Yongping Duan, California, $620,100
2007: Mohnish Pabrai, Guy Spier, Harina Kapoor, $650,100
2008: Zhao Danyang, China, $2,110,100
2009: Salida Capital, Canada, $1,680,300


That large tab was 20% less than what last year's winner paid, Zhao Danyang - a Chinese hedge fund manager. However, Salida's winning bid was 67x more than the $25,000 paid in 2000 by the first winner of lunch who chose to remain anonymous.

It's remarkable how rapidly and steadily the price of this lunch has gone up in the last decade:
There are a few striking things about this list:

  • As the media coverage has grown over time covering the winner, the price paid has gone up exponentially.
  • With the exception of David Einhorn winning in 2003 - when he and his fund Greenlight Capital had a much lower profile than today - and the broker Edward Jones in 2002, you've likely heard of none of the winners.
  • Until this year, a company had never won the charity auction (with the exception of Edward Jones in 2002 -- although this was split three ways -- so Edward Jones itself only spent $8,333). This year, the winner was clearly identified as the firm Salida Capital and not its individual fund managers.

If you're Buffett, what's the harm in all this? After all, it's all benefitting the Glide Foundation. Since 2000, $6 million has been raised for the charity. Buffett must find it ironic that lunch with the greatest value investor in the world is now the subject of such speculation. The only concern I would have, if I were him, was being associated with a "winner" who used the lunch for questionable purposes.

Last year's winner, Zhao, was questioned by some after he mentioned to the press that he had recommended a stock (WuMart) to Buffett during their conversation. He touted it as the Wal-Mart(WMT Quote) of China and was reported to make a $14 million profit after the stock jumped 25% based on its association with Buffett's name. Zhao denied that he had been pumping the stock.

This year's winning firm, Salida Capital, describes itself as following a top-down global macro strategy, meaning that it invests based on macroeconomic themes, rather than following a bottom-up value investing approach that Buffett is famous for.

Its president, Courtenay Wolfe, was hired about a year ago with a mandate to better market the firm and raise assets. Her background is sales and marketing, with her biggest career achievement according to her bio being launching Dell's (DELL Quote) Web-based sales effort in Canada in 1996 at the beginning of the first tech bubble.

When Wolfe was asked about the questions she planned to ask Buffett during the lunch, she said she didn't know: "We have eight months now to figure that out."

Asked about what her fund's investors thought about spending almost $2 million on the lunch, Wolfe said she believed that they thought it would make Salida's managers make wiser investment decisions -- sort of like taking a two-hour off-site training course with good food.

What's clear is that Wolfe figured out winning the Buffett lunch auction was a great way of getting the name Salida Capital in front of potential investors globally. Whether the media exposure will actually lead to more assets for the company remains to be seen. According to Canada's national newspaper, the Globe & Mail of Toronto, the company is eligible to write off the $1.7 million expense as a charitable donation.

There have been conflicting reports on whether the firm's managing directors will pay the $1.7 million themselves or whether the firm will pay. If it's the firm, Salida's existing investors are footing the bill either through their management fees or as an actual operating expense of the firm (e.g., if the firm's managers designated the cost as "research" to help make its managers better investors). I contacted Courtenay Wolfe earlier this week and asked her to clarify which of these scenarios best described how Salida would pay for the lunch. She responded that it was "personal partner capital" paying for the event.

If I were an investor in Salida, and I found out that I was even partially paying for this lunch -- even through management fees, which technically would still be "partner capital" -- I would be upset, as I would interpret the managers' actions as seeking to raise the firm's profile and its assets (not make them smarter managers -- although Wolfe argues that the "firm, funds, and therefore investors will benefit from" the lunch -- or to simply help a charity, which they admitted they didn't know before bidding).

I would see part of investment being spent with the purpose of growing the firm's assets, which will benefit the firm's managers but have no impact on the future performance of my remaining assets under management with them.

It's undeniable that the winner of these lunches will continue to get at least a day of heavy media exposure. Neither Buffett nor some regulator is going to stop that. However, as the purpose of the lunches is to benefit the Glide Foundation, Buffett should require all future winners to pay personally for winning bids and refrain from mentioning any stocks discussed during the lunch to avoid questions like these in the future.

Hedge fund investors (or the due diligence consultants they hire to examine potential managers) should also educate themselves more on just how a fund charges for its expenses. For example, are they charging a “training session at a glamorous resort with spouses” as “research” or “training” which is intended to benefit investors but appear more like boondoggles. Sometimes it’s not black or white but gray. However, if you see recurrent evidence of fund managers taking liberties in how the charge certain expenses to investors, it should be a big red flag to potential investors.

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Friday, July 10, 2009

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 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."


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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Thursday, July 09, 2009

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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Tuesday, July 07, 2009

Best in Class: America's Top Boards

07/07/09 - 09:11 AM EDT


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), (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, 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. 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 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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Friday, July 03, 2009

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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Wednesday, July 01, 2009

Uncle Sam's BofA Board

07/01/09 - 09:25 AM EDT


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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