Ms. Schapiro, Tear Down That Wall!

By Eric Jackson
RealMoney Contributor
7/30/2010 10:00 AM EDT
Click here for more stories by Eric Jackson

Amid all the policy changes doing the rounds of Washington DC at the moment and their potential implications for stocks in the medium term, I thought I'd take a look at the issue of proxy access, which was recently passed as part of the Dodd-Frank financial-reform bill, but which has been left to the SEC to define and enact.

Basically, proxy access would allow shareholders in public companies to nominate directors to be included in the company's official proxy statement - the list of nominees to the board of directors, on which shareholders vote at the annual meeting.

Say, for example, Citigroup (C - commentary -Trade Now) has 12 directors this year. It will typically nominate the same 12 people to be put to the vote at next year's annual shareholder meeting. As there are no other options, the shareholders will usually re-elect the slate of people put in front of them by an overwhelming margin (90-95% is common).

In the current system, if shareholders are angry at the company, as they were, for example, in 2008 after Yahoo!'s (YHOO - commentary -Trade Now) board turned up its nose atMicrosoft's (MSFT - commentary - Trade Now) offer to buy the company, there are only two things they can do when it comes to re-electing directors: (1) vote against the re-election of the company's directors (individually or collectively), or (2) pay out of their own pockets to launch a full-blown proxy contest.

The problem with voting against directors is that it's largely symbolic. In the case of Yahoo!, 30-35% of shareholders voted against the re-election of former CEO Jerry Yang, Chairman Roy Bostock and others -- but nothing happened. Bostock is still Chairman, and the company's stock price is significantly below where it was at the 2008 shareholders' meeting (and a universe away from the Microsoft buyout offer).

The problem with a proxy contest is that it's very expensive to launch. Effectively, by running such a contest, you are coming up with your own alternative list of nominees to send to all shareholders (in addition to the official company proxy they receive). Then, you have to try to convince all those shareholders to vote for your proxy rather than the company's. After mailing costs, lawyer and proxy-solicitor fees, you are looking at a minimum of $1 million, probably much more if you're going to go after a Yahoo!- or Citi-sized company. Therefore, this option is really only attractive to rich, activist-minded shareholders, such as Carl Icahn, who decided to go after Yahoo! in 2008 and later struck a deal with the company to get a few seats on the board.

....

[*** This post is an excerpt of the full article, available by clicking here to go to RealMoney.com. Note: subscription required. ***]

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Corporate Governance Role in Meltdown

By Eric Jackson, Senior Contributor

02/17/10 - 06:00 AM EST

Stock quotes in this article: TYC

What role did board governance play in the financial meltdown of 2008? According to John Gillespie and David Zweig, co-authors of a new book called "Money for Nothing," it was a major one.

Gillespie, a former Lehman banker, a co-founder of Salon.com, maintain that boards were asleep at the switch or simply failed to act to protect some of our largest companies to fail or inadequately protect themselves. Some 57 million American households own stock in public companies. Their interests are supposed to be protected by boards. Instead, their holdings plummeted in value, and then, as taxpayers, they were forced to bail out many of these same companies. I spoke to the authors last week, and excerpts of the interview follow.

TheStreet: What do you think of Mary Schapiro's performance as head of the SEC?

Gillespie: The expectations for her were really low. I've been pleasantly surprised. She's increased disclosure requirements, beefed up enforcement and instituted an Investor Accountability Office. She's also throwing out non-broker votes counting in favor of a vote for management starting this proxy season.

Zwieg: I've been disappointed in her delaying a decision about giving investors a right to nominate directors to boards (the proxy access rule). The longer she waits, the more investors' money is being used by companies' management and lawyers to fight shareholders' interests on this rule.

TheStreet: How do you beef up enforcement at the SEC?

Gillespie: It's really tough. A career person at the SEC makes 180K in annual salary but they have to be as good as the top person at Wachtell.

Zweig: Who else is going to do enforcement if not the SEC? The ratings firms? Accounting firms? I don't think so. We'd like to see a small transaction tax on all stock trades go toward beefing up of SEC enforcement.

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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Corporate Governance in Sad Shape

By Eric Jackson, Senior Contributor

02/10/10 - 06:04 AM EST

Stock quotes in this article: SHAW , CCE , MHCG , WB

A new book documenting how poor the state of corporate governance is in America -- and how it was a major cause of the financial meltdown -- will make you sick.

Money for Nothing, authored by former Lehman Brothers banker John Gillespie and Salon.com founder David Zweig, lays out a compelling case for how CEOs and their minions have subverted the purpose of boards to oversee management and made them their lapdogs.

The book outlines numerous solutions to fix this problem. If they weren't so sensible, they might have a chance of being implemented.

We've now lived through two different stock market crashes in the last decade, and we learned each time in retrospect how poor a job boards did to protect the companies they served.

We thought we learned our lesson after Enron and Worldcom when Sarbanes-Oxley was implemented in part to improve corporate governance.

But, if taking your shoes off for TSA screeners is "security theater" designed to make us feel safer -- even if we're not -- Sarbanes-Oxley was the governance equivalent.

The stories of poor governance that fill the book would make you laugh, if they didn't cause you to be outraged.

Gillespie and Zweig discuss former Merrill Lynch CEO Stan O'Neal, who eliminated anyone from his board and management team who disagreed with him. Instead, he packed eight of the 10 directors with his friends, including John Finnegan, a friend of O'Neal's for 20 years who headed the Merrill compensation committee, and Alberto Cribiore, who had once tried to hire O'Neal and who was also put on the compensation committee.

[This post is an excerpt of the full article, which is available on TheStreet.com by clicking here. Free Site.]

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SEC's Proxy Changes Sensible

09/02/09 - 06:00 AM EDT

C , BAC , FNM , FRE , YHOO , MSFT

Eric Jackson

NEW YORK (TheStreet) -- After the meltdown of firms like Lehman Brothers, Citigroup(C Quote), Bank of America(BAC Quote), Fannie Mae(FNM Quote), Freddie Mac(FRE Quote) and General Motors, and the knock-on effect this has had on our entire economy, it's fair to ask the question: Where were the boards of directors when all of this was going on? How could they let such poor decisions happen under their watch?

The Securities and Exchange Commission agrees, and after more than 30 years of debating the possibility of doing so has proposed new amendments that will let shareholders nominate up to 25% of a public company's board (to be voted on by all shareholders).

The director nominees will go on the same company ballot that management's own nominees do. Shareholders will view the bios of all the nominees and pick the candidates they believe will do the best job in representing their interests.

I've voiced my support for the amendments in a letter to the SEC a few weeks ago. In fact, the SEC has received almost 500 letters commenting on the proposed amendments. Predictably, those opposing the proposed changes that will diminish their control are fighting hard against them. Their arguments against allowing shareholders to nominate directors, and my rebuttals follow:

No. 1. "The status quo system is working; don't punish all the good boards for a couple of bad boards."

These proxy access amendments won't require any additional work on the part of companies -- unless shareholders nominate alternate directors for election. In such a case, the incumbent board members will have to justify why they're better served to sit on the board as the shareholders' representatives. That's not such an onerous responsibility, in my opinion.

And remember that the U.K. and Australia have had such nominating mechanisms for shareholders for years and haven't seen a flood of proxy contests. The overwhelming majority of elections there are still uncontested. This rule doesn't punish all the good boards but will raise the quality of all the mediocre boards. A good board won't be impacted by these changes because they won't be a target for improvement.

No. 2. "We don't need some 'one-size-fits-all' regulation to restrict our choosing how to govern ourselves."

If the SEC mandated every director had to be men between the ages of 55 and 85, I would agree with this argument (many companies ironically choose that particular "one-size-fits-all" governance structure themselves). Yet, that's not what's going on here. This is a rule change allowing shareholders to freely select the best directors with the most relevant backgrounds to represent them.

This argument is like complaining that reporting your financial numbers on a quarterly basis is "one-size-fits-all," is too restrictive, and doesn't reflect the special uniqueness of some companies that should be free to choose to report their numbers once every three years.

No. 3. Special interests will get a larger voice on boards than they deserve."

Companies worry that their boards are going to be filled with members of the AFL-CIO, PETA and Amnesty International. The reality is that these groups might end up nominating candidates for election to the board but they'll likely not pass a vote of all shareholders (unless they can make a compelling case).

If Carl Icahn couldn't get elected to the Yahoo!(YHOO Quote) board last year after that board's botched handling of the Microsoft(MSFT Quote) negotiations (which is why he cut a deal with the company to take three seats), what hope would Amnesty International have?

No. 3. "Conflict will be introduced to boards."

Some sleepy boards out there would do well with a little conflict to wake them up and get them to actually focus on key strategic issues facing them. However, again as the international data show, these changes promote better monitoring and vigilance -- not more conflict.

No. 4. "No federal law should step on the toes of state law."

I'm not a lawyer, but I don't understand the problem with a federal law being introduced that supersedes state law when it is judged to bring more benefits than costs. Extending this argument, the SEC, a national regulator, should not exist because it trumps state rights.

No. 5. "Companies know how to pick 'professional' directors who will respect fiduciary duty better than shareholders."

Besides smacking of condescension, this argument makes me laugh because proponents of this view are saying incumbent boards will pick director nominees with a better sense of fiduciary duty than shareholders -- even though the shareholders are the people to whom the directors are fiduciaries.

There were dozens of anti-proxy access letters to the SEC that looked remarkably similar. Interestingly, they all came from very small private businesses that seemingly have no dog in this fight and follow a similar format.

The letters come from companies like Hair Shapers of Bakersfield, Calif., Herren's Heating & Cooling of Rainsville, Ala., and Slycers Sandwich Shop of Jacksonville, Fla. In Tammy Bonkowski's letter, she talks about how her hair salon, Rumor Has It, in Taylor, Miss. will be hurt by proxy access because the rule change will cause "more unemployed people."

A Wall Street Journal article last week linked these many similar-sounding letters as organized through the very large and powerful U.S. Chamber of Commerce. If true, it's a sneaky and deceptive way to try to influence final voting by the SEC commissioners on these rule amendments.

The bottom line is that, when public corporations were created, the expressed purpose of the board of directors was to represent the interests of shareholders while overseeing and monitoring management.

Somewhere along the way, management found a way to appoint its own overseers and then get them to run unopposed in a sham election.

Shareholders don't want to micromanage management; they just want the right to vote on the best qualified pool of representatives to serve on the board. The SEC's proposed amendments for proxy access provide that.

-- Written by Eric Jackson in Naples, Fla.

At the time of publication, Jackson's fund 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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Letter to Senator Mel Martinez on Dismantling the Broadridge Monopoly

Last month, I wrote to Chairman Mary Schapiro of the SEC about dismantling the monopoly Broadridge enjoys counting electronic proxy votes for all US public companies.

Today, I wrote to Senator Mel Martinez (R-FL), who serves on the Senate Banking Committee, about the matter.

August 5, 2009

VIA FAX

The Honorable Mel Martinez
U.S. Senate
Room 356 – Russell Senate Office Building
Washington, D.C. 20510
202-224-3041
(Fax) 202-228-5171

Re: Encouraging the SEC to dismantle the Broadridge (BR) monopoly

Dear Senator Martinez:

I am an individual investor and hedge fund manager based in Naples, FL, who is concerned about shareholder voting and communications issues.

I would like to urge you to write to SEC Chairman Mary Schapiro and ask her and her fellow Commissioners to break up the monopoly currently enjoyed by Broadridge (ticker: BR) in overseeing electronic proxy voting for all public companies. I have also recently written to the Chairman on this matter (see the end of this letter).

The foundation of our capital markets is a “one shareholder, one vote” system for running our public companies. On an annual basis, shareholders get to voice their approval or disapproval about the way their representatives are running the company on the Board of Directors and in Senior Management. Broadridge is the company which is solely responsible for counting those votes. It has a monopoly.

Last August, after Broadridge released the results of the Yahoo! (YHOO) annual shareholders’ meeting vote, there was a large protest made by Gordy Crawford of Capital Research (one of the largest mutual funds in the country) who questioned the veracity of the results. Because of Mr. Crawford’s stature, the fact the Capital Research was one of the largest Yahoo! investors, and the intense media interest in the Yahoo! voting results, Broadridge was forced to verify the results. They later admitted their results had been far off the mark from the actual ones.

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.

I also understand from those who work in Investor Relations at corporations using Broadridge that they are often frustrated by monopolistic pricing demands placed on them by Broadridge for using their services.

In my view, investors and public companies would be best served by allowing another company to compete with Broadridge. Let the best provider to companies and shareholders be successful. It’s that spirit of competition and innovation which has served our country so well.

I hope you will consider writing to Chairman Schapiro about this matter. Although the SEC has many issues it is tackling at the moment, breaking up the Broadridge monopoly will help make our companies more competitive and risk-conscious than they previously had been. This certainly would have served them and the whole American economy well in the past 5 years.

Thank you.

/Eric M. Jackson/

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

The letter below was sent on July 16, 2009 and can be found at:

http://seekingalpha.com/article/149402-sec-should-break-up-broadridge-monopoly

From: Eric Jackson
Sent: Thursday, July 16, 2009 3:00 PM
To: 'chairmanoffice@sec.gov'
Subject: Breaking Up the Broadridge (BR) 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 Broadridge released the results of the Yahoo! (YHOO) 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 gets rid of broker votes, if 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.

Sincerely,

Eric Jackson

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

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Break-Up the Broadridge Monopoly on Counting Shareholder Votes

From: Eric Jackson
Sent: Thursday, July 16, 2009 3:00 PM
To: 'chairmanoffice@sec.gov'
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.

Sincerely,

Eric Jackson

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

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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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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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SEC May Shift Board Control

05/20/09 - 08:42 AM EDT

TGT , BAC , C

On Wednesday, the Securities and Exchange Commission will hold meetings on whether and how shareholders should be allowed to nominate directors to boards of companies in which they hold stakes. If a rule is agreed upon and put in practice in the next 90 days it could dramatically change the relationship between shareholders and management teams for years to come.

The normal course of business since the SEC was created decades ago was that management holds all the cards in selecting its board and insulating itself from criticisms from shareholders. Management picks the directors it wants, it can stagger its re-elections to make it next to impossible to overturn the board in any one year, and shareholders face huge costs and long odds in putting up their own candidates.

Even after the Enron and WorldCom scandals earlier this decade, the SEC saw fit to change nothing with respect to making corporate boards more accountable to shareholders. That's about to change.

With the latest downturn, and the large antipathy directed towards the SEC from the media and shareholders thanks to its overlooking Bernie Madoff and doing nothing to prevent large institutions like Citigroup(C Quote), Lehman Brothers, and Bear Stearns from imploding, the SEC can no longer look the other way. Chairwoman Mary Schapiro was brought in with a mandate and, so far, she's giving every indication that she's cleaning house and going the extra mile to give shareholders a voice for their concerns. All this has implications for the number of shareholder activist battles we'll see starting in 2010 and beyond. But more importantly it should truly improve the risk-adjusted returns for all public companies.

A few weeks ago, the SEC took an important first step in helping shareholders have more of an impact in annual votes. It announced it intended to get rid of "broker votes" being counted in favor of a management team's incumbent slate.

To explain how this works, take the recent case of Bank of America's (BAC Quote) annual meeting last month. Most press coverage focused on how a shareholder resolution was passed with a majority (50%) vote that stripped CEO Ken Lewis of also holding the chairman title. However, the truth is that broker votes played a key role in preventing other significant changes from occurring at the same meeting.

Here's how it works: Broker votes are those placed by brokers who hold the stock in the name of their clients. If these brokers don't receive specific instructions on how to vote their shares during proxy season (which happens the vast majority of the time for the vast majority of proxy votes), the brokers can vote them in the manner they see fit. About 99% of the time this means voting the shares in favor of management, artificially raising the perception of how much support there is for management among shareholders.

For Bank of America's vote, the Wall Street Journal calculated that broker votes would account for about 22% of the overall vote. This means that if BofA's vote had been held in 2010 instead of 2009, when broker votes will not be counted towards the election results, the shareholder proposal to separate the chairman and CEO titles would have been 64% instead of 50%. Moreover, based on last month's shareholder results, it's likely two other shareholder propositions would have passed: (1) allowing shareholders to call special meetings to possibly replace members of the board and (2) an advisory vote of executive compensation, or so-called say-on-pay. Two directors, Lewis and Temple Sloan, also would have received enough votes to vote them off the board entirely.

With the debate about allowing shareholders more "proxy access," the SEC is suggesting shareholders receive a more direct say on who will be elected to a board, at a significantly lower cost. Until now, it's been entirely the choice of management who gets elected to serve on the corporate board. Shareholders simply get to vote up or down on these nominees. The SEC wants to allow shareholders to put forward their own nominees for directors to be voted on. If there are eight spots open on the board, and eight put forward by management and four put forward by shareholders, the SEC is saying, "Let the best eight candidates with the highest number of votes serve." Sounds very democratic, doesn't it?

It's quite conceivable that in a few years at least the largest shareholders will see all potential directors parade through their offices in the weeks leading up to an election, pressing the flesh and making their case to be elected, much like politicians do in general elections.

The SEC's proposed rule, which will be debated Wednesday, will require shareholders to hold 1% of the company's shares outstanding in order to nominate directors to serve on companies with a market capitalization greater than $700 million. For companies under $700 million in market cap, shareholders will need to hold 3% in stock; for companies under $75 million in market cap, shareholders will need to own 5% of the shares outstanding.

By asking for "skin in the game" from shareholders who want to suggest candidates, the SEC hopes to ensure the candidates are of the highest quality and the suggestions are from the most serious shareholders.

Take the current battle being waged by Pershing Square's Bill Ackman, who is seeking to elect four directors to Target's(TGT Quote) board. He's estimated the current proxy battle, which will be resolved next week, is costing his firm $10 million to 15 million. He will pay this out of his own pocket, even while the incumbent board pays for all of its costs out of shareholders' pockets. It shouldn't be so costly or on such uneven terms to put forward some candidates for consideration.

When I hear management -- like that of Target -- complain that a shareholder challenge is too distracting and costly that it keeps it from running the business, I think to myself that if management had done a good enough job of running its business to begin with in the first place, shareholders wouldn't have been forced to take up a crusade against it.

These new shareholder-friendly rules from the SEC will serve all shareholders better than the old skewed rules. There will be a burst of challenges in 2010 and 2011 in response to these new rules and many boards will see their composition change significantly in response to the challenges. My prediction is that this initial "cleansing period" will prompt other boards to preemptively change themselves before being forced to by their shareholders. Counter-intuitively, I expect these new rules, in the long run, to lead to fewer shareholder showdowns, not more. Sunlight is the best disinfectant and the ability to cost-effectively run a credible proxy contest against a sleepy board will rouse many of these boards to heal themselves of what afflicts them.

At the time of publication, Jackson had no positions in any 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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Another Tool for Activists, thanks to Chuck Schumer

If Chuck Schumer has his way, he'll add several arrows to be available to activist investors seeking to influence under-performing managements and boards of directors.

According to an article over the weekend, Schumer is preparing a bill that would be favorable to shareholders in the following ways (summarized in TheCorporateCounsel.net):

1. Say-on-Pay - require companies to give shareholders an annual nonbinding vote on executive pay practices

2. Say-on-Severance - give shareholders a nonbinding vote on severance packages for executives following mergers or acquisitions

3. Proxy Access - buttress potential SEC rules that would make it easier and cheaper for investors to nominate their own directors (article says SEC is considering a number of "proxy access" techniques and could issue a proposal in mid-May)

4. No More Classified Boards - require companies to hold annual director elections rather than putting only a portion of the board up to vote each year

5. Majority Vote Standard for Director Elections- require directors to resign if they don't win a majority of shares voted

6. Independent Board Chairs - require board chair to be independent

7. Risk Management Board Committees - require boards to appoint special committees to oversee risk management

In my view, the most important parts of this are numbers 3, 4, 5, and 7. However, all these subtle changes, combined with the SEC's decision to revisit "Proxy Access" later next month and their decision to disallow broker votes in being automatically counted in favor of incumbent management on shareholders votes, will lead to a sea-change in how activists engage with entrenched boards and managers starting in 2010.

Position: None.

Originally published in RealMoney.com on 4/27/2009 9:04 AM EDT

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SEC puts Under-performing CEOs and Directors on Notice

Some great news today that the SEC is planning to end the current broker vote rules. This is a "win" for any shareholder who is tired of seeing over-paid and under-performing directors re-elected by seemingly vast majorities of shareholders at their annual meeting.

Take the Citigroup (C) meeting earlier this week. Several in the media pointed out that, despite the large number of angry shareholders voicing their displeasure at the meeting, Citi's board (including Vikram Pandit) was "comfortably" re-elected with about 70% of the vote. Turns out this is really an inflated number.

As the Wall Street Journal reported today, these vote numbers are skewed because the large number of brokers, who hold shares in companies and never hear from the underlying shareholders as to how they want those votes cast, end up throwing them behind management.
The article discusses the upcoming Bank of America (BAC) meeting next week where Ken Lewis will face a lot of heat. Because Ken Lewis will have 1.22 billion broker votes in the bag from the start, he only will need to capture about one-third of the votes from real voting shareholders to "win" a majority of support.

The SEC, under Mary Schapiro, is saying that this free ride is over starting in 2010. These broker votes will no longer count towards the encumbents' stash. All CEOs and directors will truly have to receive a majority vote. That's good for everyone -- including, ultimately, the directors. We'll have much more vigilant boards and better capital markets.

If Ken Lewis survives the vote next week, he likely won't in 2010 under these new rules, which is why my bet is that he announces his departure sometime this summer (after declaring that BAC is stonger than ever and poised to reap the benefits of his Merrill and Countrywide deals).

Position: None.

Originally published in RealMoney.com on 4/24/2009 2:48 PM EDT

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All Public Company CEOs Should be Required to Attend Quarterly Earnings Calls

This morning, Vikram Pandit decided not to attend Citi's (C) earnings' call. To me, this is an affront to any C shareholder. Even in the best of times, a public company CEO should see it as a job requirement to be on these 4x a year calls. After taking billions from taxpayers, I'm amazed that Pandit couldn't fit this in his schedule and left CFO Ned Kelly to soldier on without him. Whatever conflict Pandit had, he should have rearranged it. The optics are terrible and optics matter these days.

Next week, Microsoft (MSFT) will report. Until the last earnings' call in January, Steve Ballmer had routinely skipped these opportunities to communicate with his shareholders -- leaving his CFO, Chris Liddell, to fend for himself. I simply can't understand such reasoning. Do you think Larry Ellison skips out on these kinds of calls? Never.

We shouldn't need Mary Schapiro at the SEC to have to mandate this: public company CEOs need to simply start seeing these calls as obligations -- not distractions.

Originally published in RealMoney.com on 4/17/2009 3:39 PM EDT

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Boards Caused This Mess. Here's How To Fix Them

From Forbes.com

By Eric Jackson and Sydney Finkelstein

02.18.09, 11:25 AM EST

A simple two-step program for greatly improved governance.

Who's responsible for the swift and severe downturn in the economy over the last 18 months? Many groups deserve blame, but the most culpable group of all is boards of directors. They let their organizations leverage up enormously without fully understanding the risks or seriously considering the possibility that housing prices could level off or decline.

The last six years have proved beyond a shadow of a doubt that a tick-the-box legislated attempt to improve corporate governance, like the Sarbanes-Oxley Act of 2002, is just not sufficient; secondly, business leaders don't deserve a free pass to police themselves. We propose a two-part carrot-and-stick process, for both fixing boards and reducing the odds that such a calamitous breakdown in capital markets would happen again.

Politicians have a way of showing up at a crime after the fact (as long as it's serious enough to register with public opinion, that is) to produce legislation they hope will make people think they've done something to prevent the same problem from occurring in the future. Before September 2008, when Washington was forced to come to grips with the vastness of the downturn, politicians hadn't been so interested in business since the dot-com bubble burst eight years ago.

Back then, the drop in stock prices that savaged Americans' 401(k) portfolios was accompanied by revelations of egregious corporate wrongdoing at companies including Enron, WorldCom and Adelphia. Sarbanes-Oxley was the politicians' answer to that bad corporate behavior. It was supposed to make boards more vigilant and accountable for their companies' results. But it was utterly ineffective in preventing this biggest market breakdown since the Great Depression.

We know, from years of research and empirical evidence, that good governance does improve corporate performance and prevent corporate breakdowns. We also know that what makes governance "good" vs. "bad" has nothing to do with most of the "best practice" that finds its way into legislation. A board can be made up mostly of "independent" directors (however you define that); it can have some less tenured members and a chairman who is not also the chief executive officer, but all that has little to do with actual financial results.

The factors that most correlate with better governance and performance, it turns out, are things such as the quality of debate in board meetings, the open-mindedness of the CEO and the directors, whether the board does extensive scenario planning and whether it engages in playing devil's advocate when discussing possible courses of action. None of that is easily measured, so it can't easily be introduced into legislation. Yet it is absolutely critical to good governance.

Business leaders and their apologists at the Business Roundtable and Conference Board criticized Sarbanes-Oxley for years after it passed. They said it was too expensive, bureaucratic and good only for auditors, who got to raise their fees astronomically. They argued that Washington should take a much more hands-off approach. Businesses could police themselves, thank you very much. That point of view has been thoroughly discredited by the econolypse of the last year and a half.

In the two-part carrot-and-stick strategy we propose for improving the functioning of our country's boards, the carrot is better self-governance. Boards need to regulate themselves more effectively. The Securities and Exchange Commission can't be a fly on the wall to every board to tell it whether it's debating issues enough; boards must do that themselves.

The past year's massive destruction of both real capital and reputational capital at firms like Citigroup (nyse: C - news - people ) and Lehman should send shivers up the spine of every public company director. They should be seeking advice from other directors or consultants who have been successful at improving governance.

We have been involved since 2004 in implementing corporate early-warning systems at the board level to help directors address potential problems in a much more rigorous and systematic way. One basic measure of how a board is doing is whether it has an early-warning system in place. Boards must do everything they can to insulate themselves against failure.

But hoping public companies' boards will self-regulate is hardly sufficient. In our opinion, there needs to be a stick in place, too. To create it, SEC chairman Mary Schapiro and her commissioners need to swiftly enact something called proxy access. Today, when any shareholder in a public company wants to nominate a candidate for the company's board of directors, that shareholder must foot the bill and jump over an extraordinary number of hurdles.
The cost is, at minimum, $1 million for lawyers, mailings and proxy solicitors. The candidate must run against the incumbent board member, whose campaign is paid for entirely by shareholders. Imagine the same kind of stacked deck in favor of a one-party system in a political context--we'd call it Venezuela.

Well, U.S. shareholders have been trying to run against Hugo Chavez for years here, with Chavez protected by Delaware court decisions and SEC rules that seek to maintain the status quo (and that also keep the state coffers of Delaware filled, by the way). Proxy access would allow a shareholder who had held shares in the company for some time to nominate one or more board candidates on the company's own proxy. The challengers wouldn't have to pay the costs of mailing out proxies. If a challenger can make the case that he or she should be on the board in place of an incumbent, it should happen. May the best directors--not only the friends of the CEO--serve.

Critics of proxy access argue that shareholders who seek to be elected this way will either have extremist views (i.e., groups such as the AFL-CIO or Teamsters may gain more influence than a true majority of shareholders would want, and hijack the process), or "short-termist" views (i.e., shareholders will demand quick fixes for company problems instead of trusting management to do what's best for the long term).

In our view, these criticisms have no merit. Any potential director up for election to a board of directors, incumbent or challenger, needs to make a case for deserving the seat. We trust shareholders to judge for themselves. We believe Capital Research, Legg Mason (nyse: LM - news - people ), Vanguard, and other big investors can tell if a potential director is a crackpot or an extremist--or, on the other hand, a pawn of the CEO who will do nothing more than rubber-stamp his decisions.

We don't believe proxy access, if passed, will cause a major increase in board challenges, but there will be a few, and those could result in a sea change in board effectiveness. If board members are more closely tied to the people they are supposed to represent--the shareholders--they are bound to ask tougher questions. And that will be in everyone's best interests.

Eric Jackson is founder and managing member of Ironfire Capital LLC and general partner and investment manager of Ironfire Capital US Fund LP and Ironfire Capital International Fund, Ltd. Sydney Finkelstein is professor of strategy and leadership at the Tuck School of Business at Dartmouth and is author of Think Again: Why Good Leaders Make Bad Decisions and How to Keep It From Happening to You (Harvard Business Press, 2009).

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Hurd's Palate Should Concern H-P Shareholders

From RealMoney.com

By Eric Jackson

1/26/2009 12:29 PM EST

You'd be hard-pressed to find a CEO who since arriving at the top spot has been as admired as Mark Hurd of Hewlett Packard (HPQ - commentary - Cramer's Take). The stock is up 80% since he was hired in March 2005, recovering from years of wilt under Carly "all flash, no substance" Fiorina. Over the same period, archrival IBM's (IBM - commentary - Cramer's Take) stock has declined 1% and the NASDAQ has fallen 26%.

Hurd has kept a low profile while underpromising and overdelivering. Quarterly beating of estimates has become the norm for H-P. However, a big red flag for investors popped up last week in the company's most recent proxy filing with the SEC.

As discovered by Michelle Leder of Footnoted.org, on page 47 of the proxy filing, in addition to his $23.3 million in total compensation last year, Hurd received "an other gross-up" of $79,814, which "represents amounts reimbursed to the NEOs for taxes on meals associated with business travel undertaken by the NEOs in connection with events to which family members were invited."

Based on disclosures elsewhere in the proxy, Leder estimated the "gross-up" meant Hurd and his family ate over $243,000 worth of food last year on shareholders' dime. I don't know how that is possible for a family to do, even assuming they dine at the finest restaurants in the land.

After this news bounced around several media outlets last week, H-P issued a statement to Silicon Alley Insider:

The tax gross-up figures contained in H-P's 2009 proxy were miscalculated. The correct "other gross-up" figure for Mark Hurd was $4,117 (not $79,814), which is in-line with last year's figures. Notwithstanding this, some media outlets inaccurately extrapolated the supposed tax rate, resulting in vastly inflated and inaccurate figures for Mark's meals. While this is not a material disclosure, we wanted to set the record straight.

If Hurd and his family really charged over $200,000 in meals last year to H-P's shareholders, it is a major heads-up, especially in the wake of Merrill Lynch CEO John Thain's $1.2 million personal office renovation. In a TheStreet.com opinion column last week, I wrote there were few warning signs of selfish spending prior to Thain's ultimately rejected request for a $30 million to $40 million bonus for 2008, followed by his rushing up Merrill Lynch's year-end bonuses to December and only decreasing them by 6% from the previous year.

In the case of Hurd -- if the original proxy is correct -- this is a warning that he thinks it's OK to charge a few personal things here and there to H-P shareholders. After all, hasn't he increased the shares by 80%, far outpacing his peers, since he took over as CEO? As we learned at Enron, Tyco (TEL - commentary - Cramer's Take), WorldCom and Adelphia , it's that type of thinking that causes corporate leaders to ultimately take one step too far and dramatically cripple or kill the company.

But what if the H-P PR people are right and erroneously inflated the number 19 times in the SEC filing? It's hard to believe the accountants would make such a mistake, but if they did, as in the case of Broadridge, it makes you wonder what other reports to the SEC might have been wrong. It wouldn't give me any more confidence as a shareholder, than if Hurd's family had taken advantage of shareholders.

It reminds me of the terrible blunder made in the counting of Yahoo! (YHOO - commentary - Cramer's Take) shareholder votes at last August's annual meeting. Initially, tabulation company Broadridge Financial Solutions (BR - commentary - Cramer's Take) reported that Yahoo!'s directors had received much higher levels of shareholder support than in 2007. Reporters painted the entire annual meeting as a ho-hum affair, suggesting that reports of shareholder discontent prior to the meeting were overstated.

A few days later, Gordon Crawford of Capital Research Global Investors, one of Yahoo!'s largest and most influential shareholders, challenged the veracity of the reported numbers. It turned out that Broadridge had forgotten to add 200,000 shares for some directors and 100,000 for others. When the company corrected this error, several Yahoo! directors had much higher "against" votes than originally reported (40% versus 20% in the case of Chairman Roy Bostock).

You wonder what would have happened had Crawford not kicked up a fuss? Probably nothing, which makes you wonder how often this happens.

In addition, no revised filing has been sent to the SEC. Just a simple "Whoops -- we messed up" apology is all H-P had to issue for this story to go away.

Will the new SEC headed by Mary Schapiro not give out penalties for mistakes in filings? Surely the public deserves to know that the public company financials on the SEC's EDGAR website are accurate. And why did it take a blogger to uncover all of this? Where were the research analysts working to uncover what was really going on for the benefit of investors?

Whether H-P has a problem doing its numbers or with food expense budgeting, shareholders have seen a bright red flag. At the same time, H-P is trying to digest a slower and less profitable company in EDS, purchased for $14 billion in early 2008. In the next quarter or two, it wouldn't be surprising to get a warning from H-P about cost overruns or expected synergistic revenues that have not materialized.

There will likely be pain in 2009 for H-P shareholders. It would be wise to stay clear until the company shows it has its arms around the new acquisition and is treating its shareholders fairly.

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