Tuesday, October 9, 2007

Response to SEC Shareholder Proposals

On October 8th, we filed our response to the following SEC proposed rules:

1. Shareholder Proposals. Other Release No.: IC-27913. File No.: S7-16-07 and
2. Shareholder Proposals Relating to the Election of Directors. Other Release No.: IC-27914. File No.: S7-17-07.

In our response, we note the following:

  • Our position with respect to capital markets regulation recognizes the primacy of protecting investors. Investor interests, broadly speaking, are not served by growing levels of fraud and malfeasance. As is clear from recent events, securities laws have failed both to protect investors and to promote efficiency. “Facilitating the exercise of shareholders’ rights” will help prevent fraud from occurring.
  • We recognize that the right to submit shareholder resolutions impacting corporate operations, governance and ownership has economic value, like any option. This option value was first uncovered by faith based investors, who found their ability to implement positive social change diminished as the social order moved to a market-based culture. Submitting shareholder resolutions allowed them to move with the social order. This strategy has been co-opted by certain hedge funds, now using the practice for selfish, potentially destructive purposes.
  • Any significant concerns about expanding proxy access rests with these hedge funds, by their nature neither long term investors or sensitive to broader social concerns. We suggest the SEC permit hedge funds to make their proxy voting records public, as mutual funds are required to do. To incentivize this suggestion, the Commission should rule that those hedge funds choosing not to make their proxy voting records public forfeit any legal right to file shareholder resolutions.
  • The 5% ownership threshold proposed in File Number S7-16-07 and S7-17-07 should be much lower. The threshold should tie to length of ownership. For owners holding the stock over 10 years, there should be a nominal requirement based on number of shares held, say, 100 shares, and a pledge to hold onto the stock for another 10 years. For five year holders, there should be a 1,000 share requirement, and a pledge to hold onto the stock for another 5 years. For one year holders, there should be a 10,000 share requirement.
  • The 5% ownership threshold is equivalent to a “poll tax,” effectively disenfranchising large groups of investors. Fraud in the marketplace (detailed in our comments) mandates that options for exercising shareholder rights be enhanced, not diminished.
  • The exercise of voting rights without an economic interest in the underlying security should be disallowed. This is an administrative anachronism created by the fact that publically traded companies do not register individuals as owners of their shares.
  • Any person serving on any corporate board signs a binding contract to act as a fiduciary. This means putting the interests of all shareholders first, so, legally, there are no “special interest directors.”[1] Having an interest in and advocating for a long term issue of perceived future significance to a corporation need not be inconsistent with competent board service.
  • We believe the reference to “states rights” is code for an attitude that supports the resistance of certain entrenched corporate interests to the rights of outside shareholders who are not part of management. Federal law should dominate, given that state law failed to stop the fraud and malfeasance noted.

  • The fundamental problem is the continuing and legal disenfranchisement of the majority of shareholders. To fully address the proxy access issue means first addressing two regulatory loopholes: those that allow hedge funds to operate without supervision and those that allow publically traded companies to avoid registering individuals as owners of their shares.
We continue to believe that efforts to block these rule changes will be ineffective. We suggested a coalition-based approach to this issue in 2004, in a presentation at SRI In The Rockies, a social investing conference. Unfortunately, social investing groups are not immune from the same bigoted and exclusionary tendencies that impact society at large. For these groups to wait until 2007 to create the coalition we suggested is, in our opinion, simply too little, too late.


[1] In fact, if there are any “special interest directors” currently serving on corporate boards, they are those whose sole interest is self enrichment at the expense of other shareholders.

Friday, October 5, 2007

"Bill Pushes Diversity Among Senior (Government) Executives"

According to the Washington Post,

"Legislation to promote diversity in the government's career executive ranks was introduced yesterday by the chairmen of the House and Senate federal workplace subcommittees.
Rep. Danny K. Davis (D-Ill.) and Sen. Daniel K. Akaka (D-Hawaii) said their bill would address the lack of diversity in the Senior Executive Service, the group of about 6,300 career executives who manage the day-to-day operations of the government.

The bill would establish a Senior Executive Service program office in the Office of Personnel Management. The proposed office would collect and maintain data on the race, ethnicity, gender and any disabilities of people who have been certified as qualified to serve in the SES.

The bill also would require federal agencies to establish SES evaluation panels to review the qualifications of applicants for SES jobs. Each panel would have three members. One must be a woman and one other a member of a racial or ethnic minority group.

'We are doing this really to try to bring about some improvement in the management of the Senior Executive Service and to enhance diversity,' Akaka said.

Davis said 'diversity is valuable because it can bring a wider variety of perspectives and approaches to policy development and implementation. Minorities and women need to be at the table to contribute when strategic planning, problem solving and decision making take place.'
Davis added, 'What I see as I visit federal agencies is a senior-level workforce that is not reflective of the diverse people we serve.' "

Monday, October 1, 2007

Emerging Markets & Diversity Conferences

Two conferences on Diversity highlight the growing recognition of market opportunities in this sector.

The first is the 3rd Annual Mortgage Industry Emerging Markets and Diversity Conference. This is being billed as an opportunity to compete for origination opportunities and to preserve communities. It will be interesting to see if they mention recent reports noting racial bias in subprime mortgage lending.

The second is the 14th Annual Ethnic and Multicultural Marketing Omnibus. November 1 - 2, 2007 in Chicago. We (Creative Investment Research, Inc.) are a media sponsor for this event, billed as an opportunity to

"join a star team of Fortune 1000 clients and trail-blazers in multicultural marketing on the most successful ways of engaging the still growing and booming Multicultural Economy in the United States. One fifth of the nearly $10 Trillion in total U.S. buying power will come from the diverse multicultural segments. Learn how your brands can get a lion’s share of this robust market opportunity at a time when the general market’s buying power has considerably slowed down."