Executive Insight

Marty Lipton and “Form-Over-Substance” Corporate Governance

Interesting (and I have to think unusual) opinion piece from Marty Lipton at Wachtell, Lipton, Rozen & Katz questioning the bureaucratization and misdirection of corporate governance as manifested in the recent ISS position on Hewlett-Packard’s director nomination process…

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March 11, 2011

The decision by ISS, reported in its March 2, 2011 proxy advisory for the annual meeting of Hewlett-Packard, to recommend against the reelection of members of the nominating committee because of the participation of the Hewlett-Packard CEO in the search for new directors, reflects another mechanistic decision undermining the ability of a board to function collegially.  Like many of the positions taken by ISS, it exalts the board’s monitoring functions over its equally important strategic advisory functions. 

There is nothing in the NYSE rules that limits or restricts the CEO, or any board member who is not a member of one of the independent committees, from making recommendations to the committee, either by attending a meeting of the committee or by discussion with individual members of the committee.  In order to perform its functions as effectively as possible, a board, and its committees, must be collegial bodies.  Rigid procedures designed to wall off communication among directors are the antithesis of good corporate governance. 

The NYSE rule requiring an independent nominating/corporate governance committee specifically provides that the purpose of the committee is to select director nominees “consistent with the criteria approved by the board” and to “develop and recommend to the board a set of corporate governance guidelines.”  The “board” includes the CEO and all the other directors, independent and not independent.  It would be a totally dysfunctional process if input and advice from the CEO was prohibited until after the committee meets and makes its decisions.  There is nothing in the NYSE rule or “best practices” that warrants restricting the CEO from voicing advice or opinion until after the committee has acted. 

Martin Lipton

Source: Wachtell, Lipton, Rozen & Katz

 

"Davos Man" caught in Galleon Insider Trading Web

The Galleon insider trading web continues to grow and ensnare other prominent executives.

Last week the SEC accused a former director of Goldman Sachs Group Inc. and Procter & Gamble Co. of passing inside information about the two companies to a hedge-fund titan at a critical moment in American financial history.

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Galleon’s Web

Criminal complaints and developing disclosures in the Galleon insider trading case allege a far-reaching and complex scheme. Here – courtesy of The Wall Street Journal - are the known and alleged relationships.

View – Interactive Version

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In a civil administrative proceeding, the Securities and Exchange Commission alleged that the director, Rajat Gupta, tipped Galleon Group founder Raj Rajaratnam about quarterly earnings results for both Goldman and P&G during the financial crisis of 2008.

In “the most incendiary allegation of the case”(WSJ), the SEC said Mr. Gupta, serving as a Goldman board member, told Mr. Rajaratnam about a $5 billion investment in Goldman by Warren Buffett's Berkshire Hathaway Inc. before a public announcement of the deal at the depth of the financial panic.

Mr. Gupta called Mr. Rajaratnam after the Goldman board approved the Berkshire deal, "just minutes" before the market closed on Sept. 23, 2008—allowing Galleon to buy Goldman shares and generate a profit of $900,000, the SEC alleged.

 

Previously, Gupta was the boss of McKinsey, the world’s most famous consulting house, from 1994 to 2003. He advises the United Nations’ secretary-general on management, is the chairman of the International Chamber of Commerce, co-chair of the American India Foundation, and sits on several boards.

Now the SEC has charged Mr. Gupta with using those board positions illegally. What might the allegations mean for McKinsey? The alleged incidents took place after Mr. Gupta’s time running the consultancy. But the firm (or “the Firm”, as its employees like to call it) has a proud tradition of advising bosses both expertly and discreetly. As a matter of policy, it almost never even divulges its clients’ identities. Marvin Bower, who ran McKinsey in the 1950s and 1960s, fought to have consulting considered a profession like law and accounting, with the training, prestige and adherence to ethics that professionals pride themselves on.

The Economist writes, “For the former boss of such a firm to be found double-dealing would deal a more profound reputational blow than the usual insider-trading scandal. Traders and hedge-fund types are expected to scrap for every bit of momentary advantage to make their money. It’s rarely a shock, then, when the boiler-room pressure occasionally blows through legal safeguards. But elite consultants, and McKinsey foremost among them, consider themselves in a different class.”

McKinsey is unlikely to suffer any immediate disaster. But its rivals, the hungry two other top-tier consultancies Bain & Co. and the Boston Consulting Group, are surely gleeful today, and will get to work seizing whatever advantage they can tomorrow.

Writing in The Wall Street Journal, Evan Newmark, who like Gupta has a Harvard Business School, McKinsey and Goldman Sachs background (“Davos Man territory”) said, “if there was one message that I took away from my years at these prestigious institutions it was this: Always conduct yourself ethically. Lose your reputation and you’ll lose yourself. How could it be that Gupta didn’t come away with the same message? Or if he did get the message, why did he lose it along the way?”

Gary Naftalis, Gupta’s lawyer is of course arguing that Gupta never lost it. “The SEC’s allegations are totally baseless. Mr. Gupta’s 40-year record of ethical conduct, integrity and commitment to guarding his clients’ confidences are beyond reproach,” said Naftalis yesterday.

Newmark comments, “But only a defense lawyer would find Gupta’s little chats with Raj Rajaratnam beyond reproach. Even if it turns out Gupta isn’t guilty of any crime, he is no doubt guilty of hubris. The calls to Rajaratanam are just too reckless and arrogant.

So far, we don’t know exactly what motivated Gupta. It could be greed. It could be friendship. But it’s hard not to think that it was Gupta’s own success that is in fact now bringing him down.”

Sources:

The Wall Street Journal: Mean Street: Davos Man Rajat Gupta in Bizarro World, Feds Accuse P&G Director

The Economist: Unwanted attention for a discreet firm

Apple Shareholders Nix CEO Succession Disclosure

Apple shareholders rejected a proposal Wednesday that called for the company to disclose a succession plan for its chief executive.

The rejection came a month after Apple CEO Steve Jobs went on an indefinite medical leave for unspecified problems -- an absence that could be related to his previous bout with pancreatic cancer or his 2009 liver transplant. Jobs did not attend the meeting, which was led by Chief Operating Officer Tim Cook and general counsel Bruce Sewell.

Apple Inc. announced the preliminary vote on the non-binding proposal at its annual shareholders meeting at the company's Cupertino headquarters. The company did not provide the voting breakdown.

The Central Laborers' Pension Fund (LIUNA), which owns 11,484 shares of Apple stock, called for a succession plan to ensure "a smooth transition" in case Jobs leaves as CEO.

The proposal didn't ask Apple to name whom it planned to appoint, but it wanted the company to come up with a three-year plan for changing leadership and an emergency plan. The plan would be reviewed annually by Apple, and a report on it would be shared with stockholders.

Like many shareholder proposals, even if this one passed, it would only have served as a formal request that Apple share its succession plan, not a requirement.

Apple, which advised shareholders to vote against the proposal, said it already conducts such planning internally, but warned that its disclosure would reveal confidential information and hurt the company's ability to recruit and retain executives.

Jennifer O'Dell, spokeswoman for the Laborers' International Union of North America, spoke in favor of the proposal, saying Apple has a responsibility to its shareholders to have a clear CEO succession plan in place, whether a transition is "planned in advance or a sudden decision."

After the proposal was defeated, O'Dell said it was likely something that would be presented again in future years.

Source: Associated Press

 

Canada's 50 Best Managed Companies Announced

Established in 1993, Canada's 50 Best Managed Companies is the country’s leading business awards program, recognizing excellence in Canadian-owned and -managed companies with revenues over $10 million.

Every year, hundreds of entrepreneurial companies compete for this designation in a rigorous and independent process that evaluates the caliber of their management abilities and practices.

The Best Managed designation symbolizes Canadian corporate success: companies focused on their core vision, creating stakeholder value and excelling in the global economy. The program has continued to raise the profile of Canadian-owned businesses that have:

• Outperformed their competitors
• Created thousands of jobs
• Achieved sustainable growth
• Excelled both at home and abroad

Identifying Canada’s 50 Best Managed Companies is a two-phase process. For Phase I, companies must complete the online application. Phase I successful applicants will be notified and invited to proceed to Phase II.

Companies selected to move to Phase II are asked to present in their own words how they develop strategy, demonstrate corporate strengths, excel in their marketplace, retain top talent and manage business risks.

Highlights

Best Managed Companies see growth opportunities via mergers and acquisitions.

Over the next 12 to 24 months, there will be a significant amount of merger and acquisition (M&A) activities as private companies see growth opportunities in acquiring competitors or complementary businesses. Companies which have weathered the storm and have maintained solid core businesses, and those with realistic valuations and multiples will become attractive return on investments opportunities for private companies.

Best Managed Companies drive innovation across their organizations.

This year's winners understand the ability to innovate is a strategic competitive advantage for their organizations. Whether it's the shop floor, back office or the front-line delivery of products or services, re-engineering operations continues to be on the agendas of Canada's Best Managed Companies.

Best Managed Companies employ detailed and divergent strategies for business south of the border and beyond.

A continuing theme for Canadian private companies is managing their exposure to the U.S. market. Many companies see this as a huge opportunity to capture market share, grow revenue, relocate manufacturing facilities and engage in M&A activities. On the flipside, another emerging theme is Best Managed Companies' desire to reduce their exposure to the U.S., and pursue acquisitions or other collaborative investments such as joint ventures and alliances on a global scale, with growing interest in South America, Europe, China and other parts of Southeast Asia.

Best Managed Companies build close relationships with customers.

Helping their customers weather the last year was a key focus of Best Managed Companies. While many companies focused internally, this year's winners concentrated on their customers' issues and how to solve them as a means of strengthening their own business.

Best Managed Companies plan for succession or business transition.

Succession planning will be a mega trend private companies will experience over the next 10 years. With the aging population, planning for a massive transfer of wealth - including the ownership of a significant number of Canadian private companies - means that preparing strategic succession plans continues to be a theme with this year's recipients.

Best Managed Companies adopt green strategies.

In support of their overall growth, Best Managed Companies increased their adoption of green strategies. Those tied to the energy supply chain saw significant opportunities in serving an expanding global market domestically and internationally. Others investigated how making their organization greener could support cost-reduction initiatives, increase their reputation as good corporate citizens by protecting the environment, and help to attract the socially conscious Gen-Y labor force.

2010 Best Managed winners:

4Refuel	Farm Boy	Kaizen Automotive Group	Running Room
Artopex inc.	Fengate Capital Management	LASIK MD	S.i. Systems Ltd.
Associate Veterinary Clinics	First Air	Le Groupe Master	Sargent Farms
BCF s.e.n.c.r.l. / LLP	Gentec International	Losani Homes	StarTech.com
Cactus Restaurants Ltd.	Geo. A. Kelson Company Limited	Maple Lodge Farms Ltd.	Supreme Group
Calco Environmental Group	GreenField Ethanol	Maple Reinders Group Ltd.	The International Group, Inc.
Capital Paving Inc.	Gregg Distributors LP	McCain Foods (Canada)	The Miller Group
CBI Health Group	Groupe Robert Inc.	Medcan Clinic	TransX Group of Companies
Charm Diamond Centres	Hatch	Pfaff Automotive Partners	triOS College Business Technology Healthcare
Chaussures Régence Inc.	Holt Renfrew	Quality Foods	West Wind Group of Companies
Crestline Coach Ltd.	Ideal Supply	RGO Office Products Partnership	Western Sales Ltd.
Dessau inc.	Imperial Manufacturing Group Inc.	Ronald A. Chisholm Limited	White Spot Limited
Evertz Technologies Limited	Johnvince Foods

 

 For further information, visit www.canadas50best.com. 

 

Apple CEO Succession Proposal Gets Backing From ISS

An Apple Inc. shareholder proposal requiring the company to disclose a succession plan for Chief Executive Officer Steve Jobs gained the support of Institutional Shareholder Services, a proxy-advising service.

ISS, which helps institutional investors decide how to vote on shareholder propositions, wants Apple’s board to disclose a CEO succession plan annually, according to a report released by the firm. The measure is backed by the Laborers’ International Union of North America.

Jobs announced a leave of absence of Jan. 17, the third time the Apple co-founder has taken time away from the company since 2004 to deal with health problems. While Chief Operating Officer Tim Cook has assumed control of day-to-day operations, Apple’s board hasn’t said who will take over for Jobs if he can’t return. The proposal will be considered at Apple’s annual shareholder meeting on Feb. 23.

“A vote for the shareholder proposal to adopt a succession planning policy is warranted in light of the company’s limited disclosure regarding this issue and the market’s expression of concern over CEO succession at Apple,” Rockville, Maryland- based ISS said in a report dated Jan. 28. The laborers’ union announced the group’s support in a statement today.

Apple’s Opposition

Apple asked shareholders to vote against the proposal in its proxy statement released Jan. 7. The company said its governance guidelines require the board and CEO to annually review succession planning for senior management. That process includes identifying candidates for succession.

Those deliberations are kept confidential. The company said the information could provide competitors with an unfair advantage and give them an opportunity to poach executives. The proposal also could harm its ability to retain executives because it would identify who’s being considered for positions and how they are being evaluated, Apple said.

Steve Dowling, a spokesman for the Cupertino, California- based company, declined to comment beyond the filing.

Source: Bloomberg

Read: LIUNA News Release

Read: Our analysis of the CEO succession planning disclosure issue.

 

LIUNA Calls on Apple to Adopt Proposal Requiring CEO Succession Plan

LIUNA - the Laborers' International Union of North America - issued a news release yesterday asking Apple to disclose certain information about its CEO succession plan. This release comes soon after Apple’s CEO Steve Jobs announced his third medical leave in seven years and references a previously submitted shareholder proposal on the topic due to be voted on at Apple’s shareholder meeting on February 23^rd and which Apple opposes.

Set against the backdrop of Job’s continuing health issues, the situation highlights the increasing concern that shareholders have regarding public company CEO succession practices as examined in our recent report for the Conference Board.

Examining the impact of SEC guidance changes on CEO succession planning

It’s instructive to read both LIUNA’s proposal as well as Apple’s rational for non-disclosure. Apple is resisting disclosure of confidential information that LIUNA is not asking for. LIUNA simply asks for board formal confirmation that a plan – and certain key elements – are in place, not for plan details. The result – a disruptive and now contentious proxy proposal that really could have been avoided.

So far about 20 companies – including Whole Foods and Wells Fargo have adopted LIUNA’s proposals on succession planning.

Read:

LIUNA’s release yesterday.

LIUNA’s shareholder proposal (see page 41 of meeting notice)

Read an analysis from Fast Company, including both sides’ rationale.

A good deal for the UAW?

In efforts to save the domestic auto industry, no other group is getting as good a deal – it might appear – as the UAW. Under the Chrysler deal, the UAW’s retiree health fund will end up with 55% of Chrysler, while the deal proposed by GM would leave the union owning about 39% of the company.

The Chrysler plan envisions a partnership between Fiat and the United Auto Workers union, one of the more peculiar ownership structures in Chrysler's tortured history. The Treasury will contribute $3.3 billion to the plan: $2 billion to pay off Chrysler's lenders and the rest to pay the company's bills during bankruptcy. It said it is prepared to pitch in $4.76 billion more to keep Chrysler running for several years. That's on top of $4 billion the government lent Chrysler in previous months, a debt forgiven as part of negotiations with the UAW and lenders.

Under the GM plan, it is asking the Treasury Department for an additional $11.6 billion in loans, on top of the $15.4 billion it has already received. It envisions giving the government at least half ownership of the company as payment for half of the loans. At the same time, GM said it would use stock instead of cash to pay off half the $20.4 billion it owes a United Auto Workers fund to cover retiree health care. That stock would leave the union owning about 39% of GM.

But when you consider the 55 percent Chrysler ownership is in a company that lost $16.8 billion last year and has seen its sales drop by half, the victory seems less impressive. Especially since the union's stock must necessarily be converted at some point to cash to pay billions of dollars in retiree health care bills over the next 25 years. Plus, the union's control in the boardroom will be limited. Despite the large stake, it gets only one seat on a nine-member board that will govern a new Chrysler-Fiat joint venture.

For GM, the health care tab is projected to total $46.7 billion over the lives of about 350,000 retirees and spouses. At Chrysler, it's $10.9 billion for around 82,000 retirees. So to unload the costs, the companies persuaded a reluctant UAW to take billions in cash to set up trust funds called voluntary employees beneficiary associations, or VEBAs, to pay the bills starting next year.

But the U.S. auto market went bad and both automakers ran out of cash. Enter government financing and the Obama administration, which engineered the Chrysler-UAW deal. Chrysler has now formed an alliance with Fiat, and the government will finance what it hopes will be a quick Chrysler bankruptcy. Chrysler plans to close five more factories and shed thousands more workers as it slims down and resets to build Fiat-designed fuel-efficient cars in North America.

"What's happening at Chrysler and GM is not employee ownership in any recognizable way," said Corey Rosen, founder and executive director of the nonprofit National Center for Employee Ownership. "The employees don't own any part of Chrysler or GM, it's the health trust, and they're going to sell that stock as soon as they can. It's more like somebody saying 'I can't pay the money I owe you, so take some stock and you can sell it.'"

That's exactly what the union intends to do, its president Ron Gettelfinger said Friday in an interview with National Public Radio.

Source(s): Associated Press, UAW wins big Chrysler stake but can't run company by Tom Krisher and Dave Carpenter, May 2nd 2009; Wall Street Journal, Chrysler pushed into Fiat’s arms , May 1st, 2009; Wall Street Journal GM Offers U.S. a Majorit y Stake April 28th 2009.