To provide some context to these changes, GMI noted that since its first ratings, released shortly after Sarbanes-Oxley was enacted, the number of independent directors at US companies has risen from 66% to 73% and the average board size has declined by 5%. Add to this a substantial uptake in board evaluation practices (93% versus 35%) and the departure of âold guardâ directors and those no longer willing to serve (more than 2,000 people who served as directors at US companies in 2002 are no longer directors at GMI-rated companies), and you can see broad scale quantifiable change. But many institutional investors see these changes as only the start of needed reform and are focused on more qualitative change. Their chief concerns today are the need to change the director election process and to reign in excessive CEO pay. Both issues in their mind go to the very heart of shareholder protection.
The majority vote movement certainly has gained traction. As recently as last July only a handful of US companies allowed some form of majority voting for director elections, but today more than 120 companies tracked by GMI have adopted some variation of majority voting including Time Warner Inc last week. Further, more than a hundred and forty shareholder proposals are expected to be seen in proxies in the coming months. Considering the speed with which this issue has spread, it is indicative of a new openness at many boards and could signal the more qualitative change that institutional investors are pushing for. Among US companies that have votes on this issue coming up in the next two weeks are Analog Devices, Hewlett-Packard and Ciena. In Canada, all six of the big banks and two of the largest insurers have discarded the plurality voting system as has the Toronto Stock Exchange, and a 48-member investor group is seeking to get 50 of Canadaâs top 100 companies to adopt a form of majority voting by year end.
On the matter of executive compensation, shareholders are supporting the Securities and Exchange Commissionâs proposal for more detailed disclosure and are pressing boards to more closely tie compensation with performance. Option awards are being scaled back and there are now more instances of risk of forfeiture on option awards when performance targets are not met. Attention is also being focused on the range and amounts associated with all kinds of executive perks. Some US shareholder advocates are asking for an UK-style advisory vote on compensation committee reports and adjustments to âgolden parachutesâ. Among companies that will face some of these kinds of proposals in the next several weeks are Coca-Cola, Pfizer, US Bancorp, Citigroup and Merrill Lynch.
These new findings emerged as GMI produced its latest series of governance ratings for 3,400 global companies, including 1,780 US firms. Gavin Anderson, CEO of GMI said that âit certainly appears that directors are recognizing shareholder concerns more quickly and examining these important issues. Each board obviously will make the decisions on these matters that best serve their company, but they are clearly not oblivious to the sentiments being expressed by the owners of the companies for whom they serveâ. Despite these generally healthy developments though, they are by no means universal and there continue to be practices at US and foreign companies that convince shareholders that there is still much work to be done. Consider:
Â· Eight of the eleven member board of AWB (The Australian Wheat Board) are wheat growers, who have the ability to elect a majority of the board. AWB is under investigation in Australia for alleged bribes to the regime of Saddam Hussein to maintain wheat sales to Iraq. The stock has declined by 30% since the official inquiry began last month. (GMI rated the company 3.0 in September of 2005 and flagged the company for its unusual board structure and restrictions on shareholder rights.)
Â· Apollo Group files no proxy statement with the SEC and does not hold an annual shareholders meeting. Management, insiders and their trusts own all the voting shares and control the board; public shareholders hold non-voting shares. In the last three years insiders have sold $140 million in stock while at the same time the company has been subject to various legal actions and government investigation. In the recent past, both its auditor and its first non-family CEO have been dismissed. The stock has declined by nearly 20% in the last two years. (GMI rated Apollo 1.0, its lowest rating, in February of 2004.)
Â· Audiovox has a board where executives account for half of the members. There are two classes of voting stock and the CEO controls 55% of the votes. Recent compensation practices have included special payments of $22 million to the CEO and EVP as part of a sale of company assets to a third party. The stock has declined by more than 20% since September last year. (GMI rated Audiovox 1.0 as of September 2005.)
Â· Biovail has a board chair who is a former CEO and who stills holds 14% of the stock. While this fact alone should be enough to focus shareholdersâ attention on how the company is governed, the company has in the past issued loans to executives and is involved in numerous lawsuits and government investigations of accounting and operating practices in the US and Canada. The generally weak governance profile of the company contributed to the initial low GMI rating of 3.0 in July 2003. Subsequently, earnings collapsed - as a result of a truck accident as claimed by the company â and the investigations began shortly after. The stock is off 50% since GMIâs first rating in June of 2003.
Â· Livedoorâs CEO was arrested in Tokyo last month and charged with fraud. The company had reported earnings growth of more than 200% in 4 of the last 5 years but the board consisted of the CEO and 5 other non-independent directors, several of whom were employees. Also, the former audit partner at the companyâs 12-accountant outside audit firm provided consulting services to Livedoor while the audit firm had an ownership stake in the consulting firm which also had as one of its directors Livedoorâs CFO. The stock has dropped by 90% in the last few months. (GMI has not rated Livedoor but was conducting research on the company when the scandal broke.)
In contrast to these examples, GMI notes that 6 companies have consistently received GMIâs highest rating of 10.0 in either five out of six, or six out of seven occasions (including the latest ratings), depending on when they were first rated, and thus represent companies with high governance standards with little governance risk. These companies are: BCE (Canada), Nexen (Canada), Colgate-Palmolive (US), Pepsico (US), Wisconsin Energy (US) and Westpac Bank (Australia). In contrast to the poorly governed companies highlighted above, the composite total shareholder return over the last three years of these 6 companies through February 25 was 23.75%.