The Corner Office

All of you Lou Dobbs fans out there might be curious about what happened to one of the greatest travesties in American economic history — a proxy fight by an English hedge fund over board seats on CSX, an American railroad.

Apparently, The Children’s Investment Fund, the British group, and their Tory allies, 3G Capital Partners, may have won four of five board seats they sought at the June 25 shareholders meeting.

Yet, those seats are still being contested since several hundred million votes were cast and it is taking some time for them all to be tallied. There are lawsuits to consider. CSX has come after TCI, saying that it and 3G broke U.S. securities rules by not disclosing their intentions in time while picking up a large position in CSX.

Supposedly, the final tally will be reported July 25, but you shouldn’t hold your breath given all those votes.

What is interesting is that this proxy battle that so worried Dobbs and red-blooded, upstanding Americans everywhere appears to be a nearly complete victory for the foreign challengers. Apparently, plenty of decent American shareholders in CSX see a need for change. If the redcoats are coming, so be it.

(Redcoat image courtesy ciambue via Flickr, CC 2.0)

While gaining among corporations in general, “Say on Pay” support is losing favor among financial companies, according to a new report by The Corporate Library.

The shareholder watchdog group notes that “Say on Pay” lost support among eight major financial firms during this proxy season. The list includes Citigroup, Inc., Capital One Financial Corp., JP Morgan Chase & Co., Merrill Lynch, Morgan Stanley, U.S. Bancorp, Wachovia and Wells Fargo & Co.

Overall support, however, gained slightly from 41 percent in 2007 to 42 percent this year, The Corporate Library says.

“Say on Pay,” which involves shareholders voting on non-binding resolutions to affirm executive compensation, has gained currency as C-Suite salaries and other forms of remuneration have skyrocketed, especially at large, well-known companies. Often, the total compensation does not reflect how well a top executive has performed.

One could argue that top execs at big financial firms such as Merrill Lynch and Citi haven’t exactly been soaring successes. Wachovia announced $8.86 billion in second quarter losses just this week.

The Corporate Library posits that the diminished support for “Say on Pay” at big banks and investment houses might actually be linked to a decline in remuneration among executives precisely because of poor performance. In any event, its a trend worth watching.

The reach for non-U.S. director and executive talent continues. More companies based in the U.S or elsewhere are diversifying their C-suites and boardrooms with non-Americans and are looking increasingly to India and China for fresh blood.

That’s the trend noted by BusinessWeek and America.gov.

Here are a few examples:

• Sidney Taurel, a Moroccan-born Spaniard, is chairman and CEO of drug maker Eli Lilly.
• India-born Indra Nooryi has been CEO and chairwoman of PepsiCo Inc. for nearly two years.
• German software giant SAP has an American director, a Portugese head of sales, and will have a Frenchman born in Germany as its CEO next year. SAP is searching India and China for director candidates.
• Among companies that have recruited directors from India and China are drug-maker Norvatis, consumer giant Procter & Gamble and equipment manufacturer John Deere.
• Goldman Sachs has Indian corporate magnate Lakshmi Mittal as a director.

One reason for the outreach is obvious — a majority of sales for some marquee-name firms are coming from beyond the U.S. Hewlett-Packard, for instance, gets 70 percent of its revenue from overseeas, IBM receives about 66 percent of revenue from abroad and Cisco Systems gets about 45 percent, BusinessWeek reports.

This is a natural development as the world’s economy becomes more global but one wonders just how deep the talent pool, especially in places such as India and China, can be. There has been plenty of literature about the need to develop the managerial and technical skills of promising candidates from developing countries. Presumably, the demand for diversity will push such training initiatives forward.

After six years of survival, could a constitutional technicality derail the far-reaching Sarbanes-Oxley Act?

At issue is a case before the U.S. Court of Appeals in Washington, D.C. that challenges the constitutionality of the Public Company Accounting Oversight Board. The PCAOB was set up by the Sarbanes-Oxley Act (SOX) to set up better accounting standards for companies and enforce them.

Although controversial, the PCAOB has played an integral role in toughening accounting standards for publicly-held companies and providing better, more transparent financial statements to the advantage of investors, boards and management alike.

The court challenge, columnist Jane Bryant Quinn writes, is a technical one having to do with the constitutionality of having the U.S. Securities & Exchange Commission, which works hand in glove with the PCAOB in enforcing SOX, to appoint PCAOB members. Perhaps, the U.S. President should be making the picks, lawsuit plaintiffs argue.

What happens if the PCAOB is found to be unconstitutional? According to Quinn, a stay might be put in place so the U.S. Supreme Court can hear the case. But if it goes further and Congress does nothing corrective, all of SOX might become unraveled. Imagine all the millions of consulting fees and PowerPoint presentations that would likewise evaporate.

All that work, for nothing.

Wall Street is coming on strong for Barack Obama in this year’s presidential campaign donation race. Big investment firms such as Goldman Sachs and J.P. Morgan favor Obama over John McCain by margins of roughly four or five to one.

So states a recent report by Chief Executive magazine which examined campaign contribution reports surveyed by the Center for Responsive Politics in Washington.

Overall, Goldman Sachs has favored Democrats this time by 71 percent and J.P. Morgan by 66 pecent. Citigroup likes the Donkey Clan by 63 percent. Goldman, for instance has given Obama’s campaign $605,980 compared to $146,520 for McCain. UBS donated $370,130 to Obama compared to a mere $89,265 for McCain.

Obama love doesn’t carry over into all business sectors, however. As might be expected, Big Oil favors the GOP with 72 percent of its donations compared to only 28 percent for Democrats. No big whoop there considering that both President George Bush and Vice President Dick Cheney have very tight ties to the oil patch.

That some sectors of corporate America don’t exactly favor the GOP is no big surprise to me. Despite what populists might have you believe, CEOs of large businesses have always held Bush in fairly low regard because he seemed out to lunch on trade issues and didn’t quite understand the importance of maintaining research and development support which has slipped dramatically during his tenure.

A few years ago, in fact, I wrote a cover story for Chief Executive in which we surveyed C-level executives on the subscription list. Overall, the Bushies got a “C-minus.” The mainstream media tends to paint Bush as being the man of big business, but it isn’t necessarily so.

(Image courtesy BarackObama.com) 

Do you think the nation’s top securities regulator goes overboard in enforcement? One of its outgoing commissioners thinks it does.

U.S. Securities & Exchange Commission member Paul Atkins recently co-wrote an article claiming that enforcement issues are so egregious that the SEC needs to set up an independent review panel. The last time the SEC had one was 36 years ago.

A Republican known for constantly bird-dogging cost issues regarding enforcement, notably the Sarbanes-Oxley Act, Atkins has been the commission’s most outspoken leniency hawk since he was appointed in 2002. He has constantly urged free market, non-governmental solutions to securities matters.

Among the matters that Atkins believes need addressing:

• SEC regulators should be required to fully disclose all of their evidence and their case as they go after an alleged violator.
• If no wrong-doing is found, SEC watchdogs should close their cases fully and promptly.
• The SEC should not be allowed to subpoena all e-mails, voice mails, records and other documents in a case as this cases undue cost burden on the defendant.
• Fines should be consistent with the SEC’s mission to protect investors.
• The SEC should stop going after smaller, easier cases just to make a news media splash.

Since I have covered the SEC for a while, I have to say I admire Atkins for his consistent stances. There’s nothing wishy-washy about him. But I usually disagree with what he stands for. It seems to me that withl so many companies in deep do-do, including Countrywide Financial, Bear Stearns, Wachovia, etc., the SEC needs to be toughening its enforcement not weakening it. Your view?

(Image courtesy SEC.)

Generally speaking, finding talent for a business is a bit easier than finding capital or innovative ideas. But if you do business in China the opposite is true, according to McKinsey Quarterly in a new report.

McKinsey researchers Kevin Lane and Florian Pollner note that China’s typically shallow managerial talent pool is getting even more shallow as China’s economy screams along and more businesses expand. According to a survey by AmChamber in Shanghai, 37 percent of the managers at U.S.-owned enterprises said that recruiting talent was their biggest problem. A separate McKinsey survey noted that 44 percent of respondents said that finding talented managers was the biggest barrier to their global ambitions.

The root of the problem is that for all of its tremendous growth, China still is a developing country without a long history of management training. The problems become more acute when the Chinese manager is required to deal with markets beyond his or her homeland.

Lane and Pollner offer these tips to find and keep talent:

• Integrate strategic management and talent planning. Factor strategy into talent needs.
• Know what you need and be prepared to revise. Once you study your personnel needs, make sure you factor in internal hires, job churn and promotions due to unexpected growth.
• Give talent a stronger and sharper focus. Don’t dump recruitment on the human resource department. Elevate recruitment to the level of other must-do tasks such as financial planning.
• Build strong and long pipelines. Start at the university level and add in-house training.
• Develop in-house. For a good example, look to Procter & Gamble, which has developed such talent-nurturing programs as the one thats let promising Chinese managers earn master degrees on the job.
• Go beyond the usual in seeking talent.
• Turn problems into pluses. This can be done by letting inexperienced managers grow by tackling immediate problems.
• Be comprehensive and consistent in efforts to integrate talent-spotting into normal operations.

BNET columnist Jessica Stillman penned an intriguing post last week calling a new Stanford study noting the dubious claims of shareholder advisory services that they can predict future performance of companies. The report, issued by the Rock Center for Corporate Governance, run jointly by Stanford law and graduate business schools, reached its conclusions after examining 15,000 ratings of 6,827 public firms from 2005 to 2007.

The study took an especially close look at Institutional Shareholder Services, the Rockville, Md.-based firm that surveys around 38,000 shareholders meetings each year. ISS, now owned by RiskMetrics Groups, Inc. of New York, uses a series of metrics to rate corporate governance, including financial restatements, shareholder lawsuits, return on assets and others.

Like competitors such as Glass, Lewis & Company in San Francisco, ISS weighs on various proposals from shareholders and candidates for directorships. As shareholder democracy issues gain more currency, firms such as ISS seem to have more relevance since they present themselves as knowledgeable and unbiased sources of good info. What’s more, they have their own bells and whistles through which they can divine a company’s future, or so they claim.

The Stanford study, however, throws cold water on the conceit that governance advisers are rocket scientists. There’s another little problem as well: conflicts of interest.

ISS and its president John M. Connolly have been constantly criticized for apparent conflicts of interest. As Robert D. Hershey Jr. wrote in the New York Times a couple of years ago: “ISS draws fire for both setting governance standards and helping corporate clients meet them, provoking criticism that it profits handsomely from a possible conflict of interest. It (ISS) says it has strictly separated these functions in order to eliminate conflicts.” Another Times business reporter, Gretchen Morgenson, has regularly trashed I.S.S in her columns, saying it acts both as an auditor and consultant.

Gee, isn’t it funny that the big accounting firms got into big trouble a few years ago for profiting from a very similar situation. They vetted financial reports of companies while selling them consulting services, with the idea being, (wink wink) that if you play ball on hiring our consultants, we’ll play ball on your screwy, dishonest financial statements. Big Accounting was forced to spin off its consulting units as part of the post Enron and WorldCom house cleanings.

Another scary thing about governance advisers is that they seem to get fewer. In 2005, ISS, for instance, bought Washington, D.C.-based Investors Responsibility Research Center and last year I.S.S. itself was picked up by RiskMetrics.

And, there’s the perennial problem of Big Think with these groups. Organizations such as I.S.S. seem to think that they can guru their way through disparate companies without actually dealing with them from the inside.

Anyway, my guess is that the Stanford folks are on to something. What do you think?

In the first two installments of this three-part series, I talked about the birth of the Sarbanes-Oxley Act and about how it spread fear and loathing among business leaders in the U.S. Flash forward to today. Having taken effect nearly six years ago, SOX has settled in. Was it worth it? What’s next?

For large public companies, the learning curve was over a while ago. Most consider SOX compliance part of everyday life since they’ve had to comply in 2004.

Not so for small companies, especially “non-accelerated filers” which are firms with less than $75 million in public equity. On June 20, the Securities & Exchange Commission gave them an extra year – to Dec. 15, 2009 – to start providing internal and external attestation reports with their 10-K annual reviews. When that deadline is reached, just about every element of SOX will be in place.

Has it been worth it? That’s a very touchy question, but my vote is “yes.” Here are some reasons why:

• Costs have been rationalized. While early costs were high, ranging from about $5 million for big companies to about $2 million for middle-sized ones, the overall costs have gone down from year to year as accounting departments and their outside auditors get used to the drill. Even though small companies have been whipsawed by changing deadlines, their costs are going down, too. Lord & Benoit, a Massachusetts consulting firm, reports that small firm compliance cost has dropped from about $500,000 to $250,000.
• SOX has made a difference in fewer shareholder lawsuits. As companies are forced to report their finances in a more disciplined way, shareholders have less to complain about. For instance, the Securities Class Action Clearinghouse of Stanford University Law School, reported that securities fraud litigation activity was about 14 percent less for the 1997-2006 period. SOX must be the answer. However, there was an up-tick in lawsuits in 2006-2007, but that probably has more to do with the stock option backdating and sub prime mortgage scandals.
• SOX compliance is making it easier for U.S. firms to attract funds and goodwill in overseas markets. SOX has been a brake for fraud and a yardstick for good balance statements. Other countries, such as Japan and Great Britain have similar laws.

That’s my case. What do you think?

For more on SOX and how to deal with it, see our crash course, “How to Survive (and Win) with Sarbanes-Oxley,” and “Four Reasons to Love Sarbox.”

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A while back I posted on “Globality: Competing with Everyone from Everywhere for Everything,” a new book written by three experts from the Boston Consulting Group, Harold L. Sirkin, James W. Hemerling and Arindam K. Bhattacharya.

A smart discourse on how local companies in developing economies, such as China, India and Brazil, are bucking tradition and going for broke on their own terms, it’s a pretty compelling read. So compelling, in fact, that I thought our readers would enjoy this podcasted excerpt.

Like what you’ve read (and heard) here? Hate it? Think BNET can be better? Let us know! Email us directly, or take the Help Us Build a Better BNET poll on BNET Intercom.