WASHINGTON -- The Council of Institutional Investors chalked up several milestones at its spring meeting at the end of March.
For the first time ever, 50 members attended a private session at the Securities & Exchange Commission, meeting with the agency's top staff, commissioners and Chairman Arthur Levitt. They discussed concerns such as shareholder-proposal reform and options repricing.
Council members also adopted their first guidelines on soft dollars and trading practices and approved a bill of rights describing effective governance of public companies, policies on shareholder voting rights and what constitutes independent directors.
James Burton, chief executive officer of the California Public Employees' Retirement System, Sacramento, who had pushed for such a meeting, said he was pleased with the results and that it provided the opportunity for a healthy exchange. He said he had felt the SEC needed to hear from large institutional shareholders more directly than in the past.
"We were pleased four commissioners took the time to come and listen to our discussion. The (SEC) staff was well-represented and very attentive. They were quite candid. It was the beginning of a dialogue we need to have, and they seem to be receptive to an annual meeting."
The commissioners made it clear they understand the need to hear the shareholder perspective, but noted they feel awkward sitting in the judge's seat, he said.
"It's a position they would rather not be in, but we believe it is necessary for them to be involved," he said.
James Wood, executive director, Louisiana State Employees' Retirement System, Baton Rouge, said it was a good opportunity to clarify various issues.
"I was interested in securities litigation and soft dollars so I was happy that the SEC general counsel explained the eight criteria they use to determine when they will or will not file an amicus (friend of the court) brief in a lawsuit. It had always been a mystery to me before as to what motivated them to get involved," he said.
He had also wondered when the SEC was going to put out its own position on soft dollar practices and learned at the meeting that the delay was due to the agency's being "overwhelmed" after questioning more than 200 brokers and money management firms about their soft-dollar practices.
CalPERS' Mr. Burton added that the Council members presented the SEC commissioners with their own newly passed guidelines on soft dollar practices. "We told them we hoped they would finish their report soon. Chairman Levitt indicated the end was in sight and a report would be coming out in a couple of months," he said.
Many of the governance policies adopted by the Council two weeks ago have been in effect since the last bill of rights was passed nine years ago, but others have been voted on in bits and pieces, said Anne Hansen, deputy director of the Council.
"The new guidelines codify what we stand for," she said.
The Council reiterated core policies calling for annual elections of directors by confidential ballots, with at least two thirds of a corporation's directors independent; and it recommends all members of boards' nomination, audit and compensation committees be independent.
"A person whose directorship constitutes his or her only connection to the corporation," qualifies as independent, according to the council.
Policies not in the original bill of rights, but worth noting, include guidelines on boards giving appropriate notice of meetings and making them convenient for shareholders.
The Council also suggests boards review any director who does not receive at least 10% of the votes cast, and asks that shareholder proposals that receive a majority of votes for two consecutive years be put up by companies for binding shareholder votes at the following year's annual meetings.
Also new are the Council's recommendations for director and management compensation, which specify that annual approval of a majority vote of a corporation's independent directors should be required for the CEO's compensation, including any bonus or other extraordinary payment; all directors should own company stock and be compensated only in cash or stock, with the majority of the compensation in stock; and no underwater options should be repriced and no discount options awarded unless submitted to shareholders for approval.
The Council in addition recommends that a board have no fewer than five and no more than 15 members, with shareholders allowed to vote on any major change in board size; companies set and publish guidelines specifying how many other boards their director may serve on; and directors with full-time jobs should not serve on more than two other boards.