Over the past few years, in an atmosphere of corporate scandal and loss of faith even in well-managed companies, a few American companies have moved their headquarters to Bermuda and other offshore havens.
They say their goal is to help the bottom line for shareholders. The only problem is that argument doesn't stand up to the smell test. And it certainly falls flat in the face of reduced rights for all shareholders.
On March 6, at Tyco International Ltd.'s annual meeting - in Bermuda - shareholders will be asked to support a resolution calling on Tyco to reincorporate back to American soil. Similar resolutions are being presented to chief executive officers and boards of directors of other expatriate firms such as Ingersoll-Rand Co. Ltd. and Nabors Industries Ltd., incorporated in Bermuda and Barbados, respectively.
The California State Teachers' Retirement System and other public pension funds, along with additional institutional investors, labor organizations and state treasurers around the country - together totaling more than a trillion dollars in pension investments - are supporting those resolutions. We believe investments in foreign-based American corporations are best protected by relocating those companies back on American soil.
Tyco itself, in its last quarterly Securities and Exchange Commission 10-Q report, admitted shareholders "may have more difficulty protecting their interests" than would shareholders of U.S.-domiciled corporations. For example, under Bermuda law, officers and directors are accountable only to the corporation, putting the shareholders at the bottom of the accountability pyramid, rather than at the top as in the United States. Further, a corporation may sell off substantial assets without shareholder approval. Also, directors and officers are not required to disclose to shareholders personal interests in corporate contracts or transactions.
Offshore incorporation makes it more difficult for shareholders to hold officers and directors legally accountable. Bermuda law extremely limits shareholders' ability to sue officers and directors for such things as breach of fiduciary duty, corporate waste and actions that violate the law - critical rights in today's business climate.
We Tyco shareholders, for example, would benefit from the company's reincorporation because it would be easier for us to evaluate the company's corporate governance, which could then be compared with CalSTRS' other U.S.-domiciled corporations. As many of the rating agencies have now included corporate governance criteria as a part of their rankings, this may be important in the firm's capital-raising activities.
Legislation is pending in Congress and in several states, including California, Massachusetts and Pennsylvania, to prohibit government contracting with expatriate American companies. North Carolina has already taken that step. Those who sponsor the legislation criticize the expatriate companies for wanting contracts worth hundreds of millions of U.S. tax dollars while avoiding paying their fair share of taxes. Losing billions of dollars in federal and state business harms the profitability of and shareholder confidence in the companies affected.
Nine state treasurers, including those from California, Connecticut, Massachusetts, New York and Pennsylvania, have asked Standard & Poor's to remove Tyco and other expatriate companies from the S&P 500 stock index. In addition, the Russell 3000 index excludes non-U.S. companies, affecting institutional investors, which have predominantly indexed equity portfolios.
We believe that most of the targeted companies have failed to credibly quantify the amount of tax savings they think they generate by moving offshore. On the other hand, faced with the loss of hundreds of millions of dollars in government contracts, substantial new tax liabilities and institutional damage afflicting many of the expatriate American corporations, that tax-haven benefit becomes questionable.
Meanwhile, the tax benefits that do exist might be evaporating. The Internal Revenue Service says it is stepping up efforts to collect taxes from corporate expatriates. Legislation is pending in Congress that would result in hundreds of millions of dollars in new taxes on American corporations based offshore.
The accumulating impact of all of those things - reduced shareholder rights, lost government contracts and potential tax increases - is quickly diminishing the tax benefit. That's why we want to strengthen our investments by making these companies come home to America.
Jack Ehnes is chief executive officer of the California State Teachers' Retirement System, Sacramento. The system's $92 billion fund owns 807,649 shares of Tyco.