April 30, 2007

Comverse First to Adopt Shareholder Access Bylaw

Scandal-ridden Comverse (you might recall the former CEO is on the lam in Africa) adopted a shareholder access bylaw last week in an attempt to defuse shareholder anger. See Article IV, Section 3(b) of Comverse’s restated bylaws.

Below is an excerpt from ISS’ “Corporate Governance” Blog: In a ground-breaking development, Comverse Technology has adopted a proxy access bylaw, a move that may encourage other companies to consider creating mechanisms to allow investors to nominate directors to appear on corporate ballots.

Comverse is the first company to adopt a proxy access provision since a federal appeals court ruled last September that the Securities and Exchange Commission improperly allowed American International Group to omit an access proposal filed by the American Federation of State, County, and Municipal Employees (AFSCME) in 2005. Since that ruling, investor advocates have filed two access proposals and urged the SEC to allow shareholders to pursue the issue at individual companies.

“The action at Comverse is a clear breakthrough as the first company that has amended their bylaws to establish a process for shareholders to nominate directors on the company proxy card,” Richard Ferlauto, director of pension benefit policy at AFSCME, told Governance Weekly.

Also this week, the SEC scheduled three roundtables on the proxy voting process for May 7, May 24, and May 25. Chairman Christopher Cox has said that the SEC will complete work on an access rule before the start of the 2008 proxy season.

Comverse announced the proxy access bylaw this week as part of a series of governance changes as the New York-based company tries to recover from a stock-option grant scandal that led to criminal charges against three former executives. The voice-mail technology firm also is facing a proxy challenge from Oliver Press Partners, which is seeking to call a special meeting and to elect two board nominees.

The new Comverse bylaw is more restrictive than the access provisions that have been proposed by AFSCME and state pension funds this season. Under Comverse’s bylaw, an investor that owns a 5 percent stake for at least two years may nominate one director to appear on the company’s proxy statement. (These ownership and time requirements are consistent with a 2003 draft SEC rule that the agency later abandoned amid corporate opposition.) The Comverse bylaw also would bar an investor from making nominations for four years if its nominee fails to receive at least 25 percent support.

By contrast, a bylaw proposed by AFSCME and three state pension funds at Hewlett-Packard called for allowing two nominations by investors who collectively own a 3 percent stake for at least two years. That binding proposal received 43 percent support in March, despite the opposition of HP management. The California Public Employees’ Retirement System has filed a similar, but non-binding, proposal that will appear on the ballot at UnitedHealth Group on May 29.

It remains to be seen whether other companies will follow Comverse’s example. Last year, investors hailed Intel’s decision to adopt a majority voting bylaw, which since has been copied by dozens of major firms. Likewise, proponents of annual advisory votes on executive pay express hope that other firms will follow the lead of Aflac, which plans to hold such a vote in 2009.

Ferlauto said Comverse’s new bylaw and the vote at HP “indicate that proxy access will be part of the corporate governance landscape going forward and puts increased pressure on the SEC to set some standards for an approach for shareholder nominations.”

Comverse is believed to be the first U.S. company to adopt a proxy access bylaw. In 2003, California-based Apria Healthcare adopted a policy to allow shareholders to submit names for inclusion on its ballot, but the company’s board can reject those candidates, according to Bloomberg News. While other firms, such as HP, allow shareholders to suggest nominees, investors have no recourse if management ignores those suggestions but to wage a costly proxy solicitation.

Shareholder Voting: Economic Perspectives – and the Power of Proxy Advisors

Last week, SEC Chief Economist Chester Spatt delivered this speech on shareholder voting and corporate governance. Here is a noteworthy excerpt:

“Some of my SEC economist colleagues and I are pursuing an academic style study of the role of proxy advisors in proxy “contests.” We focus upon contests as compared to more routine proxy votes because there is relatively more uncertainly about the outcome and therefore, relatively greater potential impact and effects associated with the recommendations.

In our sample of contests with publicly-announced advisory vote recommendations, we find evidence that recommendations lead to price responses and in particular that the market tends to assess recommendations for the dissident as relatively positive news. That there appears to be a substantial valuation impact in the marketplace at the announcement of a contest recommendation also suggests that the recommendations reflect more than just previously public information or conflicts.

In addition, our empirical evidence shows that the recommendations are good predictors of contest outcomes; for example, a recommendation that supports the dissident is a good predictor that the dissident will prevail. The findings are associated with both “influence” and “prediction” hypotheses on the role of the advisor-that the recommendation either influences or helps investors to predict the outcome, or both.”

Updated List of Foreign Private Issuers

On Friday, the SEC posted its 2006 list of non-US issuers.

On a somewhat related note, as reflected in this press release, global regulators are working in tandem more than ever before. One of my first speaking gigs, well over a decade ago when I was at the SEC, was at an IOSCO function. I found it’s pretty hard to get a message across when the audience comes from such a wide variety of backgrounds (different legal frameworks – and don’t forget that there are language barriers to boot) – so that these global regulatory meetings tend to stay at a pretty high level.