Committee of Concerned Shareholders

INDEPENDENT AND/OR ACCOUNTABLE CORPORATE DIRECTOR = OXYMORON?

"MEANINGLESS ELECTIONS, WHERE THE OUTCOME IS DECIDED IN ADVANCE, FELL OUT OF FAVOR AFTER THE COLLAPSE OF THE BERLIN WALL -- EXCEPT IN CORPORATE AMERICA." (FORTUNE MAGAZINE, 3/9/06, "FIXING CORPORATE BOARDS") "WHAT WOULD YOU CALL AN ELECTION IN WHICH VOTERS ARE PRESENTED WITH ONLY ONE SLATE OF CANDIDATES AND INFORMED THAT VOTES AGAINST THAT SLATE WILL NOT MATTER?" (NYT, 4/4/03, "WILL S.E.C. ALLOW SHAREHOLDER DEMOCRACY?") "DEMOCRACY IS ONE OF THOSE FUNNY CONCEPTS THAT MOST PEOPLE SUPPORT UNTIL THERE'S A DANGER THEY WON'T WIN." (CBS. MARKETWATCH.COM, 1/31/04, "FAIR ELECTIONS? NOT FOR U.S. CORPORATIONS")

WHY SHOULD YOU CARE WHETHER MEMBERS OF CORPORATE BOARDS OF DIRECTORS, WHO SUPPOSEDLY SUPERVISE CORPORATE BEHAVIOR, ARE ACCOUNTABLE TO ANYONE? CORPORATIONS EXERCISE SUBSTANTIAL CONTROL OVER OUR DAILY LIVES AND THE LIVES OF OUR CHILDREN. TO A GREAT DEGREE, CORPORATIONS CONTROL THE QUALITY OF THE FOOD WE EAT, THE AIR WE BREATHE AND/OR THE THOUGHTS WE THINK.

SHAREHOLDERS (THE TRUE OWNERS OF CORPORATE AMERICA) SHOULD BE ENTITLED TO A FAIR AND IMPARTIAL OPPORTUNITY TO ELECT TRULY INDEPENDENT DIRECTORS. THE REALITY; HOWEVER, IS OTHERWISE. "DONALD TRUMP MAY HAVE POPULARIZED THE PHRASE 'YOU'RE FIRED,' BUT IT SEEMS THAT ONCE YOU'VE REACHED CERTAIN RAREFIED STRATA IN AMERICAN LIFE --- FAR, FAR REMOVED FROM A MERE APPRENTICESHIP --- THERE IS LITTLE DANGER OF BEING HELD ACCOUNTABLE FOR YOUR ACTIONS." (LA TIMES, 12/8/04, "YOU'RE (NOT) FIRED!") THE PERFORMANCE OF CORPORATE DIRECTORS WILL ONLY IMPROVE WHEN THEY CAN BE HELD PERSONALLY ACCOUNTABLE TO SHAREHOLDERS FOR THEIR ACTIONS, E.G., VOTED OUT OF OFFICE AND REPLACED BY CANDIDATES NOMINATED BY SHAREHOLDERS WHOSE NAMES APPEAR ON THE CORPORATE BALLOT. UNTIL SHAREHOLDERS CAN SEEK PERSONAL ACCOUNTABILITY THROUGH AN ECONOMICALLY FEASIBLE PROCEDURE, MANAGEMENT AND DIRECTORS, THEIR FIDUCIARY DUTY TO SHAREHOLDERS NOTWITHSTANDING, WILL CONDUCT "BUSINESS AS USUAL."

RULES OF THE SECURITIES AND EXCHANGE COMMISSION ("SEC") HAVE CAUSED THE PROBLEM. WE HAVE FILED A FORMAL PETITION FOR RULEMAKING AND SUPPLEMENTARY COMMENTS WITH THE SEC TO ELIMINATE THE RULE. YOU CAN ASSIST TO BRING ABOUT MUCH NEEDED CHANGE BY EMAILING YOUR COMMENTS DIRECTLY TO THE SEC. PLEASE SEE, Shareholders Unite! - Petition for Rulemaking (SEC File No. 4-461). HUNDREDS HAVE ALREADY DONE SO.

HE SEC IS CONSIDERING WHAT IT BELIEVES TO BE PROXY REFORM. WE ARE SKEPTICAL OF THE SEC'S COMMITMENT TO ACHIEVING DIRECTOR ACCOUNTABILITY. PLEASE SEE, Problems With Proposed SEC Rule 14a-11, Problems With SEC Disclosure Requirements AND OUR FORMAL COMMENTS TO THE SEC. ON MARCH 10, 2004, THE COMMITTEE OF CONCERNED SHAREHOLDERS WAS A PANELIST AT THE SEC'S SECURITY HOLDER DIRECTOR NOMINATIONS ROUNDTABLE IN WASHINGTON, D.C., AT WHICH THE COMMITTEE SUBMITTED ITS WRITTEN COMMENTS. A BEHIND-THE-SCENES PROSPECTIVE WAS PUBLISHED. (CORPORATE GOVERNANCE, MARCH-APRIL 2004, "REPORT FROM THE FRONT")

"PRESIDENT BUSH HAS BEEN PREACHING THE BENEFITS OF DEMOCRACY TO PEOPLE THROUGHOUT THE MIDDLE EAST. BUT BACK HOME, CORPORATE EXECUTIVES AND SECURITIES REGULATORS ARE MAKING IT CLEAR THEY DO NOT BELIEVE THAT WHAT IS GOOD FOR IRAQIS WILL BE GOOD FOR GENERAL MOTORS --- OR ANY OTHER PUBLIC COMPANY." (NYT, 2/13/05, "NO DEMOCRACY ON THESE BALLOTS") THE BUSINESS ROUNDTABLE, IN A THINLY VEILED ATTEMPT TO CONTINUE TO SKEW THE CORPORATE ELECTION PROCESS IN FAVOR OF CORPORATIONS WHILE IGNORING SUBSTANTIAL SHAREHOLDER INTERESTS, HAS RECENTLY PETITIONED THE SEC. THE COMMITTEE SUBMITTED ITS RESPONSIVE WRITTEN COMMENTS TO THE SEC. THE BUSINESS ROUNDTABLE AND THE CHAMBER OF COMMERCE ARE DESPERATE TO DEFEAT ANY COMPONENT OF SHAREHOLDER DEMOCRACY. SEE, "CORPORATE CRONIES: HOW THE BUSH ADMINISTRATION HAS STALLED A MAJOR CORPORATE REFORM AND PLACED THE INTERESTS OF DONORS OVER THE NATION'S INVESTORS" BY PUBLIC CITIZEN --- CONGRESS WATCH (OCTOBER 2004).

"RICHARD BREEDEN, FOUNDER OF ACTIVIST INVESTMENT FUND BREEDEN CAPITAL MANAGEMENT ... LIKE MANY INVESTORS WHO TRY TO PRESSURE COMPANIES TO CHANGE STRATEGIES OR MANAGEMENT ... INVESTS ONLY IN COMPANIES THAT FALL BEHIND THEIR PEERS. ... BREEDEN'S BACKGROUND AS A FORMER SEC CHAIRMAN SEEMS TO GIVE HIS CAMPAIGNS MORE CLOUT.... THE FORMER SEC CHAIRMAN HAS HARSH WORDS FOR COMPANIES THAT TRY TO FEND OFF ACTIVISTS WITH LEGIONS OF LAWYERS AND PUBLIC RELATIONS FIRMS TO ATTACK THEIR MOTIVES AND STRATEGIES. HE SAYS THE SEC IS PARTLY RESPONSIBLE FOR FAILING TO REQUIRE CORPORATE AMERICA TO BE MORE SHAREHOLDER FRIENDLY, A RARE PUBLIC REBUKE OF THE AGENCY BY A FORMER OFFICIAL. 'I WOULD LIKE TO SEE THEM DO MORE TO ADVANCE THE INTERESTS OF SHAREHOLDERS IN CORPORATE GOVERNANCE,' BREEDEN SAID OF THE SEC. 'THEY HAVE FALLEN SHORT.'" (REUTERS, 1/22/08, "FIRMS KEEP BLOCKING ACTIVIST INVESTOR'S GOAL")

PENSION FUNDS AND LACK OF BETTER CORPORATE GOVERNANCE

One of the most revealing questions dealing with pension funds and lack of better corporate governance is: Why are pension funds wasting time with non-binding shareholder resolutions when they could, under current SEC rules, nominate slates of Director-candidates by running low cost, effective proxy contests? The filing of a bare bone proxy statement and making about 30 vote soliciting telephone calls to institutional proxy voters could have a substantial impact. We speak from personal experience. Our group of individual investors, who met on a Yahoo financial message board, ran such a campaign against a NYSE listed company, contacted 80% of the eligible voters, won 24% of the vote for our slate of Director-candidates and caused the departure of a CEO of questionable competence. Our out-of-pocket expenses were less than $15,000. One would think that well-financed pension funds could do even better with companies that are in need of better corporate governance and are among the 14,000 companies that have publicly traded securities. Their campaigns could start with smaller corporations and work up the food chain. The bigger fish would soon take serious notice. Fear is a great motivator.

"Vanguard Group founder John Bogle says that direct ownership of stocks has shifted from control by individuals to mutual funds and institutions that often fail to act in the best interests of small investors." (MarketWatch, 10/13/05, "Bogle battles the fund business") "Some investors … have for years taken on lackluster management, while public pension plans and others have leveled criticisms over lax corporate governance issues, excessive pay and cronyism on their boards. But today, activists are having more impact because they are more willing to engage in proxy fights to replace executives or other steps, something pension plans shied away from. Bernard Black, a professor at the University of Texas at Austin, argued in a 1998 paper that previous activists 'don't conduct proxy fights, and don't try to elect their own candidates to the board of directors ... the institutions achieve the effects on firm performance that one might expect from this level of effort -- namely, not much.'" (WSJ, 11/23/05, "Big Shareholders Are Shouting Ever Louder --- Activists Pressure Executives To Unlock Value, Even Using Pirate, Bulldog in Their Monikers")

The Committee of Concerned Shareholders ("Committee"), formerly known as the Committee of Concerned Luby's Shareholders, consisting of individual shareholders of Luby’s, Inc. ("Luby's") who met on a Yahoo! Finance Message Board in 2000, is the first grass-roots shareholder group to conduct a formal proxy fight. Luby’s, then headquartered in San Antonio, Texas, was a near 230-unit cafeteria chain with annual sales of approximately $500 million. Its shares are listed for trading on the New York Stock Exchange ("NYSE").

The Committee’s Director-nominees received 24% of the votes cast and two (2) of the Shareholder Proposals that it supported (i.e., removal of all anti-takeover defenses, annual election of all Directors) received approximately 60% of the votes cast. Luby’s acceded to the Committee’s demand that any board member be allowed to place an item on a board meeting agenda. Previously, only the Chairman or CEO could set agenda items.

The Committee’s out-of-pocket expense was less than $15,000. (A member of the Committee, with a legal and computer background, provided services without charge.) The Committee was able to solicit approximately 80% of the potential votes. Luby’s expended more than $250,000 of corporate assets to oppose the Committee's efforts.

Some have said that the Committee’s efforts with Luby's caused the departure of its former Chief Executive Officer ("CEO") and President, the nomination of a Director-candidate with hands-on restaurant experience, the entry of a restaurant experienced white-knight/investor and the relinquishment of position by the former Chairman of the Board.

The Committee’s proxy contest efforts revealed the substantial difficulties that individual Shareholders would face in attempting to hold Directors accountable. Further, it showed that the extent of Shareholder dissatisfaction is not necessarily proportional to the size of stock holdings of Director-candidate nominators. Even though our Director-candidate nominators held 1/4% of the outstanding stock, our candidates garnered 24% of the votes cast!

A background paper prepared by the Council of Institutional Investors, which represents more than 130 pension funds with more than $3 trillion in assets, stated that the Petition for Rulemaking (SEC File No. 4-461), jointly filed on August 1, 2002 with the SEC by the Committee and James McRitchie, Editor of CorpGov.Net, has "re-energized" the "debate over shareholder access to management proxy cards to nominate directors and raise other issues." (CII, "Equal Access – What is It?" California Public Employees' Retirement System ["CalPERS"], Investment Committee, Agenda Item 8d, 3/17/03) The SEC is considering various changes. "[I]n filing the original rulemaking petition (SEC File No. 4-461) with the SEC that set this change in motion." (SRI.advisor.com, 10/9/03, "SEC Opens Proxy to Shareowner-Nominated Directors, Critics Bemoan Triggers, Thresholds") "Equal access is quickly becoming one of the fiercest corporate governance issues being debated...." (Financial Times, 3/25/03, "SEC under pressure on board nominations")

Several books have mentioned the Committee's efforts, e.g., "A Practical Guide to SEC Proxy and Compensation Rules" by Goodman and Olsen, "Corporate Governance" by Monks and Minow, "The Edgar Online Guide to Decoding Financial Statements: Tips, Tools and Techniques for Becoming A Savvy Investor" by Taulli "Meetings of Stockholders" by Balotti, Finkelstein & Williams, "Corporate Governance 2004: Preparing for the Next Wave of Disclosure & Board Changes" by Doty, "House of Plenty" by Dawson and Johnston.

We have entered into an age of widespread investor skepticism over nearly all aspects of corporate governance. Scandals are sapping investor confidence. With the financial shenanigans at Enron, WorldCom, Global Crossing, Tyco, Adelphia, Lucent, Xerox, Qwest, Ahold NV, Peregrine and other public companies permeating the news, many are seeking ways to improve corporate governance and, in particular, Director accountability to Shareholders. Solutions involving better disclosure and stiffer penalties miss the big picture. Additional disclosure has not caused Management and/or Directors to abandon acts of greed and conflicts of interests. Tweaking rules and regulations at the margins will only minimally improve the quality of corporate governance.

The powers-that-be will vigorously seek to maintain the status quo. It took the sarcasm/wisdom of Molly Ivins to summarize the situation. "If you look around on almost any level, you'll notice that people who have special advantages almost always manage to convince themselves that they are entitled to those advantages. ... [P]eople will just get outraged if you try to correct even the most glaring inequities -- that sense of entitlement to special privilege is really tricky. Almost everyone who has previously enjoyed an advantage and is suddenly forced onto a level playing field will feel cheated, treated unfairly, singled out for undeserved punishment." (Working for Change, 9/25/03, "Greed and Grasso")

The real problem with corporate governance is the lack of an effective procedure by which Directors can be held personally accountable for their actions, e.g., voted out of office and replaced by candidates nominated by Shareholders. Shareholders (the true owners of Corporate America) should have the legal right to nominate truly independent Director-candidates and cause the names of those candidates to appear on the Company's ballot. "[S]hareholders have no meaningful way to nominate or to elect candidates short of waging a costly proxy contest." (The Conference Board, 1/9/03, "Commission on Public Trust and Private Enterprise - Findings and Recommendations") For the most part, incumbent Directors have no real concern about their personal accountability to Shareholders. "[I]t is especially difficult to remove a director for poor performance ... [N]on-performing directors ... were allowed to stay because the chairman felt it was not worth the effort or embarrassment to remove them. ... '[O]ne of the most difficult tasks confronting boards now is what to do with underperforming directors'..." (Globe and Mail, 3/15/03, "The boardroom and its cast of characters") "'The biggest obstacle to a good board is arrogance,' Raber [Roger Raber, president of the National Association of Corporate Directors] said. 'With some directors, there is a sense of entitlement. ... "I'm here as long as I want to be."'" (LAT, 7/22/02, "Crisis In Corporate America")

"William Donaldson, chairman of the Securities and Exchange Commission ... compared the current system of electing corporate directors, in which the incumbent board nominates a slate and the ballots it sends out have no other candidates, to elections in the Soviet Union. 'It's not really an election at all,' he said." (International Heard Tribune, 5/6/04, "Who cares if the bosses are angry?")

Rich Koppes, coordinator of Stanford's Institutional Investors' Forum and Fiduciary College, member of the advisory board of the National Association of Corporate Directors and former General Counsel of the CalPERS, stated, "As a director of three public companies.... Too often, in my experience, boardrooms are full of directors that still don't understand that they have a fiduciary duty to shareholders at large. ... I think we have too much in boardrooms today a feeling that you have kind of a divine right to continue on the Board without anybody challenging that assumption." (TheCorporateCounsel.Net, 5/21/03, Webcast Transcript "Shareholder Access to the Ballot") Hopefully, Koppes does not sit silently, but timely informs his fellow BOD members that they do have fiduciary duties to Shareholders.

"[A] large proportion of U.S. investors believe financial and accounting regulations governing publicly held companies are still too lenient, according to a Wall Street Journal Online/Harris Interactive personal-finance poll. The online survey of 1,248 investors … found that 55% believe corporate governance regulations are too lenient, and that percentage jumps to 77% of investors ages 45-54. … This skeptism about the financial practices of public companies has led almost a third of investors to reduce or divest their holdings in a company due to poor governance… A majority of American investors believe responsibility for corporate governance lies primarily with the company's board of directors: … But the poll shows nearly two-thirds of investors surveyed don't believe boards of directors are effective in overseeing the companies they govern. … 42% of those polled say punishment for poor corporate governance should be directed at boards of directors… [S]ays Robert Fronk, senior vice president at Harris Interactive. 'They're saying, someone needs to take personal responsibility, someone needs to pay the price.'" (WSJ, 10/14/05, "Investors Are Skeptical of Success Of Sarbanes-Oxley, Poll Finds")

"Investor complaints about executive pay are getting louder and angrier, but CEOs are likely to keep raking it in for some time to come. They think they deserve their steep payouts even when their performance has been far from stellar. … Certainly, boards have become more independent in the past four years…. Yet, because CEOs have influence over who gets on the board -- the only board slate offered to shareholders is the one proposed by management -- directors are careful not to offend them. … Nothing will change until shareholders gain the ability to easily replace directors. Call it the fear factor: If directors knew they stood a good chance of losing their board seats -- and the prestige and valuable business connections these provide -- unless they aligned themselves with shareholders, they might stop forking over so much and narrow the gap between what CEOs and their managers and employees get. To get there requires changing corporate laws and practices. As a first step … shareholders gain the power to place director candidates on corporate ballots and to initiate and adopt changes in corporate charters. Under current rules, shareholders can only pass nonbinding resolutions and must wage costly proxy fights to nominate a dissident director slate." (WSJ, 6/26/06, "Sky-High Payouts To Top Executives Prove Hard to Curb")

"[S]hareholders deserve some rights of ownership. If they can't elect the directors who represent their interests, what can they do? Moreover, strong oversight by shareholders should reduce the need for regulatory oversight." (WSJ, 11/22/06, "Pivotal Fight Looms for Shareholder Democracy")

Directors are very much beholden to Management and fellow Directors, as opposed to Shareholders! The present system to select/nominate/retain corporate Directors is rife with conflicts of interests.

"Instead of serving as watchdogs for shareholders who elect them, corporate directors too often act as lapdogs for the executives who handpick them. At a minimum, the breakdown of board accountability has resulted in stock losses for investors. At worst, it has contributed to corporate wrongdoing." (USA Today, 4/27/03, Editorial/Opinion - "Behind many errant CEOs hide weak corporate boards")

The problem is that beholden and consensual Directors engage in "groupthink" and do not make the best decisions on behalf of Shareholders. "The psychologist Irving Janis invented the word 'groupthink' in 1972 to describe the process in which a group makes foolish choices. Each member of the group tailors his or her view to fit the consensus. Signs of groupthink include the ignoring of expert opinion, selective use of evidence and the illusion of omnipotence. ... The price of groupthink is that, at some point, reality intrudes." (LAT, 6/3/04, Opinion) "It isn't merely that members of the group think alike but that they come to overvalue the harmonious functioning of the group." (LAT, 7/11/04, Commentary: "'Groupthink Isn't the CIA's Problem") "Numerous studies show that good people can make bad decisions when acting in groups, particularly in stressful situations. … ('Group-think' pressures can be mitigated by involving) more people, and rotating in new people with fresh perspectives…. More critical eyes help root out potential problems and facilitate solutions. …Directors need to place a high priority on the airing of objections…." (Seattle Times, 6/15/04, "Good corporate ethics start with rooting out 'group think'")

"The firing of a CEO used to be a rare event -- even the worst of them often managed to cling to power with remarkable tenacity. In the past two years, however, CEO firings have become commonplace. … What has happened here is a sea change in the way American businesses are run. And it has happened in a stunningly short period of time. Just a few years ago, CEOs still handpicked most members of their boards, and most boards gave their CEOs a long leash -- or no leash at all. Today's boards look very different. Directors are picked by a nominating committee, not by the CEO. And increasingly, shareholders and their advocates have some say in that selection…. The end result: Boards are much less beholden to their CEOs, and much more susceptible to outside pressure, than ever before. … Add to that mix the anger of shareholders who are upset about low returns and inflated CEO compensation, and you have the makings of a revolution." (WSJ, 8/23/06, "Leash Gets Shorter for Beleaguered CEOs") This story is overly optimistic, but still casts Directors as, in effect, benevolent dictators. However, since Directors control the proxy machinery and, thus, are not nominated or truly elected by Shareholders, they remain effectively unaccountable. There are over 14,000 corporations with publicly traded securities. Events at a few does not a sea change make.

"During the last four-and-one-half decades I have spent sitting on five public and 16 non-public boards, I never once saw a board member being proposed by the nominating committee. Typically, one director alone along with the C.E.O., or, the C.E.O. alone proposed nominees. The nominating committee merely vetted. That, as they say, is life. /s/ Phil Johnson" (Corporate Governance Leadership Blog, 4/17/06, "Sing It Again, Frank ... That's Life ") Where was Mr. Johnson and what was his response to his fellow Directors when he observed that corporate nominating committees were being bypassed?

"Ms. Teslik [Executive Director, Council of Institutional Investors] cites how difficult it is for shareholders to elect a director other than those handpicked by management --- even though the directors, in theory, represent the shareholders. 'Our system allows executives to pick the boards who are supposed to police them,' she says." (WSJ, 7/16/02, "Wall Street Rushes Toward Washington, Flees Responsibility") For all practical purposes, Management and fellow Directors select Director-candidates and cause them to be "elected." Management uses Shareholders' assets to conduct proxy solicitation efforts on behalf of the candidates selected by Management and fellow Directors. There is little likelihood that Management will desire, select or support candidates who are inclined to ask "tough questions" on behalf of the Shareholders. Further, Directors, who do not cooperate with Management and/or fellow Directors, will not be asked to serve an additional term. Directors know the score. Yet, while dependent on Management and their fellow Directors for their longevity, Directors still have a fiduciary duty to ALL Shareholders to monitor Management’s actions.

"When John J. Mack began his effort to recruit and promote new talent at Morgan Stanley, he did not have to stray too far a field — or off the fairway, for that matter. Two of the first directors named to the firm's board last summer are members of Mr. Mack's own club, the Golf Club of Purchase in Westchester County … [W]ith chief executives under increasing pressure to have independent boards, that old temptation to have a few golf pals on the board and in the executive suite might be less acute. Yet the practice appears to be alive and well, if not as visible. … Mr. Mack has recruited other directors, as well as executives, who are diverse in makeup and background, and share no recreational ties with the chairman." (NYT, 3/11/06, "A Path to a Seat on the Board? Try the Fairway") This is a blatant example of a CEO "recruiting" his own BOD members --- the persons who are supposed to supervise him on behalf of Shareholders. Ethical handicaps seem to extend beyond the fairways. The Boardroom has become the new 19^th hole for good cheer and fellowship. The word to Shareholders is: "Four!"

Former Tyco International Director Wendy Lane discussed the Director selection process. "How did you get on Tyco's board? ... I went to a Wharton conference, and Dennis (Kozlowski) was acting CEO in a case study.... We were role-playing a board meeting.... Apparently he liked my answer. He asked me onto the Tyco board." (Corporate Board Member, Special Legal Issue 2003, "Tyco Director Says, 'I've fallen Off the Cliff")

The newly minted CEO of Tyco International decided to and did replace the entire BOD. He used "hard-nosed salesmanship" to dispose of the former Directors. One can only wonder what that euphemism really means. "It was (Ed) Breen's first day at Tyco, and the new CEO had several important visitors. … [S]even major shareholders, representing 15% of Tyco's ownership … made a simple demand: that Breen replace the majority of the board of directors right away. … Breen decided to go further than that—and replace the entire board. 'To reassure investors, we had to go overboard on corporate governance,' he says. But the process required hard-nosed salesmanship. … Breen asked the directors to vote that none of the veterans of the Kozlowski era could stand for reelection at the next annual meeting in early 2003. … With the vote deadlocked at 5-5, Breen cast the deciding vote to replace the entire board.” (Fortune, 11/15/04, "Mr. Cleanup") This was not an instance of going "overboard on corporate governance," it was an instance of going overboard. In effect, the entire BOD abandoned the ship. Tyco’s stock price has subsequently increased, but does the end justify the means with every member of the new BOD beholden to Breen?

"WorldCom said it had not used an executive search firm to attract the board members and declined to provide information about how broad a pool of candidates it had been able to assemble." (NYT, 8/30/03, "Five Are Chosen to Join Board of a Reorganized WorldCom") "UTStarcom Inc. (Internet protocol networking concern) … hired Korn/Ferry for a board search…. Korn/Ferry … arranged interviews with prospects, who included Jeff Clarke and Allen Lenzmeier. … UTStarcom paid Korn/Ferry $75,000 after Mr. Clarke, chief operating officer of Computer Associates International Inc., joined its board…. Mr. Lenzmeier, a Best Buy Co. vice chairman, took his directorship… UTStarcom didn't pay the $70,000 promised Korn/Ferry for placing him." (8/16/05, WSJ, "Korn/Ferry Alleges Theft Of Confidential Client Data By a Former Star Recruiter")

"[N]ewly appointed director Jon F. 'Jack' Hanson ... says Mr. Scrushy invited him to join its board because they casually knew each other from serving ... on the board of the National Football Foundation and College Football Hall of Fame. Several months before Mr. Hanson got his HealthSouth directorship, the company donated $425,000 to the football foundation...." (WSJ, 4/11/03, "Board Members Had Lucrative Links at HealthSouth")

"Enron CEO Kenneth Lay called to ask him to fill a board seat expected to be vacant soon..." (WSJ, 12/24/02, "Ties to Two Tainted Firms Haunt a Top Doctor") "Jeff Rodek, CEO of software maker Hyperion Solutions, interviewed candidates for the company’s board …. Rodek … has hired one new director and is looking for another." (CFO Magazine, October 2000, “Corporate Governance – Empty Seats on the Board")

"Williams H. Webster … had until recently headed the auditing committee of a company that was facing fraud accusations…. At the center of the investigation and the suits … is … the company’s chairman and chief executive, who recruited Mr. Webster and other prominent Washington figures to serve on its board... The board members included George Mitchell, the former Senate majority leader, and Beth Dozoretz, the former finance chairwoman of the Democratic National Committee." (NYT, 10/31/02, “Audit Overseer Cited Problems in Previous Post”) "CEOs are scrambling ... to recruit fresh board members..." (WSJ, 11/19/02, "Building a Board That's Independent, Strong and Effective")

"(Question) In your experience, what kind of due diligence do potential directors normally do before accepting a position? (Answer by Morrison & Foerester partner Darryl Rains) Too often very little. When a friend or longtime associate asks you to serve on a board, it's sometimes difficult to ask probing questions." (Forbes, 2/17/05, "Q&A: How Directors Can Shield Themselves") Note that it was "asks you to serve" as opposed to "asks you to apply." Where did the "friend or longtime associate" obtain the authority to invite someone to serve on a BOD? The idea that an election by Shareholders is only a mere formality is very ingrained into the corporate and news media mindset.

"Michael Miles, a longtime ally of former Morgan Stanley Chief Executive Officer Philip Purcell, stepped down yesterday as a director of the blue-chip securities firm. Mr. Miles … is one of a number of Purcell allies who have left or are expected to leave the board following Mr. Purcell's resignation…. John Mack, who succeeded Mr. Purcell on June 30, brought in three new directors last month. … As head of the nominating committee that chose new directors, Mr. Miles helped cement Mr. Purcell's hold on the CEO job…. Mr. Miles is the third Purcell ally to leave the board since the resignation." (WSJ, 9/7/05, "Miles, Ally of Ousted CEO Purcell, Leaves Morgan Stanley’s Board") Did the new CEO fire the Directors who "stepped down"? It might have been instructive had the meaning and background facts of "brought in" and "stepped down" been explored in detail. "Brought in" seems to imply beholden to Mack vis-à-vis Shareholders, to whom Directors are supposed to owe a fiduciary duty.

"Michael A. Miles, a Morgan Stanley director with close ties to the former chief executive, Philip J. Purcell, has resigned from the board, the bank said yesterday. The move, which was expected, is the latest signal that the new chief executive, John J. Mack, intends to reorganize a board that during the battle over Mr. Purcell's leadership became a lightning rod for criticism and remains the target of several shareholder lawsuits. … As head of Morgan's nominating committee, Mr. Miles was an architect of a board that included several former chief executives, many of whom lived in the Chicago suburbs, who defended Mr. Purcell in the years after the Dean Witter Morgan Stanley merger." (NYT, 9/7/05, "Morgan Director Resigns, a Sign That a Reorganization Is Likely") “Reorganize” seems to mean the selection of Directors who are beholden to the new CEO and, thus, would be compliant. And, if they are not compliant, the Directors could expect that the BOD would be “reorganized” again.

"Three more Morgan Stanley directors who served under former Chief Executive Philip Purcell announced resignations, in a year-end coda to the battle over the Wall Street firm's future that ended with the return of John Mack. The latest directors to step down are Miles Marsh, the lead outside director; Edward Brennan, the former chief executive of Sears, Roebuck & Co. who had the strongest ties to Mr. Purcell; and John Madigan, former chief executive of Tribune Co. … Mr. Mack, a North Carolina native, has recast the board, bringing in four outside directors, two of whom have North Carolina ties as well. Roy Bostock, an advertising executive, like Mr. Mack graduated from Duke University and has served as a trustee. Erskine Bowles is president-elect of the University of North Carolina . Three former Purcell-era directors left the board in September. With yesterday's resignations, only four remain from the group of 10 outside directors elected at the annual meeting in March. … [O]ne or more new directors may be added next year to the total of nine…." (WSJ, 12/22/05, "Morgan Stanley Loses 3 Directors In Latest Exodus") Is this an instance where a CEO informed Directors that they are "stepping down" so that the CEO can "recast" and "bring in" his own set of compliant cronies as opposed to engaging in the charade of a Director nomination process and election by Shareholders? Where are all the Trumanesque Directors, who, on behalf of Shareholders, would dare to stand-up to the McAurthuresque CEOs? "The resignations of Edward A. Brennan, John W. Madigan and Miles L. Marsh … are the latest sign of a fundamental reshaping of the board by the firm's new chief executive, John J. Mack. The departure … is an open acknowledgment that all the control levers at Morgan Stanley are now firmly in Mr. Mack's grip. … Mr. Mack has moved quickly to repopulate the board with executives more in his own image." (NYT, 12/22/05, "Three Morgan Directors Resign; All Were Allies of Ex-Chief") "Fundamental reshaping," "repopulating," "control levers" and "own image" sound so much more acceptable than BOD lack of accountability and usurpation of Shareholder rights.

"Fannie Mae appointed an accounting expert to its board days before a regulatory report is expected to criticize the company's directors for failing to ask tougher questions about how the mortgage-finance giant kept its books. The government-sponsored provider of funding for home loans said Dennis Beresford, an accounting professor at the University of Georgia , Athens, is joining the board and taking over as chairman of the board's audit committee. …. A Fannie spokesman declined to comment on whether the expected report from the company's main regulator, the Office of Federal Housing Enterprise Oversight, or Ofheo, was a factor in the board changes. Ofheo's report, recently sent to Fannie's management, is due to be made public Tuesday. The report is expected to blame the board and senior executives for failing to ensure that Fannie complied with accounting rules. … Mr. Beresford is a former national director of accounting at Ernst & Young LLP and former chairman of the Financial Accounting Standards Board. He also is a director of Kimberly-Clark Corp. and Legg Mason Inc." (WSJ, 5/20/06, "Fannie Mae Names New Director") Please see Internal Investigations, below.

"Over the years, Mr. (Maurice R.) Greenberg (former CEO of American International Group) connected with many of his outside directors in another way: by making big donations through the Starr Foundation, a nonprofit organization he controls, to institutions that some A.I.G. directors led or belonged to. Contributions to such outfits surpassed $44 million from 1998 to 2003, the most recent figures available. … According to the most recent filing, it had roughly $3.6 billion in assets, mostly in A.I.G. shares. …Did the foundation's contributions to the directors' favored organizations influence them as the recent crisis unfolded at A.I.G.? None of the directors would comment on that. … [S]hareholders have a right to wonder if all those donations to the directors' favorite charities are clouding their judgment." (NYT, 4/10/05, "Charity Begins at the Board. Just Ask A.I.G.") Did this involve an instance where the BOD's fear that AIG would be criminally indicted (and, thus, become extinct) trump greed? On the other hand, was personal greed the trump card? If AIG ceased to exist, those cushy BOD jobs would do likewise. "The six-paragraph letter ... represents an opening salvo ... pitting the former chief executive (Greenberg) against the ... board members he picked." (WSJ, 5/5/05, "Greenberg Takes AIG to Task") The CEO "picked" the BOD members! There is not the barest pretext that Shareholders are involved in the process, except to rubber stamp those "picked" by the CEO who the BOD is supposed to supervise. "When Mr. (Frank) Zarb left Nasdaq in 2001, Mr. Greenberg asked his friend to join AIG's board, a plum directorship at one of the nation's leading companies." (WSJ, 5/20/05, "Casualty of AIG Mess: Two Financiers' Long Alliance")

"Many more corporate directors are independent of management these days, but boards have more work to do before they can persuade shareholders that they are acting as good stewards, says Julie H. Daum, who leads the board practice at the executive search firm Spencer Stuart in New York. The firm says her practice conducts about 60 percent of all board member searches in the United States . Following are excerpts from a recent conversation: … Q. So the notion that directors are just captives of C.E.O.’s is not based in reality? A. … Now companies have to put into their proxies where the idea for a new director came from. I think boards also are very cognizant now of having anything that can be perceived as a conflict. If you and I serve on a board together, it probably means that neither of us should serve on another board with each other. Boards are very conscious of the concept of interlocking boards. It used to be that’s where the ideas for candidates came from. You knew somebody from another board and you’d recommend them. Q. What is an example of a company where the independence of directors has been questioned? A. Home Depot is a good example. The relationships among directors, those were not situations where someone was getting compensated by the other. But they were serving on the boards of other organizations. … Q. What do you think of the assertion by Bob Nardelli, Home Depot’s C.E.O., that his board is the most independent in

America

? A. … But there’s independence and then there’s independence. I could be your next-door neighbor and best friend, but I qualify as independent because we don’t have a business relationship. I’m not serving on your board. You’re not setting my compensation. We’re not doing consulting work together. We would meet the stock exchanges’ criteria for independence, but obviously we have a less-than-independent relationship. That’s what you can’t quantify." (NYT, 8/27/06, "The Pros and Cons of Independent Boards")

"Over more than 20 years, Duke (University) transformed itself from a Southern school to a premier national institution with the help of a winning strategy: targeting rich students whose families could help build up its endowment. … Both schools (Duke and Brown University ) had a behind-the-scenes power broker, a go-to man for prominent parents seeking to fast-track their children's applications. Duke had Joel Fleishman, 72 years old, a wine connoisseur who sits on boards of companies run by Duke donors and the parents of Duke students. … Celebrity students generally lag behind their classmates in academic honors. … Duke has acknowledged the existence of development admits. … Mr. Fleishman's friendships with Duke donors gave him a valuable entrée into businesses far a field from academia. Take, for example, Ralph Lauren. Two of the famed designer's children, David and Dylan, graduated from Dalton School in Manhattan in 1989 and 1992 respectively and enrolled at Duke while Mr. Fleishman ran the fund-raising campaign. A person familiar with their Dalton records describes David as a "B-plus" student with SAT scores in the 1100s. Dylan had better grades and SATs in the 1200s. In that era, Duke's average SAT score was close to 1350. … In 1999, Mr. Fleishman became a director of Polo Ralph Lauren Inc. As of the company's most-recent filing, he was earning $35,000 a year as a director plus $7,500 as chairman of its compensation committee and $2,000 per meeting. He also owned or held options to buy 37,500 shares of Ralph Lauren stock, worth at least half a million dollars, public filings show. … Mr. Fleishman also sits on the board of Boston Scientific Corp., whose chairman, Duke alumnus Peter Nicholas, is one of Duke's biggest donors. His three children graduated from the university. Mr. Fleishman sits on more corporate boards "than a lot of people, especially nonpresidents," says J. David Ross, a former vice president at Duke. Mr. Ross says he believes the directorships weren't payback for admissions." (WSJ, 9/9/06, "How Lowering the Bar Helps Colleges Prosper")

"Google Inc. Chief Executive Eric Schmidt is joining Apple Computer Inc.’s board of directors…. Schmidt was elected Tuesday…." (Reuters, 8/30/06, "Apple Board’s Search Ends With Google CEO") "Apple Computer Inc. said Google Chief Executive Eric Schmidt joined its board of directors…. Some analysts interpreted the appointment … as an event that could help Apple…. " (WSJ, 8/30/06, "Google CEO Schmidt Joins Apple Computer Board") Two well respected financial publications differ as to whether "joining" is the equivalent of being appointed or being elected. How could mere mortals, e.g. Shareholders, reasonably be expected to recognize and correctly interpret this corporate governance obfuscated code?

"[M]r. (Stanley) O'Neal's board (at Merrill Lynch) is largely handpicked. He has recruited people like John D. Finnegan, the chief executive of Chubb and a friend for more than 20 years. The two men worked together in the General Motors treasury department. Mr. O'Neal is also close to another director, Alberto Cribiore, a private equity executive who runs his own firm, Brera Capital. In the late 1990s, Mr. Cribiore came close to persuading Mr. O’Neal to join his nascent private equity firm." (NYT, 10/27/07, "Merrill Lynch Weighs Ouster of Top Officer") With a $9 billion write-down of sub-prime investments, the BOD became somewhat less consensual.

"Merrill Lynch's board members dropped the ball during the almost-five-year reign of the now-ousted Stan O'Neal. ... Directors also should recognize that their previous hands-off approach didn't work. Mr. O'Neal's ruthless response to anyone who challenged his authority might have made sense as he consolidated his position. Still, it left him holding the firm's top four positions for a time: chairman, chief executive, president and chief operating officer. ... The directors now have to put one of their own in charge as interim nonexecutive chairman. The nonexecutive chairman post is something they should consider keeping. ... That might put off some potential CEO candidates. But Merrill's travails stem from inadequate oversight, and a CEO who insists on all the leeway granted Mr. O'Neal might not be the right choice. The presence of a nonexecutive chairman could reassure investors the board is back on the case." (WSJ, 10/31/07, Comment: "Merrill Board's 2nd Chance")

"Merrill's board was packed with people picked by Mr. O'Neal, and he was reportedly someone who resisted constructive criticism and stifled genuine debate. In this, he resembles plenty of chief executives, and there's nothing in Sarbanes-Oxley to prevent it. But it's not good governance or effective leadership. As a result, Mr. O'Neal and his board may have failed to engage in the kind of debate that would have prevented this tragedy. To be specific, what was Merrill's board asking Mr. O'Neal when Merrill was earning record profits on the outsize success of its huge investment in subprime mortgages and related collateralized debt and loan obligations? I know it's hard to ask tough questions in the face of success. It's not a strategy for winning popularity contests. But it's essential in the worlds of business and investing. ... [R]eward is correlated with risk. You can't earn massive returns without assuming tremendous risk. We now know that was true for Merrill. Amid the big gains in its fixed-income operations, it was assuming far more risk than anyone there apparently realized." (WSJ, 10/31/07, "Merrill's Board Needed To Question Success")

"Fremont General Corp., the Santa Monica (California) lender forced to exit the sub-prime mortgage business, replaced its entire board of directors except for its chief executive and president. Stephen Gordon, named chairman and chief executive in November, brought in five new directors...." (LAT, 1/10/08, "Fremont replaces most of its board")

The process by which CEOs, in effect, select members of Boards of Directors is seriously flawed. In order to mask details of the secretive process, news releases may vaguely state that the persons were "appointed," "joined," "brought on," "called," "chosen," "hired," "interviewed," "recommended" or "recruited." Why are CEOs permitted to "call" upon, "interview," "hire," "recommend" and/or "recruit" the persons who are supposed to be the Shareholders' "watchdogs" of his/her activities? Even if Shareholders know the details and do not approve of the process by which board members are selected, for all practical purposes, there is currently nothing Shareholders can do to change it. Those Directors are very much beholden to the person who brought them to the dance than to Shareholders!

"Too many boards are stuffed with yes men who question little that their chief executives suggest. ... Chief executives tended to dominate the choice ... of board members (where search committees are usually encouraged to look for 'consensual' candidates who will not rock the boat)...." (The Economist, 1/9/03, "Corporate boards: The way we govern now")

"[D]eparting director Andrea Van de Kamp --- who emerged last year as one of (Disney Chairman and CEO Michael D.) Eisner’s harsher board critics --- vehemently objected and accused the chairman of orchestrating her removal … Directors said the names of the four leaving the board were submitted by the nominating committee, which was acting on the recommendation from Eisner." (LAT, 1/31/03, "Eisner Critic Losing Seat on Board of Directors") "She argued that Eisner's behavior undermines efforts to strengthen the board's independence and 'gives the appearance that rubber-stamping Michael's decisions is an unwritten prerequisite for continued board membership.'" (LAT, 2/15/03, "Exiting Board Member Says Eisner Bullied Her") "She recalled a meeting with him in the midst of the board turmoil ... nominally over new ideas, where she said he recited every instance in her four years as a board member where she disagreed with him. 'It appeared that Michael was focusing more on staying in power instead of focusing on the best interests of the company,' she said." (NYT, 12/8/03, "Criticism of Disney Chief Grows Bolder") "Things got so testy between the two, according to the book (‘DisneyWar: The Battle for the Magic Kingdom ’ by James B. Stewart), that Mr. Eisner told Ms. Van de Kamp, ‘You're a terrible director. You are so loyal to Stanley (P. Gold), it's like you've carried his babies.’ The comment stunned Ms. Van de Kamp, who was not reinstated to the board in a vote of 12 to 4, with 2 abstentions. " (NYT, 2/10/05, "Eisner Said to Be Open to Staying at Disney") This guy definitely knows how to charm the ladies! Minnie is especially fond of him.

"(Roy O.) Disney ... accused Eisner of maneuvering to have the board's nominating committee leave his name off the slate of directors that will be elected in the coming year --- 'effectively muzzling my voice.'" (LAT, 12/1/03, "Roy Disney Quits, Urges Eisner to Resign for Good of Company") "In the last year, other board members (other than Director Roy E. Disney) critical of Mr. Eisner's management style either left or saw their influence diminished. ... Mr. (Stanley P.) Gold, who was once very influential on the board, was stripped of crucial posts because of his status as the investment adviser to Mr. Disney." (NYT, 12/1/03, "Leaving Board, a Disney Heir Assails Eisner") "Mr. Eisner has proved himself a skilled corporate politician who has been shrewd about using the idea of better corporate governance as a shield against critics who threaten his reign." (WSJ, 12/1/03, "Roy Disney Quits Company Board And Calls on Eisner to Resign") "Mr. Gold's (letter) criticized the other directors for serving as a rubber stamp for management, saying that they enacted policies that muzzled dissenters and shielded Mr. Eisner from 'criticism and accountability.' ... 'Unfortunately it has been extremely difficult to have debate on a board which considers disagreement with management as "destructive."'" (NYT, 12/2/03, "2nd Member of Board Resigns at Disney")

"The University of Delaware's Charles Elson, another leading corporate-governance expert, would go even further. 'That board is such a rat's nest of conflicts that the only thing to do is to clean the whole thing out. Let is start all over again." (BusinessWeek, 12/02/03, "Stalking a Wily Prey at Disney") The latter suggestion sounds great in theory. However, implementing such a plan still disenfranchises Shareholders --- Directors select a new CEO and resign and, thereafter, the new CEO selects/appoints new Directors, who would be beholden to the new CEO.

"After Cablevision Systems Corp. Chairman Charles F. Dolan replaced three directors with four of his friends this week, corporate governance experts, legal experts and investors cringed. … What made Charles Dolan's actions all the more extraordinary was that they flew in the face of a trend toward more board independence, prompted by accounting scandals at such companies as WorldCom Inc., Enron Corp. and Adelphia Communications Corp. … Some investors said Dolan's power play was the latest reminder of the dangers of a system of dual-class shares, under which special stock carries disproportionate v