“The proposed rule is a historically significant reform that will enable investors to hold corporate boards accountable and restore investor confidence in the capital markets,” Joseph Dear, chief investment officer at the California Public Employees’ Retirement System, the nation’s largest state pension fund, wrote in the pension system’s comment letter to the SEC.

Meanwhile, corporate advocates have asked the SEC to refrain from adopting marketwide access standards or at least delay adoption until 2011. In contrast to their position in 2007 when the agency last considered the issue, most issuer representatives now are arguing that shareholders should have the ability to file resolutions that seek company-specific access provisions.

The question of giving investors the ability to nominate directors to appear on management proxy statements has been debated by the commission since the 1940s. In May, the SEC voted 3-to-2 to propose a marketwide access rule over objections from the agency’s two Republican commissioners. The proposed Rule 14a-11 would require all public companies and registered investment companies to permit qualifying shareholder groups to offer nominees for up to 25 percent of the board.

The draft rule requires a one-year holding period and includes tiered ownership thresholds based on market capitalization (or net assets for investment firms). For issuers, the minimum holding would be 1 percent at “large accelerated” filers (those with more than $750 million in publicly traded securities; 3 percent at “accelerated” filers ($75 million to $750 million in traded securities); and 5 percent at “non-accelerated” filers (less than $75 million in traded securities). The agency rulemaking release also includes a proposal to amend Rule 14a-8(i)(8) to permit investors to file bylaw proposals that seek more permissive access provisions.

The agency received more than 450 comment letters from investors, issuers, proxy solicitors, academics, and individuals by the Aug. 17 deadline. SEC officials have said they hope to have a final rule in place before the 2010 proxy season.

The SEC also received comments from various international institutions, which observed that proxy access provisions in the United Kingdom and other markets have led to more board accountability and better communication with investors. “Our experience in markets like the Britain, Australia, and the Netherlands is that these rights are rarely used. Instead, because of greater accountability to the shareholders whom they represent, boards tend to put forward qualified candidates that are more responsive to shareholder interests,” wrote Daniel Summerfield, co-head for responsible investment at the U.K.’s Universities Superannuation Scheme.

While most public pension funds and labor investors generally support the rule, other investors raised concerns or expressed opposition. Although Barclays Global Investors said it supported the principle of allowing long-term investors to propose board nominees, the investment firm called for a “narrowly tailored” approach with a triggering requirement (such as a 50 percent withhold vote) for access rights.

The United Brotherhood of Carpenters said it opposes a federal uniform access rule and urged the SEC to amend Rule 14a-8 to enable investors to file access proposals in 2010. The union noted that other reforms, such as better disclosure rules and the widespread adoption of majority voting in director elections, have made boards more accountable.

Corporate Opposition
Corporate advocates, including the National Association of Corporate Directors and the Society of Corporate Secretaries & Governance Professionals, generally opposed a marketwide rule, calling instead for the SEC to permit “private ordering” by allowing investors and companies to devise their own access rules. The proposed Rule 14a-11 “would deprive stockholders of their ability to exercise their rights under enabling state laws to implement the specific form of proxy access that they believe best fits their particular company and fellow stockholders, or alternatively to choose to forego entirely the costs and burdens of proxy access,” Cravath, Swaine & Mooreand six other corporate law firms argued in a joint comment letter.

In response, CalPERS argues that forcing investors to seek proxy access on a company-by-company basis “will cost shareowners and companies significant time, and unnecessary expense.” Based on the SEC’s 1997 data on the costs for shareholders to offer proposals and for companies to respond to them, the pension system estimates that it would cost $351 million to attempt to put proxy access in place at Russell 3000 companies.

In the SEC adopts a marketwide rule, the corporate law firms have asked the agency to delay the effective date until 2011 to give issuers and shareholders time to address the complex issues raised by access. The firms also noted that it would be difficult for investors to meet the proposed 120-day deadline for nominations at firms with early 2010 annual meetings. The corporate lawyers also said the commission should give investors the right to opt out of a uniform rule by either a stockholder vote or ratification of board action.

The Altman Group, a proxy solicitation firm, said it would be a “serious mistake” for the SEC to adopt a marketwide access rule soon after approving the New York Stock Exchange’s ban on broker votes in uncontested board elections. Instead, Altman said the SEC needs to first address “important” issues, such as the rules on issuer-shareholder communications and other “proxy plumbing” issues.

Priority for Larger Holders
Many commenters, including the Council of Institutional Investors (CII), CalPERS, and the AFL-CIO, urged the SEC to drop its proposal to use a “first-in” standard to determine priority if multiple groups seek to nominate board candidates who exceed the 25 percent limit. Instead, the investors called for giving preference to the investor group with the largest shareholding. “What matters most is not who is the fastest to nominate but what investor or group has the greatest stake in the director election and ultimately, the long term performance of the company,” CII stated in its comment letter.

The Calvert Group disagreed, arguing that a “first-in” approach would be fairer. “Allowing the largest shareholder group to essentially ‘trump’ the first smaller, but no less committed or relevant shareholder submission, is not good governance,” according to Calvert, an investment firm that offers socially responsible investment funds.

Alternatively, the Ohio Public Employees Retirement System(OPERS) called for a two-fold approach based on the length of ownership and the largest beneficial ownership. The pension fund also said a 25 percent cap on nominees was too restrictive and should be closer to 50 percent. OPERS and other investors said the limit on nominees should be based on the total number of board seats, not simply those up for election, as the later approach would reward firms with classified boards. CalPERS and many investors called for allowing at least two shareholder nominees, regardless of board size, pointing out that a single dissident director can be more easily shunned by a recalcitrant board.

Differences Over Eligibility Rules
There were a variety of opinions expressed by investors and issuers over the economic stake required to nominate directors. T. Rowe Price and TIAA-CREF asked the SEC to set a 5 percent ownership requirement at all companies, rather than permitting lower thresholds at larger companies. “[I]n order to use the company’s resources to nominate a director, a significant amount of capital must be represented and 5 percent is an acceptable threshold,” TIAA-CREF wrote in its comment letter.

In its letter, the Australian Council of Superannuation Investors (ASCI) said a 3 percent threshold should be sufficient to deter “frivolous or vexatious nominations.” Barclays called for a sliding scale of 5 to 15 percent based on market capitalization to “protect shareholders and the companies they own from the unnecessary distraction and expense of including director nominees for whom support is limited and whose likelihood of election is low.”

The coalition of seven corporate law firms suggested that the SEC impose a 5 percent threshold for a single investor and a higher threshold (7-to-10 percent) for investor groups. The National Association of Corporate Directors endorsed a 5 percent threshold (with no aggregation of holdings), and a 10 percent standard for micro-cap firms.

There also were disagreements over the required ownership duration to submit a nomination. The Change to Win (CtW) Investment Group, the AFL-CIO, the union-affiliated Amalgamated Bank, and TIAA-CREF all asked the SEC to increase the minimum time period for offering nominees from one year to two years. “A two-year holding period requirement would better ensure that shareholder-nominated directors are properly focused on long-term value creation for the company’s investors,” CtW wrote in its letter.

Some corporate advocates also endorsed a longer holding period. A group of corporate governance officers from Intel, Microsoft, Pfizer, and more than 20 other issuers said a “two- or three-year holding period would be more appropriate.”

However, T. Rowe Price said it did not object to a one-year holding requirement, and CII agreed that such a standard “should be sufficient to limit the access mechanism to long-term shareowners.” The Association of British Insurers and ASCI argued that there should be no minimum time period. “It is a core principle that the holders of the same capital instruments must have the same rights regardless of the period they have held them,” the British group wrote.

The AFL-CIO and CII were among the investors that asked the SEC to clarify the rule’s “continuous ownership” provisions to take into account the fluctuations in share ownership that may occur during the year as institutions rebalance their portfolios or lend shares. Noting that most institutions will recall loaned shares so they can vote them, the labor federation argued that the right to nominate directors “should be based on the number of shares beneficially owned, not shares that are held on loan.”

The Society of Corporate Secretaries & Governance Professionals asked the SEC to include a resubmission requirement for investor groups that repeatedly offer nominees; if a shareholder nominee failed to win at least 25 percent support, the nominating group would be barred from offering candidates at the company for two years. “Such a threshold would also ensure that other shareholders would be given a chance to suggest nominees who may be more satisfactory to the company’s shareholders,” the corporate group said in its comment letter.

More generally, a group of 80 professors led by Lucian Bebchuk of Harvard University, urged the SEC “to be careful to avoid eligibility or procedural requirements that would undermine or unnecessarily detract” from the proposed access rule. “In evaluating these requirements, it is important to keep in mind that, no matter how moderate eligibility or procedural requirements may be, shareholder nominees must still meet the demanding test of getting elected before they can join the board,” the professors wrote.

Ted Allen is director of publications at RiskMetrics. For a copy of RiskMetrics Group’s comment letter, please click here.

CalPERS is setting aside “billions of dollars” amid the credit crunch and is ready to deploy capital. It says it sees a “glimmer of hope” in the stock market.

Henry Jones, a CalPERS board of administration member, told Bloomberg that the pension fund is seeking to buy “some of the assets of these financial companies such as Citi and the others, assets that they’re trying to get off their balance sheets.”

CalPERS recently broadened its asset allocation ranges to ensure flexibility and will hold its investment review in May—18 months ahead of schedule, said Jones in a speech in Seoul, Korea.

“The assumptions that we used 18 months ago no longer fit the present market,” he said. “There’s still a tremendous ocean of toxic debt out there. Even if we didn’t buy it, it’s done enough damage to our banks to affect all of us on Wall Street.”

The pension fund lost more than a quarter of its value in the first seven months if its current fiscal year. CalPERS has $500 million invested in South Korea, including a $100 million investment with Lazard Asset Management last year, Jones said.

“I feel privileged to serve as President of the CalPERS Board for another year,” said Feckner. “We face some formidable challenges in the months ahead, in our economy and in our financial markets. I want to take this opportunity to let our members and employers know that we will work hard to protect their retirement and health security, and be mindful that this is a difficult time for everyone.”

Global Proxy Watch reports today that Securities and Exchange Commission Chairman Mary Schapiro will name Kayla Gillan, a prominent corporate governance champion, to a “top chief-of-staff-like post.”

“My role will be to outreach to the investor community and try to restore the organization’s reputation there,” Gillan told GPW. Gillan was a key architect of the governance program at the California Public Employees’ Retirement System before the SEC appointed her as a founding board member of the Public Company Accounting Oversight Board in 2002. She left last year for become the chief administrative officer of RiskMetrics. Expect investors to celebrate the move, as it promises them a direct information channel to SEC decision-making.

Under ex-chair Christopher Cox, funds felt frozen out of the agency, whose motto is “the investors advocate.” Shapiro is also laying plans to expand the SEC’s depleted enforcement staff and lift the need for board approval before it can negotiate penalties with accused firms—a rule that cut fines by 85% since it was adopted in 2006. She will have to act quickly: the agency is getting mauled in Congress. At a Wednesday hearing on Bernard Madoff’s US $50 billion Ponzi scheme, lawmakers blasted the SEC as incapable of protecting investors.

“I understand the desire to know a little more. But this is regulating an investment organization that belongs to a country,” he told the board members of the California Public Employees’ Retirement System during their yearly off-site meeting.

“Disclosure has never been the cure,” said Sudarskis, who was speaking on a panel during a session titled “International Institutional Investment Organizations” at the meeting of the $227.7 billion system as reported by Pensions & Investments.

Other panelists included David Neal, chief investment officer of the A$61.5 billion (US $56.3 billion) Future Fund of Melbourne, Australia, and Robert Kaproth, director of the office of international monetary policy at the U.S. Department of Treasury.

At least one member of the retirement board had different views from Sudarskis.

George Diehr, vice president of the CalPERS board, said it is in the interest of sovereign wealth funds to provide more transparency of their actions. “It’s because they are so opaque that people are concerned,” Diehr said in an interview wth Pension

Fred Buenrostro, chief executive of the California Public Employees’ Retirement System (CalPERs), said in a statement released over the weekend that he will retire at the end of the year.

Meanwhile, the board is expected to discuss naming an interim CEO at its next meeting later this month.

News of his impending departure leaked a week ago, compelling a formal announcement Monday. Board members asked Buenrostro to set an exit two months ago, around the
time new trustees took their seats at a Feb. 21 meeting, according to Global Proxy Watch.
Longtime Buenrostro champion Robert Carlson had retired in January.

Chief executive since 2002, Buenrostro, 58, has kept CalPERS at the vanguard of global
corporate governance advocacy. But a take-no-prisoners leadership style prompted ongoing concerns about staff morale. He also drew global controversy, most famously at the 2004 International Corporate Governance Network annual conference in Rio de Janeiro, where arm-twisting tactics left a rift between CalPERS and other funds.

Under President Rob Feckner, Buenrostro has worked to heal those wounds. But his departure marks the third executive to quit the largest U.S. pension fund this year, following chief investment officer Russell Read and senior investment officer Christianna Wood.

No word yet on who will fill Buenrostro’s shoes. Expect one internal candidate: chief operating investment officer Anne Stausboll.

 

During his six-year tenure, Buenrostro helped solidify CalPERS investment position, earning the pension fund the distinction of being named the most influential player in U.S. corporate governance.
 
Buenrostro, chief executive, said in a statement he would leave the fund, best known as CalPERS, which manages roughly $244 billion0, to pursue private sector opportunities.

NNews of Buenrostro’s pending retirement after six years as the fund’s chief executive comes less than a week after Calpers said chief investment officer Russell Read was resigning to pursue environmental investments.

Anne Stausboll, the chief investment operating officer at CalPERS, has been designated as Read’s interim replacement. No succcessor has been announced for Buenrostro.

In January, hedge fund group Capital Z Asset Management said it had hired as chief executive Calpers senior investment advisor Christianna Wood, who oversaw $150 billion in assets invested in global equities plus many of the pension fund’s hedge fund allocations.