| Council Research Service
ALERTS Vol. 6, No. 11 March 29, 2001 MEMBERS VOTED TO AMEND THE COUNCIL POLICIES to refine a few existing policies and add several new ones. Following up on the unanimous vote at the January executive committee meeting, members voted to add the following phrase to the preamble of the Council’s policies: Consistent with their fiduciary duties to their limited partners, the general partners of venture capital, buyout and other private equity funds should use appropriate efforts to encourage the companies in which they invest to adopt long-term corporate governance provisions that are consistent with the Council’s Core Policies, General Principals and Positions or other comparable corporate governance guidelines. A draft letter and sample partnership agreement provision that members could send to general partners are available and will be posted on the Council’s web page. Other new principals are: Companies should not adjourn a meeting for the purpose of soliciting more votes to enable management to prevail on a voting item. Extending a meeting should only be done for compelling reasons such as vote fraud, problems with the voting process or lack of quorum. Companies should hold shareholder meetings by remote communication (so-called electronic or “cyber” meetings) only as a supplement to traditional in-person shareholder meetings, not as a substitute. Change-in-control provisions in compensation plans and compensation agreements should be “double-triggered,” stipulating that compensation is payable only (1) after a control change actually takes place and (2) if a covered executive’s job is terminated as a result of a control change. Companies should disclose in the annual proxy statement whether they have rescinded and regranted options exercised by executive officers during the prior year or if executive officers have hedged (by buying puts and selling calls or employing other risk-minimizing techniques) shares awarded as stock-based incentive or acquired through options granted by the company. Such practices reduce the risk of stock-based incentive compensation awarded to executive officers and should be disclosed to shareholders. NON-MATERIAL AMENDMENTS TO EXISTING POLICIES were approved to clarify - not change - their intent. The changes clarify that: all directors should be elected annually; confidential voting should apply to all ballot items; all equity-based compensation plans covering any director or executive officer should be submitted for shareholder approval; directors aren’t deemed independent if they have a financial, familial or professional connection to the company, the chair, the CEO or any other executive officer. Via E-Mail March 29, 2001 George Kim Johnson, Esq. General Counsel Public Employees’ Retirement Association of Colorado 1300 Logan Street Denver, CO 80203-2386 Re: Private Equity Governance Initiative Dear Kim: I have enclosed for your perusal a form copy of a letter that the PRIM Board sent to its significant venture capital and buyout fund general partners last week, asking them to take appropriate steps to encourage “good corporate governance” provisions at their IPO-stage portfolio companies. I’d appreciate your comments. If you think it appropriate, I’d be happy to circulate this to the rest of the NAPPA membership. The general partners with whom I’ve discussed this initiative have been supportive (many) or indifferent (most); none has objected, so I don’t believe this will have a negative impact on the PRIM Board’s deal flow. I hope that as the Council of Institutional Investors and other groups endorse this initial, modest, and relatively non-controversial policy, it may provide a platform for more ambitious reforms. Best regards. Sincerely, R. Scott Henderson Attachments cc: Richard Koppes Pamela Anderson -oo0oo- March 13, 2001
Dear «First_Name»: The Pension Reserves Investment Management Board, like most institutional investors, has long believed that well-governed companies will perform better in the stock market than poorly governed companies. Accordingly, through its proxy voting program, support of the Council of Institutional Investors, and other activities, the PRIM Board encourages an appropriate alignment of the economic interests of corporate officers and directors with those of their shareholders. A recent study by McKinsey & Co. seems to confirm our view of the value of good governance: it concludes that “international investors . . . are prepared to pay a markup of more than 20% for shares of companies that demonstrate good corporate governance.” (See “Good Corporate Governance Will Spur Investor Premiums, According to Survey,” Wall Street Journal, Monday, June 19, 2000 @ B6; a summary of the McKinsey report can be found at its website, www.mckinsey.com/features/investor_opinion/). Another recent survey has received less attention, and reports more troubling findings: according to Robert Daines of NYU and Michael Klausner of Stanford, “IPO stage” companies, including those backed by venture capital and buyout funds, commonly have corporate charters with provisions that are detrimental to long-term shareholder value. An article summarizing their review of 300 firms that went public between 1994 and 1997 - “Do IPO Charters Maximize Firm Value?” - is available at http://papers.ssrn.com/paper.taf?abstract id=187348. We recognize that the general partners of venture capital and buyout funds have strong economic incentives to maximize the value of IPO stage companies in which they have invested. Typically, the funds are significant shareholders and their general partners are influential, activist directors. They are willing and able to forge an appropriate alignment of interests between the managements and beneficial owners (including limited partnership investors) of IPO stage companies. But once an initial public offering has been achieved, the general partners of venture capital and buyout funds have relatively short-term investment horizons, at least as compared to their institutional limited partners. While general partners look to the public markets to exit their portfolio company investments, institutional limited partners may end up owning these companies, post-IPO, in their publicly-traded securities portfolios for a much longer time. Indeed, if the portfolio companies’ shares end up in a benchmark stock index, institutional investors may own them, effectively, forever. The long-term impact of an IPO stage company’s corporate charter provisions will be borne by long-term investors in publicly-traded securities, including the PRIM Board, not by the general partners of private equity funds. As noted above, institutional investors expend significant time and resources encouraging good governance of publicly-traded companies, where their leverage as shareholders is relatively weak and the obstacles to reform are formidable. Many of these institutional investors also happen to be important - if not predominant - sources of capital for venture capital and buyout funds, which can have enormous leverage over privately-held, IPO stage companies. As Massachusetts State Treasurer Shannon O’Brien noted during her remarks to the Council of Institutional Investors last September, “as with children, it should be a lot easier to teach these companies proper behavior while they are young and dependent, before they grow up and take their places in the public securities markets.” In January, the Council’s Executive Committee recommended the adoption of a new “Core Policy” to foster long-term good governance at IPO stage companies: Consistent with their fiduciary obligations to their limited partners, the general partners of venture capital, buy-out and other private equity funds should use appropriate efforts to encourage the companies in which they invest to adopt long-term corporate governance provisions that are consistent with the Council of Institutional Investor’s Core Policies, General Principles, and Positions. The Council’s general membership - corporate, public, and Taft-Hartley pension plans and other institutional investors with more than $1.5 trillion in assets - will consider the policy at the Council’s March 2001 meeting. The PRIM Board plans to include a substantially similar provision in all its partnership agreements (or “side letter” agreements, if necessary) beginning with the funds to which we will commit capital in 2001: The General Partner shall use reasonable efforts, consistent with its fiduciary obligations to the Partnership and its primary obligation to maximize the value of the Fund’s holdings for the benefit of its Limited Partners, to encourage the Partnership’s portfolio companies to adopt corporate charters and long-term corporate governance structures that are consistent with the Council of Institutional Investors’ Core Policies., General Principles, and Positions (a current copy of which is attached hereto); provided, however, that (i) a portfolio company shall be considered to have acted in full compliance with this provision if it adopts such corporate charter provisions with an effective date deferred up to three years following the date it first becomes a publicly-traded company, and (ii) a portfolio company’s failure to adopt such corporate charter provisions and governance structures shall not be considered a breach of the Partnership Agreement or give rise to any liability on the part of the General Partner. Through this provision, discussions at advisory committee meetings, and other means, we hope to encourage our general partners to pay more attention to the post-IPO governance structures of their portfolio companies. We would appreciate your efforts in this regard, and look forward to working together to enhance the long-term value of the companies in which we invest. If you have any questions in the meantime, please do not hesitate to contact me at 617-946-8426 Sincerely, R. Scott Henderson cc: Treasurer Shannon P. O’Brien, PRIM Board Committee Chair James B. G. Heartly, PRIM Investment Committee Chair
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