Pension Risk News & Analysis : Pension Governance, LLC : Pension Risk & Investment

On April 7, 2008, this blogger wrote about unhappy pension campers, seeking to rid troubled companies of certain board members. (See "Three Public Pension Plans Say No Thanks.") At the time, the general consensus seemed to be "good luck but don't count on being able to oust anyone" in part because experts suggest that boards may be limited in their oversight capabilities. In what appears to be a win for protesting pensions, director Mary Pugh has resigned from Washington Mutual. According to The Street.com, CtW Investment Group had asked shareholders to draw support for Pugh (chairwoman of the bank's finance committee) and a second director, James Stever (chairman of the human resources committee). In a slide presentation and on its website, CtW blames this duo for failing "to recognize and act in a timely manner on the risks to shareholder value presented by the housing bubble" and for not reducing executive bonuses as a result of "this risk management failure." Note that she was re-elected with "50.4 percent of the shareholder vote" according to the Associated Press ("WaMu directors narrowly re-elected in shareholder vote, April 16, 2007), notwithstanding a Q1-2008 reported loss of $1.1 billion.

Click to read "WaMu Director Resigns Under Pressure" by Laurie Kulikowski (TheStreet.com, April 15, 2008).

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Related to our April 6, 2008 post about risk management oversight (asking who is in charge is a logical query), Wall Street Journal reporter Jed Horowitz writes about unhappy pension campers.  Three plans are now on record as opposing the re-election of various Morgan Stanley directors, including Chairman and CEO John Mack. They include: (a) California State Teachers' Retirement System (b) State Universities Retirement System of Illinois and the State of Connecticut Retirement Plans & Trust Funds. Citing "failure to generate returns consistent with the broad stock market," inter alia, they decry an adverse impact of the company's risk-taking on the value of their Morgan Stanley shares. See "Morgan Stanley Board Feels Heat Over Loss" (April 7, 2008).

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In "Bear's board was busy elsewhere," Financial News reporter Jeff Nash (March 31, 2008) writes that the investment bank's board has been busy, with three individuals doing work for "at least four other public companies" and two "of those three extremely busy directors" doing double duty as members of the risk committee. Corporate governance pundits add that outside distractions do little to help business fiduciaries carry out critical risk oversight duties.

Wall Street Journal reporter George Anders likewise addresses the question of where the buck stops, or if it arrived at all. In "Wall Street Housecleaning May Bypass Boardroom," the executive director of the $12 billion Illinois State Board of Investment, William R. Atwood puzzles over the involvement of directors as relates to sub-prime losses, wondering if "directors at big banks and Wall Street firms share some responsibility for what has gone wrong." Others quoted in the April 2, 2008 article counter that it may be ill-advised to unseat veteran directors. New appointees face a steep learning curve that exposes a company to risk of another kind.

The courts will surely play a prominent role in determining who pays (if at all) as shareholders and pension plan participants file lawsuits aplenty.

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As hedge funds around the world take a seat in the boardroom, new rules of engagement apply. In response, the Conference Board Governance Center Research Working Group on Hedge Fund Activism issues draft guidelines for companies under attack from alternative capital pools.

According to its March 18, 2008 press release, the Conference Board prioritizes five areas, as excerpted below.

• What corporations can do to better monitor securities holdings and learn about those accumulations of stock or extraordinary trading patterns that may reveal a hedge fund's activism tactic.
• What measures corporations can adopt to avoid becoming a target.
• How boards and senior executives can react to an activism campaign and how they should respond to requests for change made by hedge funds.
• How companies and large institutional investors can ensure integrity of the voting process in those situations where hedge funds borrow shares for the sole purpose of influencing a shareholders' vote.
• What considerations institutional investors should be mindful of when allocating some of their assets to hedge funds pursuing activism strategies.

Pension plan fiduciaries are urged to "pursue their beneficiaries' long-term interest" when allocating monies to hedge funds that are likely to buy shares in public companies. Does this imply that hedge fund activists may be motivated by short-term gains only? The authors provoke with an intriguing question. What are institutional investors obliged to do so as not to reduce "shareholder value for companies that may be held elsewhere in their portfolio?" This is a valid query for several reasons. First, a pension plan may be working against itself if it invests in both an activist hedge fund and a particular company, each with divergent interests. Second, a plan sponsor may think it is getting diversification when in fact it is doubling up (or more) on a particular equity issuer. The economic consequences could be profound.

Members of the public are invited to comment before April 30, 2008. A final report is planned for June 2008. Click to download "Report of the Conference Board Research Working Group on Hedge Fund Activism: Findings and Recommendations for Corporations and Investors."

Adopting a similar stance that hedge fund activism is a "must know" topic, the National Association of Corporate Directors hosts an afternoon program in New York City on April 17. Entitled "Activist Hedge Funds: What Public Company Directors Need to Know," the esteemed speakers will address the reality that "hedge funds now account for as much as 30% of total U.S. equity trading." Click here to register.

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Little noticed inside the pension community is a provision of the Pension Protection Act of 2006 that directly impacts reporting by tax-exempt organizations. What's interesting is that required changes mandate important governance disclosures for churches and foundations and other non-profits. According to Guidestar.org, "Form 990-T was considered a tax return and was not open to public inspection. The Pension Protection Act of 2006, however, mandates that any IRS Form 990-T filed by a 501(c)(3) organization after August 17, 2006, is now a public document. The exception is a Form 990-T filed solely to request a refund of the telephone excise tax."

Too bad the same disclosures are out of reach for anyone interested in understanding the nature of fiduciary risk attached to pension plans. As we pointed out in "Searching for Hidden Treasure" (April 17, 2006), even seemingly "mundane" information such as who makes primary decisions about defined benefit and defined contribution plans is often out of reach. As I wrote then, other than the names of the plan sponsor and plan administrator (found on Form 5500), no one knows much about who is in charge. (Some databases provide this information for a fee and various plan sponsors voluntarily provide this information online or in writing.)

Wouldn't it be grand to know more about who is making critical decisions regarding the $10 trillion pension industry? After all, how can we reward "good players" and hold "bad" or "careless" fiduciaries accountable if they operate in the shadows?

At a time when the SEC is asking for additional information (executive compensation decisions, audit committees, etc) and FASB wants to know more (having just announced plans to promote pension investment risk disclosure) where is the upset about pension fiduciaries - who they are, how they are selected and whether they are qualified for the tasks put upon them?

Editor's Note:

Part III questions of the newly revised form 990 are shown below. The IRS website provides detailed instructions and commentary.

• Enter the number of members of the governing body
• Did the organization make any significant changes to its organizing or governing documents?
• Does the organization have a written conflict of interest policy?
• Does the organization have a written whistleblower policy?
• Does the organization contemporaneously document the meetings of the governing body and related committees through the preparation of minutes or other similar documentation?
• Enter the number of independent members of the governing body
• If “Yes,” how many transactions did the organization review under this policy and related
  procedures during the year?
• Does the organization have a written document retention and destruction policy?
• Does the organization have local chapters, branches or affiliates?
• If yes, does the organization have written policies and procedures governing the activities of such chapters, affiliates and branches to ensure their operations are consistent with the organization’s?
• Does an officer, director, trustee, employee or volunteer prepare the organization’s financial statements?
• Does the organization have an audit committee?
• How do you make the following available to the public?

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I love the challenge of an intermediate/advanced yoga class and attend as often as my schedule permits. Executing splits and flips like Gumby (am I dating myself here?) comes easy to me so the appeal is likely due to my comfort level in taking stretches to the limit.  Not surprisingly, many of us indulge in hobbies and sports that exploit an existing aptitude or strength. Is this a coincidence?

Do we adopt activities that help us enhance what we already do relatively well ("preaching to the choir")? If true, does that mean that companies with anemic corporate governance policies and practices are unlikely to "walk the pension governance walk" because it's too hard or different from the comfortable status quo?

It's a provocative idea.

At a time when new accounting rules and regulations have the potential to materially impact share price, it would be nice to know if corporate governance precedes pension governance or if the two activities are independent of each other. Indeed, quantifying how much companies care about their stewardship responsibilities is an attention-grabber.

Mounting evidence suggests that a solid reputation matters to the bottom line. According to a July 9, 2007 Business Week article, corporate reputation that is "able to deliver growth, attract top talent, and avoid ethical mishaps" may explain "much of the 30%-to-70% gap between the book value of most companies and their market capitalizations." This statement ignores some of the measurement issues that determine the book value - market value gap but merits review. Click here to access the article. (Registration may be required.)

• How much is a good name worth and what exact governance policies and procedures tend to drive up stock prices?
• Do investors care more about compliance or do they reward going beyond what is minimally required by law?
• Is the relationship symmetric in the sense that stock issued by corporate baddies should be avoided at all costs while "hero equity" makes for good buys?

Wall Street Journal reporter Phred Dvorak quotes CEO of GovernanceMetrics International, Howard Sherman, as saying that "Good governance translates into trust, and trust determines what you're willing to pay for a company's shares." That makes sense but a further read of the July 2, 2007 article informs readers that ratings can and do vary. Audit Integrity and other rivals end up with a different "you go gal" list, in part because they employ alternative measures. Click here to read "Finding the Best Measure Of 'Corporate Citizenship' Governance Trackers Use Various Rating Criteria, Leaving Users Confused." (Registration may be required.)

One thing is certain. The business of governance is far from trivial. In a July 2, 2007 press release, Ethan Berman, chief executive officer of RiskMetrics explains the rationale for its announced acquisition of the Center for Research & Analysis ("CFRA"). Proud owner of proxy advisory firm Institutional Shareholder Services ("ISS"), RiskMetrics will name CFRA CEO Rich Leggett as head of ISS. Click here to read the full text announcement.

Note: In the spirit of full disclosure, Pension Governance, LLC currently resells CFRA products, including its PPM (Pension Portfolio Monitor) product. Click here to learn more. We are also developing a three-day in-person workshop about pension risk management with RiskMetrics. Click here to get more details about the debut September program.

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As we've said before and will continue to say, the link between corporate governance and pension governance is strong and growing. We welcome the ISS (Institutional Shareholder Services) Corporate Governance Blog to our Links.

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According to the New York Stock Exchange Fact Book, pension ownership now accounts for nearly twenty-five cents of every equity dollar. No surprise then that the governance movement is alive and well and ensuring that forthcoming talks about proxy reform receive wide attention.

Part of the SEC's roundtable discussions about voting reform, various institutional investors, attorneys and governance experts will meet on May 7 to talk about topics such as shareholder rights under state law, whether investors should be able to exert more influence over corporate management and the role of the SEC in overseeing the proxy process. Click here to access the full agenda and list (and bios) of speakers. Subsequent meetings will take place later this month.

At a time when large shareholders crave more power over issues such as executive pay, corporate social responsibility and proper financial disclosure, a meaningful conversation is welcome.

On a related note, the PCAOB (Public Company Accounting Oversight Board) concluded its first International Auditor Regulatory Institute on May 4, 2007. With representatives from over forty countries assembling to discuss how the PCAOB handles Sarbanes-Oxley Act of 2002 compliance, chairman Mark Olson extols the notion of global oversight.

Also in the news, BDO Seidman's "Financial Reporting" letter (dated May 2007) is replete with question lists for shareholders. Organized by topic such as board composition, audit committees, preparation of financial statements, management's strategic plans and business ethics, the publication is easy to understand and serves as a useful guide.  The sub-list on risk management emphasizes company-wide issues, including, but not limited to, topics such as the role of the board in developing a risk management system and the choice of risk management techniques to evaluate "the adequacy and cost effectiveness of insured risks." Questions related to derivatives and financial risk are shown below (excerpted verbatim from the BDO document). Click here for the full text publication.

1. Does the company use enterprise risk management?
2. What is the company's attitude towards financial risk?
3. Were there any significant foreign currency exchange gains or losses in 2006 and in interim 2007 operations?
4. What is the company doing to minimize the impact of changes in foreign currency rates?
5. Does the company hedge its foreign currency exposures?
6. What types of financial instruments and derivatives does the company use?
7. What are the major risks from the company's use of financial instruments or derivatives (e.g. options, futures, forwards, caps, collars, interest rate swaps)?
8. Does the company have written guidelines and policies on the use of financial instruments and derivative instruments?
9. Who formulated those policies?
10. Did the board of directors approve those policies?
11. Do management and the board of directors monitor the company's financial instruments and derivatives exposures?
12. Is there a limit system in place (i.e. a system that sets the maximum amount of loss the company would tolerate before liquidating a position)?

PG Editor's Note: We are (and will continue to) address many of these issues online. Visit www.pensiongovernance.com. Also watch for our soon-to-be published newsletter about the use of derivatives, investment fiduciary risk, financial statement analysis and so much more. Pension Risk Alert^SM will examine risk and valuation issues from a "how-to" perspective. Email us if you want to be notified about the availability of this informative newsletter.

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A recent trend in class action litigation circles is the pension plan opt-out. Choosing not to settle with the rest of the "class," several large institutional investors are getting recompense that reflects multiples of what they could otherwise receive.

Pension Governance contributing editor, attorney Kevin Lacroix talks about this significant shift in class action outcomes, citing a sea change in the cost of litigation. Click here for more information about Kevin's interesting article and here to read more about our first class team of contributing editors.

PG Editor's Note: We have just posted an interesting and complementary item to www.pensiongovernance.com. In "Predicting Corporate Governance Risk: Evidence from the Directors' & Officers' Liability Insurance Market," authors Tom Baker and Sean J. Griffith examine how liability insurance underwriters assess corporate governance behavior - and related expectations of risk - when pricing coverage. The authors also examine whether corporations are deterred by the cost of liability insurance, especially since "virtually all corporations purchase D&O insurance to cover the risk of shareholder litigation, and because virtually all shareholder litigation settles within the D&O insurance limits, the D&O insurance premium represents the insurer’s best guess of the insured’s expected liability costs." The authors conclude that governance factors such as culture and character are taken into account by insurance underwriters. Click here for more information.

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Pension Governance, LLC is pleased to announce the sponsorship of two sections of the Social Science Research Network. Check them out and see for yourself. You'll find interesting research papers and announcements about forthcoming events in the areas of employee benefits law and corporate governance, respectively.  At a time when so much is happening in these two areas, we're delighted to encourage cutting edge analysis by top scholars. Click here to learn more.

Section One: Employee Benefits, Compensation & Pension Law
Edited by Pamela Perun with the Urban Institute, "Employee Benefits, Compensation and Pension Law Abstracts is a forum for the exchange of ideas by policy makers, practitioners and researchers on current employee benefits issues. It publishes abstracts of working papers and recently published and forthcoming articles on the full spectrum of employee benefits, both in the U.S. and abroad, such as healthcare, pension and savings arrangements, cash and equity compensation, and Social Security."

Section Two: Corporate Governance Law
Edited by Bernard S. Black with the University of Texas at Austin Law School, "Corporate Governance Law publishes abstracts of working papers as well as articles accepted for publication in corporate governance law, and related fields of scholarship.."

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In response to a request from the United Brotherhood of Carpenters and Joiners of America, American Express Co. is slicing retirement benefits for top executives by more than ten percent. According to Wall Street Journal reporter Robin Sidel, the changes "come amid shareholder criticism over supplemental executive retirement plans, or SERPS, that award big pay packages to departing executives." (See "Top Executives at American Express Will See Retirement Benefits Shrink" - January 27-28, 2007).

This is not the first time that unions have taken an activist stance nor will it likely be the last. Check out the long list of Annual Group Meeting (AGM) resolutions brought by union pension plans, courtesy of Ms. Jackie Cook, a researcher on director interlocks and corporate social responsibility. Click here to access the list.

Now that new, and arguably more rigorous, SEC executive compensation disclosure rules are in effect, it will be interesting to observe union response. Will juicy corporate pay packages encourage even more attempts at reform? Will rank-and-file workers find it difficult to lobby for cuts in executive perks while asking for personal hikes? How will the dual role of employee and shareholder affect union clout?

"Workers unite" could start to take on an altogether different meaning.

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A question that arises again and again centers on who "owns" the benefits issue at a particular organization. There is increasing evidence that board members and C-level executives are becoming more involved, if not so already. One gentleman told me that his board has met four times this year about pension issues alone.

This comports with the notion that pension, health care and other types of deferred compensation benefit programs can significantly impact a corporate or government employer's financial health, lower debt ratings, diminish (or enhance) employee productivity and influence the ability to attract and retain skilled workers, already in short supply.

So it is with great pleasure that I will be part of a panel that addresses the ownership issue, enterprise risk management and "pension tensions" (though the issues extend to other benefit programs as well).

Entitled "Strategies for Managing Diverse Constituencies: Shareholders, Employees, Beneficiaries and Management" and part of an exciting risk management conference, sponsored by Pensions & Investments, the panel plans to address a host of important governance and financial issues.

Ms. Fern Jones, CFA is the conference moderator. Managing Partner of FJ Corp/THS Ltd, Jones will lead the following panelists in what is sure to be a lively discussion. Speakers include:

Mr. James H. Norman
Managing Director
Deutsche Asset Management

Dr. Susan M. Mangiero, CFA, AVA, FRM and Accredited Investment Fiduciary Analyst
Managing Member
BVA, LLC and Pension Governance, LLC

Mr. Jim M. Voytko
President & COO
R.V. Kuhns & Associates, Inc.

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According to Fulbright & Jaworski partner and global chair of the Litigation Department, Stephen C. Dillard, fear may be appropriate with respect to all things litigation. In "Litigation Nation" (Wall Street Journal, November 25, 2006), Dillard describes results from their third Litigation Trend Survey, emphasizing an increasing upward trend in lawsuits here and abroad. "Even we were surprised by the volume and scope of legal actions across all major industries and regardless of company size."

Besides finding that "Some 89% of companies report being hit with at least one new lawsuit in the past year," companies stateside "face an average of 305 lawsuits pending world-wide." At the same time, "companies with sales of $1 billion or more" face an average of 556 cases, "with 50 fresh suits emerging each year for nearly half of these firms."

The cost of litigation is far from trivial. The survey cites corporate legal expenditures averaging $12 million, up from $8 million last year and with some industries - engineering and insurance - spending over $35 million.

Given the nature of this blog, www.pensionriskmatters.com, what caught my eye were the assertions that "more than half of the in-house counsel cited employment as their top litigation concern" and that "disputes over wages and hours can be brought as class actions in many jurisdictions, creating more waves of litigation."

Other press accounts about corporate lawsuits are similarly engaging.

According to the Chief Legal Officer Survey 2006, compliance and litigation are huge concerns. Conducted by Altman Weil, Inc. and LexisNexis Martindale-Hubbell, respondents lament that time and money used to fight and/or prevent lawsuits could not be otherwise used to grow the company.

New York Times reporter Paul B. Brown describes the concept of litigation funding companies in "What's Offline: Next, a Lawsuit Futures Exchange?" Citing Joshua Lipton in "Litigation 2006," Brown informs that hedge funds are researching the possibilities of investing now in anticipation of enjoying hefty case outcomes later on. That same supplement to the American Lawyer & Corporate Counsel includes a piece by Alison Frankel that offers insight about the globalization of litigation.

Lest you need more of a reminder that a sea change is upon us, consider the U.S. Appeals Court decision that found a fiduciary personally liable for nearly $180,000 due to losses realized by the International Brotherhood of Industrial Workers Health and Welfare Fund. In "Ruling highlights fiduciary need for hindsight", Reid and Riege attorneys David M.S. Shaiken and Eileen M. Marks describe the serious fallout from Chao v. Merino, 452 F.3d 174 (2d Cir. 2006), stating that the individual in question "was permanently prohibited from serving as a fiduciary or service provider to any employee benefit plan."

Other excerpts from the November 2006 Employee Benefit News article merit attention.

1. "The Court of Appeals' holding underscores how important it is for new plan fiduciaries to inform themselves thoroughly about a plan's operations, consultants and service providers with whom the plan has contracted. New fiduciaries should raise with co-fiduciaries any concerns about existing relationships after conducting their review.

2. The mere fact that an imprudent relationship predates a fiduciary's tenure does not shield the fiduciary from liability. The duties to be informed about plan business and to act prudently include a duty to be informed about, raise objections to, and protect the fund from any imprudent relationships that are in place with consultants and service providers when a fiduciary's term begins.

3. Plan fiduciaries may wish to review their and their plan's insurance coverage. ERISA plan fiduciary liability insurance covers claims against current and former plan trustees and, if they are named in the policy, plan administrators who have fiduciary duties. In case of a claim of breach of fiduciary duty, within the insurance policy's limits the insurer provides and pays for defense counsel, and indemnifies the plan fiduciary from liability, provided that the claim is not excluded from the policy's coverage."

Given the tsunami of litigation (with all indications that more is on its way), pension fiduciaries need to assess their personal and professional risk.

It's scary stuff indeed. Email us if you want to know more about our fiduciary and board training programs. If you are an attorney, ask to receive our complimentary pension governance kit.

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While November 16, 2006 marks the passing of famed economist, Dr. Milton Friedman, his ideas will no doubt live on for years to come. Economists in the U.S. and abroad embrace his work for its clarity, originality and impact. Recipient of the 1976 Nobel Prize for Economic Science, Friedman was a staunch advocate of free markets, something that put him at odds with the big government crowd. Author of Capitalism and Freedom and co-author (with his wife Rose) of Free to Choose (book and television show), Friedman wrote about the "tyranny of controls" in 1979, adding that "restrictions on economic freedom inevitably affect freedom in general, even such areas as freedom of speech and press." Taking a page from Adam Smith's Wealth of Nations, this well-respected Ph.D. wrote that "it is in the self-interest of the businessman to serve the consumer" and by doing so, everyone wins.

Post-mortem tributes that review Friedman's work as part of a general discussion about free markets versus regulation come at a time when laws such as the Sarbanes-Oxley Act of 2002 are being critically examined. In early September of this year, the Committee on Capital Markets Regulation, "a newly formed independent group of U.S. business, financial, investor and corporate governance, legal, accounting and academic leaders" announced its intent to study ways to "improve the competitiveness of the U.S. public capital markets."

A critical question? How much regulation is enough?

In "Businesses Seek New Protection on Legal Front," journalist Stephen Labaton (New York Times, October 29, 2006) writes that the Committee on Capital Markets Regulation and a parallel group "aim to limit the liability of accounting firms for the work they do on behalf of clients, to force prosecutors to target individual wrongdoers rather than entire companies, and to scale back shareholder lawsuits."

Dr. Friedman was not only prescient but correct to observe that "there is no such thing as a free lunch." Someone, somewhere, somehow pays.

What is an appropriate cost to pay for a relaxation of current rules? More self-policing at the industry level? At the individual company level? At the shareholder level?

With regard to pension funds, should we abandon ERISA and ask company sponsors to provide more transparency and financial backing on their own? How do we reward companies that do that already and without prodding from government watchdogs? Will the aftermath of the Pension Protection Act of 2006 reflect the law of unintended consequences, i.e. outcomes that are antithetical to the original intent of legislators?

Only time will tell but, until then, thank you Dr. Friedman. Your legacy of thought-provoking ideas is a rich one indeed.

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Ever have a sleepless night? You find yourself watching late night television and pondering whether to call overseas clients in their time zone as a way to score points. If so, you may have come across a police reality show known simply as COPS. According to the Fox Television website, COPS is "still one of the most popular television shows on the air," leading one to wonder about the national fascination with crime and disgrace.

Unfortunately, there never seems to be a shortage of bad boys and gals who flaunt the law. The temptation of easy money is too intoxicating for some, ensuring that the saga will likely continue for a long time to come.

Just recently, former Enron CEO Jeffrey Skilling was sentenced to twenty-four years over a corporate scandal that has received significant press attention and prompted a new wave of governance standards and rules. New York Times reporter Alexei Barrionuevo describes Skilling's sentence as slightly shorter than the twenty-five years metered out to Bernie J. Ebbers, former head of WorldCom "who was sentenced to 25 years last year for his role in the $11 billion fraud that led to that company's collapse." (In the spirit of full disclosure, let me confess to owning some two hundred shares of Enron common stock.)

Financial Times reporter Kevin Allison writes that David Kreinberg, former CFO of voicemail software company Converse, "became the first top executive to plead guilty to conspiracy and securities fraud in connection with options backdating." Rumour has it that others are in the hot seat and have hired criminal lawyers.

Financial wrongdoing accounts for an entire industry of specialists. Benchmark Financial Services bills itself as an expert "in investigations of pension fraud, money management abuses and wrongdoing involving securities brokerages and pension investment consultants," adding that their "investigations frequently focus upon illegal or unethical business practices that are commonplace in the securities brokerage, asset management and consulting industries, as well as hidden or poorly disclosed financial arrangements between vendors to pensions."

Another organization, Corporate Resolutions, focuses on fraud, money laundering, risk management and competitive intelligence. President Ken Springer, a Certified Fraud Examiner and former special agent of the Federal Bureau of Investigation, provides an interesting update in the company's monthly newsletter about security issues.

Notwithstanding their efforts, some interesting questions come to mind with respect to how people respond to problems in pension land and elsewhere.

1. Does news about white collar criminal punishments deter others from misdeeds?

2. What type and magnitude of loss roils people to the point of lobbying for changes in the system, with the goal of minimizing future mishaps?

3. Does the avoidance of shame play a role in keeping financial abuses to a minimum? (How many rogue traders are now making a nice living as commentators, security consultants or well-published writers?)

4. What is the fine line between fraud and unethical practices?

5. Who is responsible for early detection of fraud within an organization?

6. What can investors and/or plan beneficiaries do to protect themselves from fraud and "ethically challenged" decision-makers?

Taking a pro-active approach can go a long way to calming jitters. For pension fiduciaries, providing transparency about the investment process, including choice of money managers and related vendors, is huge.

Why then is it often difficult to get meaningful information about a plan and how it is being managed? Why do we pay attention to the bad boys and gals instead of more emphatically rewarding all the good players?

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I can't tell you how many conversations I've had on the topic of governance and what motivates behavior, good or bad. Is it the proverbial carrot or stick? What is that one event (or series of events) that changes the collective mindset and spurs organizations to take action?

The answer I get most of the time is that people will act when they are forced to do so, either because of regulation, litigation, liability insurance hikes, regulatory investigation, losses that lead to headlines and so on.

Does that imply that bad news is a harbinger of corporate governance activity (and by extension, pension governance)?

If so, then a recent article about corporate counsel liability is a must read. According to "Gatekeeper GCs Increasingly Becoming Targets for Liability" by Sheri Qualters, gatekeepers like corporate attorneys are under "escalating government scrutiny" for failing to protect shareholders' interests. As a result, "in-house counsel and their law firm advisers say they're increasingly concerned about potential liability faced by in-house lawyers, who are stepping up their documentation of advice and even taking on additional professional liability insurance as precautionary measures."

Securities litigation lawyer William Schuman with McDermott Will & Emery's Chicago office offers that "The current mindset at enforcement agencies is that general counsel need to protect the shareholders' best interests, not just do the management team's bidding."

So how does this relate to life in pension land?

Let me count the ways.

1. There is increasing recognition that ERISA and Sarbanes-Oxley go hand in hand and that anyone involved in corporate governance is necessarily on the hook for pension governance. (In case you missed it, click here to read "Can Poor Pension Governance Land You in Jail?")

2. The first of several major accounting rule changes announced last week have the potential to wreak financial havoc for companies with underfunded plans. There is some talk that even companies with "healthy" plans may find the heightened scrutiny by investors a bit tough to take. Similar to stock drop cases, one wonders if adverse financial statement impact could lead to shareholder suits.

3. In the aftermath of several hedge fund blow-ups, do some ERISA plan fiduciaries leave themselves exposed if their selection process is anything but robust?

4. Will 401(k) plan providers be accused of selecting an inappropriate default investment option (pursuant to the Pension Protection Act of 2006) and have to quell participants' concerns in court?

5. How many more complaints will be filed on the basis of fiduciary breach with respect to the payment of investment fees? (See "Employers Face Suits Over 401(k) Fees" by Arden Dale and Jilian Mincer, Dow Jones Newswires, October 3, 2006.)

These are just a few of the many outcomes we think could lead shareholders to cry foul, sue and put the general counsel, board members and other parties in the liability hot seat.

Drop us a line if you want to talk further.

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In a riveting and timely article, senior Greenberg Traurig ERISA attorney Jeff Mamorsky provides a serious wake-up call to pension fiduciaries everywhere. (Click here to read "Is Today's Pension Plan Environment Cause for Concern?", CEO Magazine, August 2006.)

Mamorsky chronicles the parade of corporate horribles in the U.S. that eventually led to the Sarbanes-Oxley Act of 2002 (SOX). He points out the irony that "All this happened in the USA despite the fact that the federal pension law, the Employee Retirement Income Security Act of 1974 (ERISA), contains rules that require plan sponsors to establish internal control procedures to monitor compliance with the fiduciary responsibility requirements of ERISA."

In the spirit of the stick winning over the carrot, Mamorsky adds that "These rules were in some cases not followed since there were few real teeth in the law. It took SOX with its draconian certification penalties and ERISA's 'white collar' criminal penalty provisions to make plan sponsors take pension governance more seriously."

Emphasizing the nature of personal liability for pension fiduciaries, the article explains the critical, and undeniable, connection between SOX compliance and pension governance. In a rather ominous statement, Mamorsky warns "This liability has increased as the result of legislation such as SOX that requires a public company CEO, CFO or other responsible fiduciary to certify the establishment and adequacy of 'disclosure controls and procedures' relating to material items in the annual financial report. What companies sometimes overlook is that this SOX section 404 management assessment of the adequacy of internal control procedures requirement applies to pension and benefit expenses."

If you aren't scared at this point in the article, he goes on to describe SOX sanctions of money and jail - "$2m and up to ten years' imprisonment for non-wilful ($5m / up to 20 years' imprisonment for wilful) certification of any statement that does not comply with SOX requirements." Then there is the matter of heightened IRS scrutiny of pension plan governance (or lack thereof), a rise in litigation and general upset about the topics du jour, pension funding gaps, rescinded benefits and so on.

Mamorsky concludes that the rest of the world is starting to feel the pinch as the UK and other countries address governance as an important element of the "global pension world."

As an aside, our sister company, Pension Governance, LLC is soon to launch a pension litigation database, chock full of analyses and trends. We had planned to launch earlier but found many more cases than we originally anticipated.

A harbinger of days ahead in pension governance land?

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SEC Chairman Christopher Cox announces new disclosure rules about executive compensation by stating that "With more than 20,000 comments, and counting, it is now official that no issue in the 72 years of the Commission's history has generated such interest." (Read the announcement online.)

Besides wages, options and other types of compensation, the investing public will now have access to a Pension Benefits Table which, among other things, will include "disclosure of the actuarial present value of each named executive officer's accumulated benefit under each pension plan, computed using the same assumptions (except for the normal retirement age) and measurement period as used for financial reporting purposes under generally accepted accounting principles".

This comes as good news, especially as Wall Street Journal reporters Ellen E. Schultz and Theo Francis highlighted the "hidden burden" for shareholders in the form of executive pensions. According to their June 23, 2006 article, "As Workers' Pensions Wither, Those for Executives Flourish", "Compensation committees often aim for a pension that replaces 60% to 100% of a top executive's compensation" versus "20% to 35% for lower-level employees." Their research revealed that "executive benefits are playing a large and hidden role in the declining health of America's pensions."

Talk about a morale buster for everyone below C-level!

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According to CFO.com, the State of California may soon prohibit a company from paying out dividends or buying back shares until all required defined benefit plan payments have been made. AB 2122, introduced by Democrat Johan Klehs, could impact corporate leaders individually as well since it "would make directors and officers of a corporation jointly and severally liable for improper distributions", even if they had no knowledge of the impropriety.

Needless to say that if this bill becomes law, other states would likely follow, creating a cascade of new challenges for chief financial officers everywhere.

Think about it.

Capital structure, securities issuance and debt rating assignments would necessarily change as a function of a company's mix of employee benefits. Modeling a defined benefit plan liability (and related liquidity obligations) would take center stage. Shareholders seeking current dividend income may get an unpleasant surprise if dividend payouts become more volatile, even if a company enjoys steady growth in economic earnings.

Then there is the philosophical issue about the role of government with respect to corporate management. Does the state have the right to micromanage this way? Would shareholders shy away from investing in companies with defined benefit plans, knowing that the state has the right to prevent dividend distributions? Would companies rush to shed defined benefit plans, possibly exacerbating an already pronounced trend towards defined contribution plans? Would companies lobby more aggressively for exemptions from the dividend rule? Would that worsen campaign finance problems? Would D&O insurance costs skyrocket as a result of increased liability exposure for board members? Would federal lawmakers seek to follow suit?

The little bill that could ...

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