Union shareholder activists' letter to Sotheby's investors

excuse the cut & paste!

Dear fellow Sotheby’s shareholder:

At Sotheby’s May 8, 2012 annual meeting, we urge you to VOTE NO on the re-election of Michael I. Sovern, Allen Questrom, and Diana L. Taylor, the incumbent members of the Nominating and Governance Committee up for re-election. The board’s failure to take decisive action and break with James Murdoch in the face of investor demands, a persistent stream of negative news flow from the UK hacking scandal and resulting mounting reputational risk to Sotheby’s are only the symptoms of the underlying problem - a flawed nomination process that fails to identify and recruit credible, outside directors. In fact, little has changed in this regard since the elimination of the dual class voting structure seven years ago, with four of the last six nominees handpicked by the CEO, and the latest appointee, Steven B. Dodge, a former director dating back to the company’s former controlled status. By voting against incumbent members of the Nomination and Governance committee, shareholders can send a strong message: rather than rubber-stamping management’s candidates, the committee needs to perform its responsibilities and obligations and undertake a thorough search for a new crop of independent directors with the assistance of an outside search firm.

The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, which collectively hold $200 billion in assets. Since many of these funds own Sotheby’s through index funds and are unable to sell regardless of board or management concerns, robust governance and director accountability are paramount. Troubled by the concerns being raised over James Murdoch’s judgment, oversight and conduct at News Corp. in the wake of the phone hacking scandal at the News of the World, the CtW Investment Group last fall started calling on the Sotheby’s Nominating and Governance Committee to take decisive action and break with James Murdoch.

The James Murdoch debacle

Despite a clear basis for action in its corporate governance guidelines and the repeated urging from investors, Sotheby’s directors were passive bystanders to a slow motion train wreck, leaving it up to James Murdoch to voluntarily step down on the eve of the proxy statement’s publication. As early as late summer 2011, it should have been obvious that his position on the board was untenable given widespread concern for his ethical conduct, integrity and business judgment – key director attributes outlined in Sotheby’s governance guidelines – in handling the phone hacking scandal at the News of the World. Alleged inconsistencies in his testimony before a British Parliamentary Committee investigating the matter had sent his credibility into free fall. Lord Myners, an authority on UK corporate governance and the former chairman of Marks & Spencer plc, told the British House of Lords in mid-July there were sufficient doubts about his business judgment that he should resign from BSkyB. Sir Christopher Bland, former Chairman of the BBC and BT Group plc, echoed these concerns in The Financial Times, writing that “James Murdoch’s ‘willful blindness’ showed at best a lack of curiosity, and at worst a failure to ask questions, for fear of hearing unacceptable answers.”

Yet the board continued, even after his historic rejection by outside shareholders at News Corp., where 75% of independent shareholders voted against his re-election to the board, to insist on calling James Murdoch a “valued member of the board,” unnecessarily exposing Sotheby’s to months of negative media attention. Despite repeated calls from the CtW Investment Group, widespread media commentary on his increasingly tenuous position at GlaxoSmithKline, Sotheby’s, and his eventual departure from the former and resignation from the latter, our board took no action. It is perhaps instructive to note that James Murdoch was recommended to the board by John Angelo, whose son, Jesse Angelo, is a childhood friend of James Murdoch and editor-in-chief of New Corp.’s “tablet tabloid” The Daily.

There is an unwelcome sense of déjà vu for shareholders in the board’s handling of James Murdoch. Eight years ago, despite the specter of civil fraud charges hanging over him for months, Conrad Black was allowed to step down on his own accord from Sotheby’s board, the last of his outside directorships, at the AGM. In both cases, the board appears to have shown deference and loyalty to these directors, and not to shareholders. Conrad Black later served three years in federal prison for fraud and other charges relating to is media empire, Hollinger International. Unfortunately, this experience highlights that the James Murdoch saga is only a symptom of a broken nominating and evaluation system, rather than an isolated event.

A Broken Nomination System

The quality of independent oversight on a board is, in many respects, only as good as the independence and rigor of the underlying nomination process; this is the Achilles heel of Sotheby’s governance. The identification and recruitment of qualified candidates retains the trappings of the company’s previous controlled status and betrays the influence of insiders in selecting new members. Leaving aside the peculiarities behind James Murdoch’s appointment, the last four new recruits to the board - Daniel Meyer (appointed 2011), Marsha Simms (2011), John Angelo (2007) and Diana Taylor (2007) - were all initially recommended for consideration by the CEO. The result is essentially the same selection process under which longer serving directors were first appointed prior to the elimination of the dual class stock structure and the controlling interest of the Taubman family. Clearly, old habits die hard. The decision to nominate a former director, Steven B. Dodge (2000 – 2007), to fill a current vacancy simply underscores the dysfunction of the current process.

The Risk to Investors

Sotheby’s may occupy a niche of the specialty retail industry, but with close to a billion dollars in revenue and $2.5 billion in market capitalization, just like any other major public company, we believe that it needs to be overseen by critical mass of outside directors recruited in an objective, independent manner. In fact, this is even more critical at Sotheby’s in light of the notorious price fixing scandal a decade ago that resulted in anti-trust convictions for former Chairman Alfred Taubman and former CEO Diana Brooks and hundreds of millions of dollars in fines and settlement costs.

Recommendation: Vote “No” on Directors Michael I. Sovern, Allen Questrom, and Diana L. Taylor

We urge you to join us in opposing the re-election of directors Michael I. Sovern, Allen Questrom, and Diana L. Taylor, the incumbent members of the Nomination and Governance Committee, at Sotheby’s May 8, 2012 annual meeting. In light of the breakdown in the nominating process, we are also asking Sotheby’s to retain the services of a search firm to identify qualified independent candidates to the board.

Sincerely,

Richard W. Clayton III
Research Director

Unintended consequences in corporate governance

As I have droned on before, I get a bit sick of hearing about "unintended consequences" when even relatively modest reforms to corporate governance are put forward. This isn't because I don't think policy interventions have unintended consequences, I'm sure most do. But rather because our corner of the world seems only able to consider negative unintended consequences.

As I blogged recently, it's notable that the unintended consequence most governance people think of in relation to a 75% threshold for passing a remuneration vote is a negative one - Stelios dicking around at easyJet. They do not see they equally valid argument that it would empower minority shareholders in companies like BSkyB, Xstrata etc. I think that examples like this suggest a potential positive unintended consequence (unintended because I don't think the policy is designed to address such cases).

More broadly, when you think about it the existence of a corporate governance community (and the employment of people within it) is arguably an unintended consequence. It results from the extension of equity-backed pensions and investment products and the rise of the institutional shareholder as a major player. Before this, certainly in markets like the UK, shareholder engagement of any kind was rare and the idea that shareholders were 'owners' of companies in a meaningful sense was a dormant one.

However with the extension of funded pension schemes (driven in no small part by trade unions negotiating for them) form of investor emerged with potentially significant voting power. The separation of ownership and control which had grown up over many decades before, and was regarded as an inevitable feature of the PLC, could begin to be addressed. Finally there were shareholders with enough clout to make a difference. With the decline in unions the institutional shareholder became the main source countervailing power in the governance of many public companies.

The result is that now many institutional shareholders, mainly but not only asset managers, employ people solely to look at governance issues. It's an unintended consequence, I reckon, of the changing nature of share ownership. So is it a bad thing?

Employee directors and shareholder interests

A quick snippet from the Bullock committee report on industrial democracy.

We do not see why a board comprising employee as well as shareholder representatives should be unable to strike an adequate balance between short and long term interests. A board consisting of shareholder representatives is said to be able to strike the correct balance between the short and the long term interests of equity investors in determining, for example, the size of dividends. If employee directors are unable to strike a similar balance on wage and employment policies, it must be either because they or their constituents are more short-sighted than shareholders and their representatives, or because the the real economic interests of employees lie, relatively speaking, in the short term and those of the shareholders in the long term. Neither proposition is self-evident, let alone proved. To put it no higher, there does not seem any reason to believe that employee representatives will not have as clear a perception of where their constituents' best interests lie, or that the stake held by employees in the long term health of the company is less that that of the shareholders.

Obviously in the UK we haven't really revisited such radical (by UK standards) ideas about corporate governance since the 70s. There is a slight resurgence of interest on the Left now, and we've obviously had the issue of employees on rem comms under discussion. The striking thing is how commonplace employee representation is in other European countries, whereas in the UK it is portrayed as almost communist (seriously, one rem consultant compared employees on rem comms to Cuba).

Adventures in voting data - notice for meetings news

Governance geeks out there may have noticed my mini obsession with the rising average vote against resolutions seeking authority to hold meetings on short notice. The average vote against is higher than that on director elections or auditor appointments which I think is, frankly, barking.

It is also obviously being driven by overseas investors, as my own trawling of asset manager websites suggests that UK institutions vote for this type of resolution. However, I have (finally) been able to find an institution that does vote against them - Morgan Stanley.

More tedious voting data related titbits to come....!

It's not all about the money

Someone else in the corporate governance world arguing that over-reliance on financial incentives for directors is a problem.

Change to Win still targeting Sotheby's

CtW INVESTMENT GROUP URGES SOTHEBY’S SHAREHOLDERS TO VOTE AGAINST THE RE-ELECTION OF DIANA TAYLOR AND TWO OTHER DIRECTORS AT MAY 8TH AGM

Nominating Committee’s Repeated Failure to Recruit Independent Directors & Mismanagement of Murdoch Scandal Taint Credibility

WASHINGTON, D.C. - In a letter to Sotheby’s (NYSE:BID) shareholders, the CtW Investment Group called on them to oppose the re-election of the incumbent members of the Nominating and Governance Committee. Chairman Michael I. Sovern, Allen Questrom, and Diana L. Taylor, should be opposed for their failure to recruit independent, credible directors and for the mismanagement of the James Murdoch scandal.

The Group’s letter points out that four of the last six director nominees have been handpicked by the CEO, including Diana Taylor who currently sits on the nominating committee, while the latest appointee, Steven B. Dodge, is a former director dating back to the firm’s days as a controlled company.

“The Sotheby’s board’s failure to take decisive action shows how little has changed since the elimination of the dual class voting structure and controlling insider interest seven years ago,” stated Richard Clayton, CtW Research Director. “This is particularly alarming given Sotheby’s track record with previously sullied board members.”

Additionally, the Group called on shareholders to take action against the directors for their gross mismanagement of the James Murdoch scandal.

“Sotheby’s directors were passive bystanders to a slow motion train wreck,” continued Clayton. “They sat by and let former director James Murdoch voluntarily step down on the eve of the proxy statement’s publication despite a mass outcry for his removal from investors and widespread media commentary on his increasingly tenuous position. Shareholders are tired of seeing the company’s name in the press for the wrong reasons.”

To see the full letter to Sotheby’s shareholders click on: http://www.ctwinvestmentgroup.com/fileadmin/group_files/Sotheby_ s_Vote_No_Letter_April_12_FINAL.pdf

Recently, James Murdoch stepped down from the boards of GlaxoSmithKlein plc (LON: GSK) and Sotheby’s and resigned as Executive Chairman of News International and as Chairman of BSkyB (PINK: BSYBY), where more than 40 percent of the company’s independent shareholders failed to back his re-election. In the fallout from the hacking scandal at the News of the World, Murdoch also received a resounding vote of no confidence from shareholders at News Corporation (NASDAQ: NWSA) last October, with over 70 percent of independent shareholders voting against his re-election to the board.

The CtW Investment Group works with pension funds sponsored by unions affiliated with Change to Win, which collectively hold over $200 billion in assets. The Group first raised concerns with Sotheby’s nominating process last fall with calls on the Nominating and Governance Committee to take decisive action regarding James Murdoch.

Why we have a problem

Read this statement, from one of the NEDs at Barclays:

“Many, many people were at fault in terms of what caused this crisis – partly politicians, partly regulators who loosened capital requirements – and there are many reforms still to be done,” he said. “But it is time to stop talking about revenge and to reflect calmly on how to move ahead.”

I wouldn't disagree that politicians were partly to blame, or regulators. But what about, you know, the banks? Do not under-estimate how prevalent this idea is - that if it wasn't for those meddling politicians and bureaucrats none of this would have happened. It's a way of maintaining the belief that markets will inevitably right themselves, and it's only the actions of meddlers that pushed them so far from equilibrium. (Read Hyman Minsky for some solid thinking about why the financial sector inevitably tends to instability, regardless of the actions of politicians, regulators etc).

Unfortunately this idea infects thinking about the crisis. It's a version of the law of unintended consequences that is never knowingly undersold in the policy bit of the investment world. Whilst people continue to use this sort of cop out to avoid facing up to the fact that banks are quite able to get themselves in serious trouble we will continue to make little progress.