”Time to Clear the Air” at the NYSE

Pension funds, state treasurers put on the pressure for major reforms. Also: California's Ehnes advocates gold standard for governance; are companies buying back stock on the rise?; and more.

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In a Wednesday meeting at the New York Stock Exchange, top officials from some of the largest pension funds in the United States aggressively pressed the NYSE for sweeping corporate governance reforms.

The attendees, who control about $600 billion in state pension funds, reportedly included Jack Ehnes, CEO of the California State Teachers’ Retirement System (Calstrs), the nation’s third-largest pension fund; New York City Comptroller William Thompson, New York State Comptroller Alan Hevesi; California State Treasurer Phil Angelides; North Carolina State Treasurer Richard Moore; and Sean Harrigan, president of the board of the California Public Employees’ Retirement System (Calpers).

Their demands, according to Reuters, include that the exchange separate its regulatory and business functions, that former chairman and chief executive Richard Grasso return some of his compensation, and that the NYSE split the positions of chairman and CEO. (That last issue is the subject of this week’s poll; share your opinion in the box above, right.)

They also called for an independent review of the NYSE by the Securities and Exchange Commission, as well as greater investor representation on the exchange’s board, according to the report.

“We sent a clear message that it’s time to clear the air and restore the credibility of the New York Stock Exchange,” Angelides reportedly told a news conference. Connecticut State Treasurer Denise Nappier compared “the culture at the Big Board” to “a private club with an old boy network,” adding, “That has got to change.”

In a statement, H. Carl McCall, co-chairman of the NYSE’s special committee on governance, said that “we will share the concerns and recommendations of these individuals with John Reed upon his arrival at the Exchange, and with John we will respond to plans to develop a working partnership with these very important representatives of the investing public.”

Reed was named interim NYSE chairman and will assume those duties on Monday.

Meanwhile, SEC Chairman William Donaldson has written to the heads of the other major stock exchanges seeking information on how much they pay their executives, according to Reuters, citing an SEC spokesman.

The letter requested information regarding public representation on exchange boards, the exchanges’ processes for nominating directors, directors’ committee assignments, and public disclosure plans for this information, added the wire service.

California’s Ehnes Advocates Gold Standard for Governance

Calstrs CEO Jack Ehnes also fired off a letter on Tuesday to H. Carl McCall and Leon Panetta, the co-chairman of the NYSE’s special committee on governance.

His letter outlined recommendations for reform in the areas of board independence, committee structure, regulatory responsibilities, and transparency. The recommendations include:

  • Separating the exchange’s regulatory function from its business dealings, to eliminate conflicts of interest.
  • Requiring that a majority of the board members be independent directors.
  • Setting standards for disclosure, including a requirement of annual public reports from key committees.
  • Reducing or eliminating the practice of cross-directorships — that is, directors who serve on each other’s boards.
  • Establishing independent nominating and compensation committees.
  • Separating the roles of chairman and chief executive officer.
  • Electing and evaluating the members of the board of directors every year.

“Now’s the time for the Exchange to come in line with the governance reforms corporate America is embracing in this new environment of transparency and accountability,” said Ehnes. “By tackling these important issues and making the hard decisions, the Exchange will be truly responsive to its ultimate constituents, the country’s shareholders.”

Are Companies Buying Back Stock on the Rise?

The stock market may be on a tear so far this year, but apparently this runup has not stopped many companies from buying back their stock.

In fact, many of the companies that recently announced major repurchase programs have also, clearly, not been left behind during the overall market rally. (The circumstances were considerably different during a similar spate of activity last September, as we discussed in “Buybacks or Giveaways?“)

Take Cisco Systems Inc., which on Tuesday said its board authorized up to $7 billion toward repurchases of its common stock. The new authorization is in addition the $13 billion in buybacks authorized by Cisco’s board since September 2001.

“We continue to evaluate the most effective use of our cash,” said Dennis Powell, senior vice president and chief financial officer, in a statement. “Today, we believe the stock repurchase program, along with ongoing strategic investments and a strong cash balance, is in the best interest of our shareholders.”

Cisco’s share price, about $20 at Wednesday’s close, is up about 150 percent from its low (although in early 2000 the stock traded as high as $80).

On Wednesday, Horizon Financial Corp., a regional commercial banking company, said its board authorized the repurchase of up to 10 percent of its outstanding common shares. Its stock is currently trading for less than $2 below its all-time high of $18.

Last week Hewlett-Packard Co. announced that its board of directors authorized an additional $1 billion for future repurchases of its stock. The company said it intends to use the authorization to continue its normal share repurchases, which primarily offset dilution from the issuance of shares under company employee benefit programs and also include opportunistic share repurchases. HP’s announcement followed a doubling of the company’s stock price this year.

Also last week, Gillette said that its board authorized a repurchase program for 50 million shares of Gillette common stock. The razor company added that it still had the authority to repurchase 7 million shares under a prior program. (The prior program, according to Motley Fool, allowed for the repurchase of 150 million shares, and in that program the company spent about $5 billion on share repurchases.) Gillette’s stock, however, is trading about half of what it was fetching in the late 1990s.

Finally, AutoZone said it repurchased 5.8 million shares of its common stock for $447 million during the fourth quarter. Its stock is trading a few dollars below its all-time high of around $95.

Buybacks are not restricted to the stock market. Earlier this week AT&T Corp. said that it will call three debt issues totaling approximately $1.1 billion, and that it expects to use cash on hand to fund the redemptions. AT&T added that the buybacks are “part of the company’s continued effort to build financial flexibility and strengthen its balance sheet.”

The announcement follows an early redemption of $506 million of long-term debt the company announced last month.

Short Takes

  • McDonald’s Corp. is the latest company to aggressively hike its dividend since the tax rate on dividends was lowered. The fast-food giant said it will raise its annual dividend 70 percent.
  • Wells Fargo & Co. raised $1.5 billion from issuing floating-rate medium-term notes in two parts, led by J.P. Morgan and Lehman Brothers Inc.
  • Merrill Lynch & Co. Inc. issued $850 million in 12-year medium-term bonds in a self-led deal, up from an initially planned $750 million. They were priced to yield 5.332 percent, 110 basis points more than comparable Treasurys. They were rated Aa3 by Moody’s and A-plus by Standard & Poor’s.
  • S&P lowered its short-term corporate credit and commercial paper ratings on forest products giants International Paper Co. and its majority-owned subsidiary Carter Holt Harvey Ltd.; Weyerhaeuser Co. and its wholly owned subsidiary Weyerhaeuser Real Estate Co.; MeadWestvaco Corp.; and Temple-Inland Inc. In addition, the outlooks on all these companies were revised to negative from stable.

“These rating actions were prompted by our expectation that demand and pricing for most pulp and paper grades will only improve gradually from the very weak levels of the last two years, and may not reach earlier peaks,” said S&P’s credit analyst Cynthia Werneth, in a statement. “In addition, significant industry consolidation over the past several years has resulted in more rational paper production and capacity expansion, yet the industry remains oversupplied.”

  • Tenneco Automotive named Kenneth R. Trammell senior vice president and chief financial officer. He was the company’s vice president and controller and has been serving as interim CFO since July.

Trammell has served as Tenneco Automotive’s controller since November 1999 when the company became a stand-alone entity. He joined Tenneco Inc. in 1996 as assistant controller and was promoted to corporate controller the following year.

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