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October 14, 2011

News Corp, Nine Other Firms Singled out for Poor Governance
    by Robert Kropp

GMI Risk List highlights ten companies with poor governance issues and other ESG-related concerns.

SocialFunds.com -- The fiduciary necessity of incorporating environmental, social, and corporate governance (ESG) factors into investment decision-making and corporate engagement has steadily grown into a mainstream practice in recent years. While there is no doubt that the contributions of poor governance by financial firms to the financial crisis and its recessionary aftermath have played a central role in the transition, they are hardly the only recent examples.

GovernanceMetrics International (GMI), in its recently published Risk List of ten poorly governed corporations, includes but one company from the financial industries: EZCORP, a payday lender. Nor does the list include such recent high-profile governance failures as Massey Energy, whose Upper Big Branch coal mining disaster in 2010, which claimed the lives of 29 miners, was only the most recent in a string of repeated environmental and safety violations that led to at least two criminal convictions in the past three years.

Neither did Tokyo Electric Power (TEPCO), the owner of the crippled Fukushima Daiichi Nuclear Power Plant, make the list, but its absence can be attributed to the fact that GMI restricted its analysis to North American companies. Risks related to extreme weather events had been hidden or understated by TEPCO for years; in 2002, its chairman and president resigned after they admitted the company had falsified repair reports at its nuclear plants for more than two decades.

So while the governance of companies included on the Risk List may not have led to loss of life, their failures as documented by GMI should raise red flags for investors concerned about the long-term outlook of their portfolios. As Jack Zwingli, CEO of GMI, stated, "Corporate failures are often driven by non-financial issues, in areas where management is not sufficiently addressing risks or has interests that are not aligned with long term performance and sustainability."

One high-profile corporate governance failure that did make the list was News Corp, whose phone hacking and bribery scandal sent its stock price and market valuation plummeting earlier this year. Responding to the scandal, Christian Brothers Investment Services (CBIS) filed a shareowner resolution requesting that the company separate the positions of Chair and CEO, both of which are currently occupied by Rupert Murdoch. And the proxy advisory firm Glass Lewis recently advised shareowners to vote against six directors, including two of Murdoch's sons, for re-election to the company board.

About News Corp, GMI wrote in its Risk List, the scandal "has brought additional scrutiny of the company's journalistic standards and ethics, as well as its relationship with various government agencies." Furthermore, GMI continued, "There is little indication that the quality of the company's governance is improving—particularly in the crucial area of the relationship between the board and Murdoch."

Of the 4,200 companies whose governance is evaluated annually by GMI, no more than 5% receive the lowest grade of F; a grade which News Corp has consistently been given, "only because there is no lower grade," as Nell Minow of GMI wrote recently. News Corp also has a dual-class stock ownership structure, one of the concerns listed by GMI as contributing to poor governance. A dual-class structure is comprised of one class of shares for outside investors, and one that confers majority voting status for insiders. Murdoch and his family, through their voting shares, retain control of News Corp.

Other governance concerns highlighted by GMI include board independence, executive compensation, environmental and health and safety risks, questionable accounting practices, and unusually high leverage.

In addition to EZCORP and News Corp, corporations flagged in GMI's Risk List are Apollo Group, Comstock Resources, Comtech Telecomm, Discovery Communications, K-Swiss, M.D.C. Holdings, SandRidge Energy, and Scientific Games.

Despite its documentation of the somber state of affairs among the worst-performing North American companies, GMI did recently find, in its 2011 Proxy Season Wrap-Up, that many important corporate governance policies are now enshrined at most S&P 500 companies.

Referring, for instance, to proposals requesting that companies permit shareowners to call special meetings, GMI noted that "the proportion of S&P 500 companies at which shareholders have no right to call a special meeting is at an all-time low of 49.6 percent." The primary reason for this development, GMI continued, is that shareowner activists "have had a great deal of success in pushing companies to stop using certain defenses."

Other governance improvements include a decline in the number of companies with classified boards, in which directors serve overlapping terms. On the other hand, regarding the number of shareowner proposals calling for companies to allow shareholders to act by written consent, GMI stated, "Proposals calling for such an avenue for action increased from zero in 2009 to 32 in 2011."

"Written consent rights allow shareholders to take action such as replacing directors or amending the bylaws outside of the normal annual meeting cycle, which is largely under the control of a company's incumbent board," GMI continued.

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