6.6 ISS Governance QuickScore 2.0

According to ISS, their Governance QuickScore 2.0 is a scoring and screening solution designed to help institutional investors identify governance risk within portfolio companies. QuickScore 2.0 provides investors with the tools and insight they need to assess governance attributes categorized under four pillars: Board Structure, Shareholder Rights, Compensation/Remuneration, and Audit.

According to ISS, QuickScore 2.0 enables investors to differentiate companies and allows for better alignment with company performance, quantitative modeling results, and ISS voting policy.

ISS believes that its QuickScore can be used for many investor purposes, including:

• Screening on management quality to generate a list of buy candidates, or filter out companies

• Analyzing potential success of a proposed M&A transaction

• Screening for companies that may be potential targets of a takeover, change in control or activist campaign

• Highlighting compensation and pay for performance issues that may be symptoms of larger problems

• Integrating scores and data into financial models, scoring tools, and into internal dashboards or reporting systems

• Targeting portfolio companies with poor governance practices

• Monitoring portfolios for quick views of where risk lies, to identify areas of focus

• Incorporating unique compensation, board, shareholder responsiveness data into investor management assessments

• Preparing for engagements with company executives and directors around governance issues

With coverage of 4,100+ companies across 25 markets, ISS's QuickScore provides an overall company score and drill-down pillar scores for four elements of corporate governance: (1) board of director's structure, (2) shareholder rights, (3) audit-related practices and (4) executive compensation. According to ISS, in calculating QuickScores for each company, they draw upon market views of what constitutes best practice. They say they have assessed each covered company's governance risk using between 50 to 80 critical corporate governance factors.

The elements that make up the four pillars are:

Board Structure

• Board Compensation

• Composition of Committees

• Board Practices

• Board Policies

• Related Party Transactions

Compensation/Remuneration

• Pay for Performance

• Non-Performance Based Pay

• Use of Equity

• Equity Risk Mitigation

• Non-Executive Pay

• Communications and Disclosure

• Termination

• Controversies

Shareholder Rights

• One Share One Vote

• Takeover Defenses

• Voting Issues

• Voting Formalities

• Other Shareholder Rights Issues

Audit Practices

• External Auditor

• Audit and Accounting Controversies

• Other Audit Issues

QuickScore 2.0 uses a numeric, decile-based score that indicates a company's governance risk relative to its index or region. A score of 1 indicates relatively lower governance risk, while a score of 10 indicates relatively higher governance risk. The following is an example of the ISS Goverance QuickScore Profile.

In addition to an overall score and scores across the four pillars of Board Structure, Compensation/ Remuneration, Shareholder Rights, and Audit, ISS QuickScore considers factor scores within the subcategory level and provides additional high-level flagging within each pillar. The QuickScores for some large companies as of July 1, 2014 are shown in the following table.

When ISS & Glass Lewis Recommend Votes Against Directors

The major concern of corporations is that ISS and/or Glass Lewis will advise their clients to vote against one of more of a company's proxy solicitation proposals (election of directors, say-on-pay, etc.). While the issues change each year both ISS and Glass Lewis have publicly identified those governance issues that cause them concern and which they recommend votes against. The following are the issues they identified in 2014:

• Burn Rate and/or Overhang too high: The burn rate is a measure of how much stock a company is using to reward officers, directors and employees with equity (stock of the company. The annual burn rate is calculated as follows: (# of options granted + # of full value shares awarded * Multiplier) / Weighted Average common shares outstanding). In evaluating an employee stock plan proposal, ISS will look at a company's historical use of equity compensation. Generally, ISS will recommend a vote against an employee stock plan if the company's average three-year burn rate exceeds the greater of:

• the mean plus one standard deviation of the company's global industry classification standard ("GICS") group segmented on the basis of whether or not it is in the Russell 3000 index (as reflected in a provided table); or

• two percent of its weighted common shares outstanding.

• Excessive Overhang: While burn rate is the annual amount of equity used to compensate officers, directors and employees, overhang is the cumulative amount of all equity awarded to these individuals that is still outstanding. Overhang is defined as stock options and stock already granted, plus those remaining to be granted, as a percentage of the total shares outstanding at a company. Overhang has grown dramatically over the past decade because of much larger executive option and restricted stock grants and broader option eligibility. As is the case for all scarce resources, optimum usage and allocation of stock options and stock by boards of directors is absolutely required by the equity markets. This optimal level—which companies manage their overhang level toward—is called the "sweet spot. The average overhang for public companies is 13%. Higher numbers are problematic.

• Excessive non-audit fees or problematic relationships with auditor

• Adverse opinion on financial statements or material weakness on internal controls

• Occurrence of a fraud in the company

• Unusual or overly generous pay packages (say-on-pay issues)

• Poor accounting practices

• Pledging of Stock by executive officers (failure of risk oversight)

• Director Nominees

• Lack of board accountability

• Lack of board responsiveness

• Lack of director independence (Airline)

• Lack of director competence

• Problematic Takeover defenses

• Classified boards

• Supermajority vote requirements

• Inability of shareholders to call special meetings

• Dual class capital structure

• Shareholder non-approved poison pill

• Changes to employee stock option and stock grant plans

• Refreshing of the equity pool (from which to award executives, employees and board members equity remuneration)

• Vote against compensation committee members if:

• There is a significant misalignment between CEO pay and company performance (pay for performance);

• Executive pay is too high when compared to an ISS determined peer group

• The company maintains significant problematic pay practices;

• The board exhibits a significant level of poor communication and responsiveness to shareholders;

• The company fails to submit one-time transfers of stock options to a shareholder vote; or

• The company fails to fulfill the terms of a burn rate commitment made to shareholders

• The company's previous say-on-pay proposal received the support of less than 70 percent of votes cast, taking into account

• Excessive, non-shareholder approved Golden Parachutes with problematic features such as single triggers, acceleration of unvested equity awards, excessive cash severance, excise tax gross-ups, excessive golden parachute payments, etc.

• Material failures of governance, stewardship or risk oversight

• Egregious actions related to a director's service on other boards

• Failure to act on a shareholder proposal that received a majority vote in a previous year (For Glass Lewis it is any shareholder proposal that gets at least a 25% vote)

• Independent directors make up less than a majority of the directors

• A board that lacks an independent audit, compensation or governance committee

• A director who sits on more than 6 public boards

• CEOs who sit on more than 2 public boards besides their own

• Directors who fail to attend at least 75% of board and committee meetings

• Glass Lewis sometimes recommends votes against exclusive forums (discussed later in this book) unless the company can show it benefits shareholders

• Under its proxy voting guidelines, ISS considers the following factors when making its voting recommendation on an employee stock plan proposal:

• The total "cost" of all of a company's employee stock plans (in other words, their potential dilutive effect);

• The company's historical annual equity expenditures (its "burn rate");

• Whether the plan expressly permits stock option re-pricings or exchanges without shareholder approval or provides for accelerated vesting of outstanding awards upon a change in control transaction (so-called "single trigger" rights) or similar or other benefits without the actual consummation of a change in control transaction;

• For Russell 3000 companies, the company's "pay-for-performance" history, as reflected in its CEO's total compensation and total shareholder return; and

• Whether the plan is deemed to be a vehicle for problematic pay practices.

Concerns About Proxy Advisory Firms

Concerns About Proxy Advisory Firms

In recent years both public company officers and directors and regulators have become increasingly uncomfortable with the amount of influence proxy advisory firms wield. Many believe that the two main firms, Institutional Shareholder Services and Glass Lewis, are understaffed and often uninformed, and that the firms, which also offer consulting services to companies, are riddled with conflicts of interest.

To address these concerns, in 2014 the SEC hosted a round-table discussion that examined the influence of proxy advisers, potential conflicts of interest, and the transparency and accuracy of their recommendations. Since that roundtable, the SEC has not proposed any rules, but it is considering if any regulations are needed.

As stated previously, because many institutional investors such as mutual funds often do not have the time and resources to analyze all of the thousands of companies in their portfolios, they rely on firms like ISS and Glass Lewis for advice. As a result, these two firms especially have an enormous influence on a wide swath of corporate America. The question really the SEC is addressing is whether ISS, which owns no stock, should have the power of a $4 trillion voter. One S.E.C. commissioner stated that he has become increasingly concerned that proxy advisory firms may exercise outsized influence on shareholder voting. He stated that, as an economist, his concern is heightened by the lack of competition in the proxy advisory market, which appears to be a stable duopoly preserved by near-impenetrable barriers for new entrants. Other concerns are that the proxy advisory firms do not engage in sufficient research to really understand the issues of all public companies and that investors blindly follow the advice of these proxy firms.

Activist Investors

An activist investor is an individual or group that purchases large numbers of a public company's shares and/or tries to obtain seats on the company's board with the goal of effecting a major change in the company. A company can become a target for activist investors if it is mismanaged, has excessive costs, could be run more profitably as a private company or has another problem that the activist investor believes it can fix to make the company more valuable. Activist shareholders (investors) use equity stakes in corporations to put public pressure on their managements. The goals of activist shareholders range from financial (increase of shareholder value through changes in corporate policy, financing structure, cost cutting, etc.) to non-financial (disinvestment from particular countries, adoption of environmentally friendly policies, etc.). The attraction of shareholder activism lies in its comparative cheapness; a fairly small stake (less than 10% of outstanding shares) may be enough to launch a successful campaign. In comparison, a full takeover bid is a much more costly and difficult undertaking.

Given the current economic environment, there has been increased scrutiny by public company shareholders of the managements of many underperforming companies. There are many reasons why shareholders may be dissatisfied with a public company's performance. When shareholders believe that poor decision making, judgment or strategic vision on the part of the company's incumbent management is to blame they may consider an activist approach to effect change. While shareholder activism is not new, many more investors now feel that it is prudent to take a more activist approach to protect their investments. In most instances, an activist shareholder's first efforts will be to establish a constructive dialogue with management or members of the board of directors in an effort to makes its views known and encourage change. In other instances, a shareholder may have the opportunity to have its proposal put before shareholders on the Company's own proxy statement. However, when all other options have been considered or exhausted, a shareholder may decide that it has no choice but to resort to a full proxy fight to gain representation on, or even control of, the board. Because of the considerable costs of an adversarial proxy solicitation, in terms of resources, time and money, activist shareholders must consider whether such a strategy is right for their particular situation. Two factors that have caused an increase in shareholder activism has been the increases in management compensation and the large cash balances on corporate balance sheets.

Shareholder activism can take any of several forms: proxy battles, publicity campaigns, shareholder resolutions, litigation, and negotiations with management. Some of the recent activist investment funds include: California Public Employees' Retirement System (CalPERS), Icahn Management LP, Santa Monica Partners Opportunity Fund LP, State Board of Administration of Florida (SBA), and Relational Investors, LLC. Due to the Internet, smaller shareholders have also gained an outlet to voice their opinions.

Companies should not underestimate the power and disruption of activist investors. Aggressive hedge funds are now populated by savvy investment analysts and highly trained corporate investigators. They have the ability to gather all kinds of information on the backgrounds of executives and directors, as well as the companies they target. They currently have more cash and investors than ever before. Just 10 years ago, activist hedge funds had less than $12 billion under management. Today that number tops $65.5 billion, according to the Wall Street Journal. Much of this growth has come from investments by large institutional investors, including pension funds and university endowments. Indeed, activism has gone mainstream.

In the U.S., activist funds have earned an average of 13% returns for investors & have outperformed other hedge funds and investments. Worldwide, their returns have also been higher than non-activist funds. A 2012 study by London-based research firm Activist Insight showed that the mean annual net return of over 40 activist-focused hedge funds had consistently outperformed the MSCI world index in the years following the global financial crisis in 2008. Recently, professors at Harvard, Duke and Columbia published a paper that examined 2,000 interventions by hedge fund activists from 1994 to 2007. They found that in the short run, stocks tend to rise around 6 percent when activist investors get involved. And, according to their research, the gains were not temporary. If their research results are true, they confound the long-held believe that activists are seeking short-term gains at the expense of other shareholders.

Some of the issues activists don't like about corporate directors are:

• Receiving poor marks from corporate governance proxy advisory firms.

• Significant percentage of votes withheld for reelection

• Serves on too many boards

• Presided over a significant fall in stock price or failure of a major strategic initiative

• No prior experience as a public company director

• Misrepresented college degree or other untrue biographical information

• Insider trading issues

• String of motor vehicle violations, including DUI convictions

• Embroiled in criminal controversies with foreign or domestic governments

To illustrate the kinds of issues that activist investors take on, consider the following financial press news items from 2013.

Timken Agrees to Split in Two After Pressure From Activist Investors: "A shareholder proposal by the California State Teachers' Retirement System (CalSTRS) aimed at breaking Timken Co. into two separate companies is taking activism by pension funds to a new level," reports Pensions & Investments (April 29, Diamond). Pension plans involved in corporate activism usually attempt to replace board members in order to make companies more accountable on governance issues. In this case, CalSTRS officials insist that spinning off the industrial company's steel operations from its bearings business will unlock substantial shareholder value. "CalSTRS appears to be the first pension plan to expand its activism to the level of sponsoring a shareholder proposal to break up a company," reports Paul D. Lapides, director of the corporate governance center at Kennesaw State University. If CalSTRS is successful, Lapides expects other pension plans to file their own shareholder resolutions directly involving company operations to maximize shareholder value. "Activist investors scored another victory on Thursday when the board of the Timken Company agreed to spin off its steel business from its industrial bearings operations amid pressure from two big shareholders," reports the New York Times (Sept. 5, de la Merced). The board's decision came after a nonbinding vote by investors this past summer in favor of such a move. Under terms of its proposed split, to be completed within a year, Timken will spin off its engineered steel arm to create a new publicly traded company with approximately $1.7 billion in annual sales. "The remaining business will retain the Timken name and have estimated annual revenue of about $3.4 billion," the Times states. The proposal was led by the California State Teachers' Retirement System and the Relational Investors hedge fund.

Activist Investor Sues Bob Evans in Bid to Split Business: Sandell Asset Management Corp. has filed a lawsuit in Delaware's Court of Chancery charging that Bob Evans Farms Inc. is attempting to strip shareholders of their rights to amend the company's bylaws, reports Columbus Business First (Jan. 14, Newpoff). The New York-based investment company alleges that Bob Evans' board of directors "unilaterally adopted, without shareholder approval, a requirement that an 80 percent supermajority shareholder vote be obtained in order for shareholders to amend the bylaws. This amendment was made less than three months after shareholders had overwhelmingly voted to reduce such a supermajority requirement." This follows Sandell's decision last month to bring its concerns about how Bob Evans is being operated to investors via a consent solicitation. "Bob Evans has rejected Sandell's proposal to split its business into restaurant and food products companies and sell real estate for the majority of its restaurants," notes the publication.

Dow Chemical Lands in Hedge Fund's Sights: The Wall Street Journal (Jan. 21, Benoit, Lefebvre) reports that Third Point LLC, which recently disclosed a sizable stake in Dow Chemical Co., has called on the world's second-biggest chemical maker to split its businesses more significantly than the company now plans. In a letter to his investors, Third Point founder Dan Loeb wrote that Dow "should fully separate its petrochemicals and specialty chemicals businesses, [because] attempts to run the two as a unified company have led to underperformance." The activist hedge fund's plan calls for a more dramatic split of the businesses that turn oil and gas into chemicals from the units that make higher-margin specialty chemicals used in agriculture, food, pharmaceuticals, and electronics. Telly Zachariades, a partner at The Valence Group, remarks, "Dow is a big, big company. It wouldn't shock me that an activist investor thought there was more to do.

Investor to Darden: Keep Red Lobster!:Starboard Value has urged Darden Restaurants Inc. to delay the spinoff of its struggling Red Lobster chain," reports CNBC News (Jan. 21), "becoming the second activist investor in as many weeks to call on the company to rethink its strategy for improving results." Starboard Value managing member Jeffrey Smith wrote a letter to Darden's board of directors on Tuesday in which he described the proposed Red Lobster separation as a "sub-optimal outcome" that may prove to be "value destructive." Darden's proposal to spin-off or sell Red Lobster followed a call by Barington Capital Group to split the company in two. Barington has also prodded the nation's biggest U.S. full-service restaurant operator to explore the creation of a publicly traded REIT to "unlock the value" of its commercial real-estate holdings, which it values at around $4 billion. In his letter to Darden, Smith called on Darden to consider other options to boost share value, including divesting property assets. Darden's biggest rivals own comparatively little real estate.     

Boing Co.: "Boeing Co. is trying to fend off a shareholder plan to split Jim McNerney's roles as both CEO and chairman of the company," states the Puget Sound Business Journal (April 18). Looking to block shareholder Ray Chevedden's proposal to split McNerney's posts, the company is adding to the duties of independent lead director Ken Duberstein. Investors are scheduled to vote on Chevedden.

Shareholders Wage Campaign Against Jos A. Bank Clothiers: The Baltimore Sun (Aug. 18, Mirabella) has learned that Jos. A. Bank Clothiers faces a growing shareholder revolt as evidenced by BeaconLight Capital LLC's recent open letter calling for the Maryland-based retailer to return its growing cash reserve to shareowners. The institutional investor, which owns more than 1 percent of Jos. A. Bank, has urged the chain to reorganize its board of directors and realign management incentives. BeaconLight founder Ed Bosek states, "Our biggest concern is that the company has progressively become more shareholder-unfriendly." BeaconLight's criticisms came on the heels of 31 percent of shareholders voting against the election of two directors. Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware, remarks, "Shareholder activism has been highly effective of late in changing board composition and function and corporate strategy. In the end, if you don't like how management is responding, they can put up a slate of their own candidates."

Activists Spur Horse Trading for Seats on Corporate Boards: "Office Depot Inc. is pursuing an unusual tactic for dealing with dissident investors: Give them seats as long as key management appointees can keep theirs," reports the Wall Street Journal (Aug. 19, Lublin, Fitzgerald). Fearing the results of a bitter proxy fight at its annual meeting later this week, the office-supply retailer has offered to expand its 10-member board and give seats to three of Starboard Value LP's four nominees -- if two current directors get re-elected. The two directors serve on a committee that is tasked with selecting a CEO to run the company after it merges with OfficeMax Inc. "Starboard, which holds nearly 15 percent of Office Depot's shares, rejected the offer," the Journal states. "As of Monday, however, both sides were discussing a possible compromise." Office Depot's gambit highlights the growing clout of activist investors with regards to board elections. Activists have scored a 44 percent success rate in U.S. contests for director seats since Jan. 1, either via settlements or elections.

J. P. Morgan Directors Cote and Futter Step Down: NEW YORK (AP) - JPMorgan Chase & Co. says two directors who served on the bank's risk policy committee at the time of its $6 billion "London whale" trading loss are stepping down from the board. The nation's largest bank says David Cote and Ellen Futter have retired, and it plans to name replacements later this year. Cote, the chairman and CEO of industrial conglomerate Honeywell Inc., and Futter, the president of the American Museum of Natural History, were both re-elected to new terms this year but they were targeted by activist investors and received diminished support from shareholders. Futter has been on the board for 16 years and Cote has been on the board for five years. They served on the risk policy committee when the bank suffered the surprise trading loss. Cote and Futter were both re-elected with less than 60 percent approval from shareholders at the company's annual meeting in May. So was James Crown, who runs a privately owned investment company and also sat on the risk policy committee. The company's other eight directors were re-elected with support of more than 90 percent. CEO Jamie Dimon, said in May that JPMorgan would continue to evaluate the makeup of the board. The trading loss is nicknamed the "London whale" for the location of the responsible trader and its size. The trader made the outsized bets on complex debt securities that went wrong. JPMorgan first disclosed the losses in May 2012, estimating them at $2 billion. Two months later it disclosed that the loss would be about $6 billion. The company said traders may have tried to conceal the losses. JPMorgan said it closed the division responsible for the mistake.

Icahn Says He Is Prepared for eBay Proxy Fight: "Carl Icahn says he is prepared for a proxy fight to win two seats on the board of eBay Inc.," reports the Wall Street Journal (Jan. 24, Bensinger), "and push the company to split off its PayPal unit." Icahn further stated that he expects the e-commerce company to resist his proposal, as its executives and directors have done. "The company seems to be sort of dug in on the fact they don't want to do the PayPal spinoff," Icahn remarks. "We hope we don't [have a proxy fight], but if we have to, we will." The billionaire activist investor nominated two employees of his investment firm to the eBay board on the Jan. 18 deadline. For eBay, at stake is the future of what many consider its most promising business, as PayPal has been the driving force in digital payments for over a decade now. Business Week (Jan. 23, Sutherland, Womack, Lachapelle) states that eBay "is willing to forego a possible 26 percent stock pop by rejecting Carl Icahn's proposal to split off PayPal, banking instead on the promise of longer-term rewards by keeping its online payment unit in-house." So far, major shareholders ranging from Sterling Capital Management LLC to Kornitzer Capital Management Inc. are backing the stance of CEO John Donahoe. He maintains that a unified eBay helps fund PayPal's expansion. Icahn continues to describe a separation of PayPal a "no-brainer."

LSI Board Sued Over Avago's $6.6 Billion Takeover Offer: The City Orlando Police Pension Fund has filed a lawsuit against LSI Corp.'s board of directors, Bloomberg (Jan. 14, Feeley) reports, contending that it did not get the best price possible for the computer chipmaker when it agreed to Avago Technologies Ltd.'s $6.6 billion takeover. In fact, the Florida-based investor charges, the deal was structured to unfairly bar competing bids. According to the pension fund, LSI directors are "improperly favoring Avago's $11.15-a-share cash offer by agreeing not to release other potential bidders from past confidentiality and standstill agreements." Avago has been named as a defendant for aiding and abetting the LSI board members' allegedly improper conduct. "By contractually tying their hands, the board members have breached their fiduciary duty to maximize value in this all-cash sale," lawyers for The City Orlando Police Pension Fund concluded in Monday's filing.

Notable Activist Investors

During the 1980s, notable activist investors such as Carl Icahn and T. Boone Pickens gained international notoriety and were often perceived as "corporate raiders" for acquiring an equity stake in publicly owned companies, like Icahn's investment in B.F. Goodrich, and then forcing companies to take action to improve value or rid themselves of rebel intruders like Icahn by buying back the raider's investment at a fat premium, often at the expense of the other shareholders. Today, activist investors are no longer considered corporate raiders, a term never preferred by Carl Icahn and others, but consider themselves as catalysts unlocking value in an underlying security. Some of the more notable activist investors in recent years have been Carl Icahn, Daniel Loeb, Ralph V. Whitworth, Kirk Kerkorian, Warren Lichtenstein, Alexey Navalny, Stephen Mayne, T. Boone Pickens, Jr., Sister Patricia Daly, Phillip Goldstein, Thomas Strobhar, Barington Capital, David Webb, William Ackman, and Guy Wyser-Pratte.

In addition to activist funds that are trying to unlocking hidden corporate value and increase their own returns, there is another motivation for other activist investors. These investors, including organizations such as the Interfaith Center on Corporate Responsibility (ICCR) and Ceres use shareholder resolutions, and other means of activist pressure, to address issues such as sustainability and human rights. They are especially active in fighting greenhouse gases, global warming, foreign sweat shops used by American corporations and other similar issues.

Because of their past success, when activist investors take an interest in a company, the stock of that company usually increases. It has even been said that Carl Icahn can move a stock price mearly by tweeting his intentions or past actions. For example, he recently tweeted that he had taken a position in Apple. The stock immediately was bid upward. The current years are definitely the golden age of activist investors. Almost every day there's a new story that runs like this: hedge fund manager "X" has purchased a stake in an iconic American company that he thinks will be worth more—if only the company will follow his plan. It's now a familiar part of the Wall Street landscape.

Some people believe that investors are being pushed into activism by market efficiency. The idea is that taking advantage of pricing discrepancies doesn't work in the era of high-frequency trading, where algorithms relentlessly and swiftly push mean reversion in all liquid assets. As a result, they believe that investors seeking superior returns have to try something new—talking their way to gains. In other words, instead of speculating about future performance, activists are trying to change future performance.

Previously, the targets of activist investors tended to be smaller firms, often in serious financial difficulty. Now, armed with far more financial firepower, activists regularly target very large companies. As of 2014, almost 30 percent of the companies targeted for a board seat by activists had market caps of more than $1 billion. These companies included such household names and global corporate titans as Sony, Pepsi, Apple, Microsoft, and Hess.

Activist Investors: The Ten Most Momentous Recent Events

According to the financial press, some of the most momentous moves by activist investors in recent years were the following:

Dell: Carl Icahn's bid to derail Michael Dell's bid to take the company private was called one of the nastiest tech buyouts ever. Icahn used tweets, media interviews, and open letters to shareholders. Dell eventually went private, albeit at a higher price after a very costly battle. Here is a new report about this case:

Carl Icahn Slams Dell Board After Dropping FightCNBC News (Sept. 9, Sandholm) confirms that activist investor Carl Icahn has officially "abandoned efforts to block Dell founder Michael Dell's proposed buyout of the technology company because it 'was too difficult' given a lack of progress with the board, which he likened to a 'dictatorship.'" Icahn, along with Southeastern Asset Management, had argued that the $25 billion takeover offer by Michael Dell and Silver Lake undervalues the PC maker. On CNBC's "Fast Money Halftime Report" Icahn lamented that the board just would not listen to his line of reasoning. He went on to state that the incident highlights the need for "better corporate governance" in U.S. companies. Icahn remarked, "We pride ourselves in setting examples for the rest of the world in, you know, considering morality and even considering democracy and here we have dictatorship in our corporates."

Apple: When Icahn tweeted that he had taken a position in Apple, the stock naturally went up. Seeking to pressure Apple to return cash to shareholders, he claimed the shares were undervalued and the company should repurchase shares quickly. Apple announced that it had repurchased $14 billion of its own shares in the aftermath of disappointing performance results. Then on February 10th, Icahn ended his six-month effort, claiming victory because of those repurchases.

Fannie Mae and Freddie Mac: Pershing Square CEO Bill Ackman purchased nearly 10% of the common shares in Fannie and Freddie not owned by the government. He did not support Fairholme Capital's plan to spin off the mortgage insurance business. The Fairholme and Pershing Square investments nonetheless highlight how, in the space of two years, Freddie and Fannie went from taxpayer sinkholes to money-makers that investment managers are fighting to privatize.

Microsoft: Change knocked at the software giant's door with the announcement that ValueAct Capital Management had gained a seat on the board with its small 0.8% stake. CEO Steve Balmer soon announced he'd be quitting within a year, which speaks for itself as a reflection on the growing power of activist investors.

Sony: Even George Clooney undefined got involved in Daniel Loeb's effort to get Sony to spin off its entertainment assets. Sony rejected the investor's stock sale proposal.

Proctor & Gamble: Bill Ackman used his investment in P&G to force the company to cut costs and replace top management. In May 2013, CEO Bob McDonald abruptly retired as Ackman pocketed an estimated $485 million on his investment.

J. C. Penney: Win some, lose some! In a major setback for Ackman, his two-year campaign to transform J.C. Penney came to an end when he resigned from the board. His departure followed on the failure of his hand-picked CEO, Ron Johnson, to transform the company. Johnson was fired by the board.

Herbalife: A war of titans pitted Ackman against Carl Icahn, joined by other activists including Dan Loeb and George Soros. With Ackman claiming Herbalife is a pyramid scheme, the stock fluctuated wildly as investors sought short-term gains.

Oracle: Pension plan advisory company CtW Investment Group led the campaign against Oracle's say-on-pay measure after shareholders once again voted down CEO Larry Ellison's pay package. (He was already the highest paid CEO in the world.) CtW issued a statement that Oracle directors have failed investors by refusing to address pay concerns.

Transocean Ltd: Yielding to demands from Icahn, Transocean boosted its dividend and cut costs. The company had lost as much as half its value after the Deepwater Horizon rig explosion. Icahn announced that the company was positioned to realize its potential.

Cases

You serve as the audit committee chair of a manufacturing firm. Your CEO and your CFO own significant amounts of the company's stock. (In fact, the CEO is the company's second largest shareholder behind Fidelity.) The CEO currently has 69% of his stock pledged on other borrowings and the CFO has 39% of his company stock pledged. This has not been a problem in the past but this year ISS's position for the first time is that where there is pledging of company stock (any amount) by company officers they recommend a "no" vote for the reelection of the members of the audit committee. It is also the first year that the SEC has required disclosure of pledged stock in the 10-K. As chair of the audit committee what should you do?

• Force the officers to "unpledge" their company stock holdings?

• Set a practical limit on how much stock can be pledged?

• Ignore the ISS position and let them recommend a "no" vote on the re-election of audit committee members?

• Take some other action.

2. You serve on the board of a retail company. Up until this point, the company has had a classified board, with each board member being elected every 3 years for a 3-year term. Both ISS and Glass-Lewis are now recommending a "no" vote against all directors of any company who have classified boards. As a board member, what would you do?

• Change the election to a non-classified board (annual elections)

• Ignore the ISS and Glass Lewis "no" votes

• Take some other action

3. You are a board member and chairman of the audit committee of a major service company. As a public company board member you are required each year to complete a D&O Questionnaire that assesses your independence. You have learned that one board member is a major shareholder of an investment advisory firm that manages several hundred million dollars of the company's cash. You also learn that this relationship was not reported on the D&O Questionnaire. What should you do?

• Encourage the board member to report the relationship either next year or in a supplemental filing this year.

• Recommend to the board that this board member be removed from the board because of his lack of independence and disclosure.

The subject board member is highly respected in the community and state and has been on the board for several years. With the exception of this issue, he is a very well qualified board member and has contributed significantly to board deliberations.