News headlines persist in reminding us of the governance challenges facing the corporate sector¾ the New York Stock Exchange’s executive pay debacle being one of the more recent. Strangely, this era of scandals is simultaneously a time of significant reform both within individual companies and in the rules that govern them. Within this context, investor pressure continues to be essential, and Walden continues to act.

Much of Walden’s work is done in the public domain as we file shareholder resolutions, speak publicly, and advocate for changes at the Securities and Exchange Commission (SEC). Equally important are Walden’s behind-the-scenes dialogues, the quiet conversations that are not reported in The Wall Street Journal, but which often have significant influence on company policies and practices.

In recent months, Walden has focused on three key areas of activity related to corporate governance reforms.

Promoting shareholder votes on Auditors: The reckless and sometimes fraudulent accounting practices that contributed to a number of stock implosions in recent years prompted Walden to write to portfolio companies that do not allow investors to ratify Auditors on the proxy statement and urge them to change this practice. Without the ratification vote, shareholders cannot easily express concerns pertaining to Auditor conflicts of interest or the proportion of fees paid to them for consulting services as opposed to auditing, among other concerns. Southwest Airlines agreed with us and will put its Auditor up for ratification next year¾ a good example of "private persuasion" in action. Several other companies have responded that they are considering our request as well.

Campaigning for annual election of all Directors: Walden continues to work for greater Director accountability by encouraging an end to staggered (also called classified) Board structures which allow shareholders to vote on only a third of the Directors each year. In late September, the McDonald’s Corporation held a special seminar with a panel of experts on the question of whether it should move to annual elections of Directors. The panel was created as part of an agreement between McDonald’s, Walden, and Christian Brothers Investment Services to undertake an in-depth study of the pros and cons of eliminating its three classes of Directors. Walden withdrew its shareholder resolution that requested annual election upon reaching this agreement. The panelists presented their views to the Board Corporate Governance Committee, along with other McDonald’s Board members. Moreover, Walden was invited to join the meeting. Whatever the Board decides, McDonald’s deserves credit for a unique approach in reviewing an important corporate governance issue, as well as high marks on transparency for welcoming investor participation.

In contrast, the Boards of Avon and Gillette also reviewed the issue of annual Director elections, but only after Walden-led resolutions won 80 percent and 64 percent of the shareholder vote, respectively. Neither company reached out to its shareholders (its owners) for direct input in deliberations. Instead, their processes took on the form of an internal think tank. Though both companies reported back to Walden, Avon’s CEO Andrea Jung and other senior managers met with us in October to communicate their position, which continues to favor a classified Board structure.

Walden, along with an increasing number of other investor proponents, will continue to press for annual elections of directors, especially at companies where we believe additional accountability is necessary because of demonstrated unresponsiveness to important social, environmental or governance issues.

Advocating for public policy reforms: A recent Harris Poll commissioned by the labor union, AFSCME, found that 85 percent of investors polled wanted companies to include shareholder nominations for corporate Boards of Directors on their annual proxy ballots for a vote. Walden agrees that the process of nominating Directors should be open to investors who at present face the undemocratic process of voting only for management’s slate of Director nominees. On October 8^th the SEC proposed a new rule for comment that would allow investors to do just that. As part of this process, Walden submitted to the SEC public comments promoting increased shareholder access to the proxy for investor nominated Directors, in addition to enhancing communications and disclosure, as a means of improving investor confidence and board accountability.

Walden also continues various shareholder advocacy initiatives on a wide range of social and environmental issues (see Investing for Social and Environmental Change below), using the voice and power of investment leverage as a force for change. —T.Smith