Independence of directors - The report incorrectly classifies 2 of Farmer's 6 directors as independent instead of only 1 of the 6.  (Of the 3 members of the Audit and Compensation Committees, only 1 member is independent, instead of the 2 stated in ISS's report.)  The proxy statement, for this as well as previous years, shows that one of directors ISS reports to be independent, John M. Anglin, is in fact the senior partner of a law firm engaged by the company.

 

Description of shareholder proposal - The report incorrectly describes the Franklin Mutual proposal as one that would require the entire company's conversion to an ICA regulated "investment company."  In fact, the proposed bylaw amendment would require ICA compliance only for the company's investment portfolio.  It should also be clear from Franklin Mutual's supporting statement that the intent is to separate the two distinct businesses -- coffee operations and investment management -- and to leave it up to management to decide how that can best be done.  There is certainly no requirement, or even a suggestion, that the coffee operations should be converted into an investment company.

 

Opinion regarding "fiduciary responsibility" - Responding to questions about the basis for their stated opinion that "the company appears to have exhibited fiduciary responsibility" in its management of funds, ISS admitted that they had not obtained any legal advice on whether the company is managing its investments in compliance with laws or accepted standards of practice.  They indicated verbally that this statement was intended as a non-legal opinion, and that they saw no reason why fiduciary responsibility would require compliance with ICA regulations, the reporting of specific investment information, the professional management of investments, or other practices normally associated with funds of this size.

 

Performance of investment funds - Responding to questions about the basis for their stated opinion about the company's "responsible investment of excess cash," ISS admitted that they had not obtained any financial analyst advice or applied any conventional measurements of portfolio performance.  They indicated verbally that this statement was intended only as their own opinion that investment practices were "conservative."

 

Management credit for stock price improvement - ISS has been asked to explain how they justify basing support of management on increases in the company's stock price.  ISS has acknowledged that the coffee business has been declining, and that its performance is not likely to be contributing to recent price improvements.  They have also been asked to consider whether it is likely that historical performance of the investment portfolio, which does not appear to be better than average for comparable funds, could be driving the stock price.  Finally, they have been asked to present any reasonable basis they may have for believing that the stock price is reacting to anything else other than investor expectations of a change in control, just as the market usually does when there are signs of an end to "underperforming" management.  If stock price improvements appear to reflect prospects for a change of control, it would be inappropriate for ISS to use investor demand for change as a reason for voting against it.

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